Natural Gas Leases
Many leasing agents (landmen) and energy companies offer only very basic leases that usually favor the company. It is imperative that you hire an experienced oil and gas attorney to develop the most protective lease. The following are several leases that are more protective for the landowner, as well as explanatory materials.
*** Remember, a lease is only a piece of paper and can’t protect your groundwater or your health. It will only guide a scrupulous energy company and may help you seek compensation if or when something happens. ***
Wyoming County Lease
A comprehensive and protective lease from Wyoming County, PA. It addresses many of the important topics in a lease, especially the community impacts that everyone experiences. It was signed by many landowners and Chesapeake Appalachia in Wyoming County, PA.
Chesapeake / ALOV Lease
This lease was recently signed by a large landowner group in Columbiana County (ALOV) and Chesapeake Exploration. There are some very protective portions.
- It doesn’t address the community impacts as well as other leases.
- The large drilling unit allowance is very problematic. A landowner should negotiate for as small a drilling unit size as possible in the lease. Throughout the US, the average drilling unit size for shale wells is about 180 acres. If the energy company doesn’t drill in the unit within the specified time, the lease reverts back to the landowner. If the drilling unit is large, one well can hold many, many acres in production.
- This lease allows compressor stations for gas produced on the premises. With these large drilling units, a compressor station may be likely. Therefore, better protections should be in place regarding the noise level (maximum decibel level), location (xx feet from an occupied dwelling and mutually agreed to in writing) and additional compensation for these facilities.
These general comments are set out below and are intended to raise issues for the lessor’s attorney to potentially address in the context of the applicable Ohio law and the requirements of the parties:
1) I assume this lease form will be executed separately by committing owner and that each owner. If this is to be a single 30,000 acre lease covering numerous smaller tracts with varied ownership the default, payment and other terms will require additional work.
2) Art. I, ¶3: The Wyoming County form lease provided for maximum spacing units for horizontal wells of approximately 180 acres. This lease provides for spacing units of up to 640 acres, which means that, assuming the same spacing, the Operator can hold up to three additional drillsites with each initial well drilled. You should consider using the 180 acres as the standard, as opposed to the larger 640 acres. It is more advantageous for the lessor. If you do stay with 640 acres, consider an express subsequent drilling requirement which would provide an incentive for timely drilling the infill wells.
3) Art. II, ¶2: rather than extending the entire lease with additional drilling of a single well you may wish to consider extending the lease as to that portion of the lease included in the spaing unit for the applicable well. This is an issue primarily with large leases.
4) Art. II, ¶3: The first rights of refusal set out in the lease are quite valuable to the Lessee and may limit the lessor’s ability to lease retained interests. However, the lease overall is quite favorable, and in a sense, the Lessor is well compensated for this first rights of refusal considering the overall deal.
5) Art. II, ¶4: conform to Art. III, ¶7. Art. II, ¶5, subpara. (i) the lease should terminate as to “acreage not within such designated actually producing units.” Subpara. (ii): how is the first right of refusal exercised and in what time frame?
6) Art. II, ¶9.(b): default notice provisions are used by the Lessee to effectively preclude the certification of class action cases brought by lessors for under payment of royalty and related to other issues. You may wish to consider adding a provision in which the Lessee agrees not to utilize the default provision in this manner. Note: In general, this default provision (which is applicable to non-payment of royalty and other issues) provides the Lessor with strong enforcement rights not otherwise available.
7) Art. III, ¶3 (d)(iv): the Lessor’s royalty should also apply to proceeds from contract buy-downs, buy-outs, renegotiation, termination or release. Otherwise the royalty clause addresses major issues in a manner favorable to the Lessor.
8 ) Art. III, ¶7 (b): conform to Art. II, ¶4. Amend sixty months to 48 months.
9) Art. III, ¶8: Is the $15,000 in addition to surface damages paid for the wellpad, road and pipeline etc. or is this the surface damage payment? With respect to the compensation for pond and pits, you may want to limit their size and provide for an annual payment.
10) Art. V., ¶1 (k): Why does the road need to be 50 feet? The standard “oil field road is 18 to 20 feet wide with bar ditches as required to control water and erosion. Roads should be crowned and graveled, maintained in good and passable condition and maintained in a manner which precludes ponding and erosion. Off road vehicle use is normally precluded.
11) Art. III, ¶1 (l), line 7: Amend “pipelines” to “utilities.”
12) Art. III, ¶1 (m): Provide for final restoration upon cessation of use of all or part of the lands used by Lessee. In some States, absent an express provision in the lease, the common law allows the Lessee to abandon premises without reclamation. Require removal of all foreign substances at either interim or final reclamation.
13) Art. III, ¶1 (p): You may wish to consider requiring pitless drilling using contained mud systems.
