Marcellus Shale in Pennsylvania: Conclusions

Posted By Rogan Law || 5-Apr-2013

Advisory Opinions to Municipalities

Since the Robinson Township decision, municipal governments are left with countless questions and concerns regarding their local ordinances which may or may not be upheld pending the PA Supreme Court decision. ACT 13 states that a municipality can petition for an advisory opinion from the PUC to determine if their zoning ordinance complies with ACT 13. If the ordinance does not comply, then the municipality is ineligible to receive funds from impact fees.

However, on October 26, 2012, a senior judge on the PA Commonwealth Court issued an order that advisory opinions by the PUC are unlawful.

LAND LEASES

As the promise of untapped millions of dollars spread across the mountains of northern Pennsylvania, so did dozens of natural gas companies looking for valuable land from which to tap the natural gas. Many local citizens in quiet towns were now confronted with the choice of leasing their land to gas companies in exchange for royalty payments from the amount of gas produced on their land. As gas is a moveable resource, many neighbors jumped at the opportunity to strike it rich by leasing their land. Some landowners made hundreds of thousands of dollars while others saw only meager returns and were stuck in long-term contracts as their property values dropped and their water became toxic.

Although the massive media exposure and statewide legislation has made leasing to gas company less likely to destroy your health and property, there are still a lack of statutory protections for landowners who have leased or will lease to natural gas companies.

The largest drilling company in the Marcellus Shale region, Chesapeake Energy, defines the basic lease agreement as follows:

"The basic lease agreement involves an initial bonus payment for signing the lease, a royalty percentage to be paid if natural gas or oil is found and produced from the property and term (primary term), a time frame within which the energy company has the option to begin operations. If natural gas or oil production does occur, the lease continues in effect for as long as the well produces, which could be for decades.

Commonly, the term bonus refers to the up-front money paid to the owner of the mineral rights in consideration for signing a natural gas and oil lease. It is generally calculated on a per-acre basis, and the amount paid depends on the amount of mineral acres owned by the lessor."

The basic agreement example displayed above makes it clear that the gas company retains many options in exercising their rights to enter your land and drill once a lease is signed. Although a lease continuing in effect for as long as the well produces may lead to large amounts of royalty payments, it also ensures the landowner that they will be dealing with production equipment, noise, and maintenance as long as the well is producing. Royalties in small amounts may not be worth the aggravation.

Further, the DEP states on their website that "the Commonwealth of Pennsylvania is not involved in regulating lease agreements between mineral property owners and producers. Lease agreements are contractual matters between private parties. DEP does not audit payments, read or calibrate meters or tanks, or otherwise get involved in these matters."

This hands-off approach to natural gas leasing regulation leaves the landowner in a position where they need to hire an expert in the field of gas leasing or take their chances with the more knowledgeable and better funded gas company.

Case law gives us limited guidance as to what type of contractual agreements will be upheld or found void in the area of leasing gas rights. In Katzin v. Central Appalachia Petroleum the Superior Court held that the gas company was authorized to distribute royalties after "post production" costs even though the lease was vague regarding what costs could be deducted. However, in Heasley v. KSM Energy Inc., the Superior Court held that when oil and gas production ceased, the lease became an at-will tenancy, subject to termination by the lessor (landowner) at any time.

Although the cases above give limited guidance regarding gas leasing decision, the ultimate responsibility is up to the landowner to hire an expert attorney to create a lease that protects the landowner's rights.

NOTE

All sections of the 5-part series are cited in original document titled The Effect of the Natural Gas Boom in Pennsylvania by Dan Mulhern. Written in 2012.

Categories: General, Marcellus Shale