14) Art. III, ¶1 (q): You may wish to consider limiting pump stations, tank batteries, dryers and separators to gas from the leased premises and lands pooled therewith (assuming small leases). Units can be quite large and large gas treatment facilities are normally separately negotiated and are large industrial sites. The Lessee will often purchase land for these facilities. Also consider stating that compressor facilities, oil and gas treatment facilities, gas processing facilities and pipelines which carry off-lease gas or oil shall not be located on the premises without the express written permission of the Lessor.
15) Art. III, ¶1: You may wish to consider requiring lessee to compensate lessor for subsequent surface disturbances (i.e. pipeline repair or off road vehicle use).
16) Art. VI. ¶1: In addition to the indemnification (which is well done) you may wish to repair the Lessee to be responsible to the Lessor for all damage to Lessor’s person and property resulting from or related to Lessee’s operations.
17) Art. VI, ¶4: You may wish to state that the due diligence requirement does not limit or amend the Lessee’s implied covenant obligations, whether implied in law or fact.
18) Art. VI, ¶6: Do you also want to receive well logs, seismic data and all test results from operations on the leased premises?
Harvard’s Environmental and Health Impacts in Natural Gas Leasing
This guide clearly explains the situation, risks and potential lease language concerning the environmental and health impacts regarding leasing in Ohio. There are a number of additional points the landowner should consider, if using the language in this guide.
- 1. Acquisition of Baseline Information – The lease should reference an Addendum, in which a specific water-testing plan is outlined. This should include: the exact chemicals that will be tested for, which lab(s) will be used, the actual sampling method(s), etc.
- 4. Roads – Lessor should have to agree, in writing, to the location of any road.
- 7. Restrictions on Using Hazardous Materials – Lessor should require the actual chemical composition and quantity of all substances used in the drilling. The MSDS sheets (required by ODNR) do not go into sufficient detail to prove water contamination. Also, this provision should apply to any drilling in which the Lessor is part of the drilling unit (not just on Lessor’s land.)
- 9. Development of the Well site – Make sure that plantings and interim reclamation are done when the wellpad is finished, before drilling begins.
- 12. Extraction of Natural Gas – Require that an experienced emergency response team be at the location within XX hours
- 14. Compressors – Compressor stations and processing plants are very loud and disruptive. If they are part of the drilling unit or are on the landowner’s property, a certain decibel level maximum should be specified, as well as an additional fee if it is on the landowner’s property. Additionally, the location should be mutually agreed to, in writing.
- Realize that a protective Oil and Gas Lease has many other sections: These include, but are not limited to: Grant of lease, Unitization (want it as small as possible), Primary term and extension, Pugh Clause, Bonus payment, Royalty payment (gross proceeds), Bonus payment, Payment for all obtained gases including butane, etc., Spud fee, Force Majeure, etc.
- Throughout the document, it says, “At Lessor’s request….” – In many cases, the activity mentioned should be done automatically and the language should read something like, “Unless Lessor requests otherwise…”
- Throughout, need references to: Radium as well as radon. Or use the more generic name for all these materials: NORM or Uranium / Radium series.
Oil and Gas at Your Door?
Although published in 2005, this is an excellent guide that methodically goes through many of the important considerations and steps in contemplating an oil and gas lease.
Protect yourself if you sign a lease, Include these important points.
A lease is just a piece of paper; it can’t guarantee that your property and health won’t be adversely affected by drilling. It will just guide scrupulous drillers about what to do and may allow you to recoup some of your losses if something goes wrong.
Unfortunately, a multinational energy company’s cadre of attorneys is much more experienced than any attorney you could pay to represent you. You are at a distinct disadvantage, if you have to enforce any of the terms of the lease.
After weighing the numerous environmental, health and safety risks, long-term liability, and the temporary and permanent impacts to the land, if you do decide to sign a lease, it is critical that you hire an experienced oil and gas attorney who can develop a protective oil and gas lease.
According to State law, an energy or drilling company has the right to reasonably do whatever it takes to extract the oil and gas, which includes overriding all normal land protections (e.g. tearing down your barn if it’s in the way). A detailed lease, specific to your property, that’s signed by you and the energy company is your only protection.
Several important points to keep in mind:
o There is no such thing as a standard lease
o All points are negotiable
o Everything must be written down and included in the signed lease
o Verify that the oil and gas attorney you choose does not work for the industry or won’t benefit if more leases are signed.
To protect you, the following points should be included in a lease. (The attorney should draft the actual legal language for each point.) This is only a partial list. Additional items should be included after researching the issue and working with an experienced attorney.
- The location of the wellhead(s), tank batteries, pipelines (only those for gas produced on the premises), access roads, etc. should be precisely described and depicted in the lease, or they must be mutually agreed to in writing prior to drilling.
- Setbacks from the wellhead, tanks, etc. to all structures, especially homes, should be established. Ohio law allows very small setbacks of only 100 to 150 feet. Fort Worth Texas requires a 600-foot setback. The new hydraulically fractured shale wells are quite industrial, and so large setbacks are recommended.
- Environmental impacts must be minimized, by including items such as: requirement to follow water management and sediment and erosion measures, establish sufficient riparian, wetland, pond and floodplain setbacks, use maximum decibel level maximum for noise mitigation, cite specific restoration requirements, etc.
- Only oil and gas, no other minerals, should be included in the lease. Additionally, only one strata or layer should be negotiated per lease. Decide if directional or horizontal drilling can take place and specify the exact terms.
- Compression stations, pump stations, large transfer lines, etc. should be expressly excluded from the lease. These are huge, invasive and/or dangerous industrial components.
- Exclude injection wells, gas storage or carbon sequestration wells.
- The royalty payment is negotiable, and the going rate is higher than 12.5%. The royalty payment should be calculated at the point of sale, not at net proceeds price or after costs are subtracted. All natural gas byproducts should be included in the lease. Include a specific royalty payment schedule and time-period. A minimum payment should be written into the lease, in case the well is shut in. If the lease is sold, negotiate a percent of profit for the “flip.”
- Consider money instead of free gas, as raw natural gas can contain corrosive hydrocarbons and does not contain mercaptan, an odorant that can be added to raw gas to detect leaks of methane, which is an odorless, but highly explosive gas.
- Keep the drilling unit as small as possible, to maximize profits and allow the lease to expire if the land is not used for an oil or gas well.
- Determine water usage issues and write them into the contract, such as whether the energy company can use water from ponds, streams on the property or drill a water well.
- Negotiate a short primary term (from the time of the signed lease to a producing well). Beware of how the lease is extended. Sometimes, just a minor action will automatically extend the lease.
- A comprehensive water-testing procedure must be written into the lease: type of contaminates tested for, radius of testing (at least 1,000 feet), pre- and post-testing, advance notice so you can arrange for a “split sample” done with you own independent lab, etc. All this should be paid for by the energy company.
- Insist on insurance levels equivalent to the value of the land, water and livelihood (agricultural use of land) of all the landowners in the drilling unit or community. Must include environmental insurance, as well as general, workers comp, and other insurance.
- Require the energy company to give the Fire Chief all contact information and access to the well. Also require a list of all chemicals used during the entire process be given to the Fire Chief.
- If the lease is sold or transferred, all terms of the lease apply. Additionally, it is not binding until you have been notified in writing.
- “Open pits” or buried waste pits on the property should not be allowed. Open pits contain the drilling mud, plus frack fluid (potentially toxic chemicals) and radioactive material. These open pits and buried pits increase the risk of groundwater contamination and negative health issues. Instead, a closed loop system should be required.
- Utilize all Best Management Practices throughout the entire process.
- Require rigorous inspection during and after drilling and mandate that copies of all inspection logs and reports sent to you. After drilling, the Inspector and the Energy Company must sign a document stating that all Special Permit Conditions, Regulations and Rules were witnessed and followed.
- Require the company to have a remote shut-off for all wells.
- During drilling and production, the energy company should minimize impacts such as noise (decibel level maximum), dust (such as water on roads), limit time of day for activity such as truck traffic, etc.
- Require interim restoration, such as acceptable upkeep of roads, landscape / barriers during drilling, reclamation after seismic testing, etc.
- Re-fracking of a well can’t proceed without the landowner’s consent. (For instance, if the landowner notices damage to groundwater in the area, he / she might have grounds to not want to the well re-fracked.)
- If any terms of the lease are not followed, the lease may become “null and void.”
- Appoint an independent committee, with ODNR as only one member, that will investigate any possible ill-effects such as contaminated groundwater, air pollution, property devaluation, etc. The energy company should pay for all associated costs of this committee.
- If the energy company does not rectify any breach of the lease within 30 days, the energy company should pay reasonable attorney fees and reasonable investigative costs incurred in preparing for trial.
- Require compensation for all surface damages.
- Require the energy company to be liable for any problems associated with the drilling site (pipeline leaks, explosions, etc.) for 50 to 100 years. You should not assume the liability once the energy company ends their lease and leaves.
- Additional points to include: Pugh clause, Indemnification clause, and stipulate that a default on any assigned part of the lease is a default on the whole.
Even with all these provisions, the experience of landowners throughout the U.S. who’ve signed leases is that even a good lease can’t protect their health, safety, groundwater, property value, etc. when something goes wrong. Proceed with caution!
The content on this website is intended for informational purposes only and should not be considered as financial or legal advice. NEOGAP assumes no liability for the actions taken (or not taken) by any party in reliance on this information.