Watch Out For These Marcellus Shale Gas Leasing Snags

Watch Out For These Marcellus Shale Gas Leasing Snags

Marcellus natural gas leases promise to enrich landowners or produce near-term disappointment.

By Tom Rivers and John Vogel

The Marcellus shale natural gas boom could be a huge bonanza for farmers and other landowners. Or if those contracts aren't written correctly, those royalty rewards may be a long time in coming.

The difference for landowners hinges on lease terms, warns Jim Leonard, a nat­ural gas leas­ing con­sul­tant from Endi­cott, N.Y. Take a long view when signing leases, he urges. Focus on royalties, not on the prospect of a lucrative upfront bonus. "The real money is in the royalties. An oil and gas lease is a marriage of generations."

Beware of  'flips' and HBP's

DO IT RIGHT! "When you sign a lease, it's for you, your kids, your grandkids and their kids," emphasizes Leonard. "So take the time and tap the expertise to do it right!"

Work with an attorney on the lease terms, he stresses. Try to ensure the companies drill for gas, not just flip leases or keep them held in production with very little activity.

Leases should be crafted with "anti-flipping" fees, a seismic charge, payments for delayed drilling, a well rig location fee, damage payments and easements for pipelines and well heads. Property owners should also look at joining landowner coalitions, which can boost their bargaining power and connect with professional assistance in negotiating leases, he stresses.

New York landowners "are signing up too cheap", often content with 15% royalties, contends Leonard, a board member of the National Association of Royalty Owners. That compares to a typical 25% in Texas lease agreements.

Another problem is that gas company leases is that landowners may not be paid properly for their royalties. A lot of operators are "holding by production", especially Chesapeake Energy."

HBP means the lessee (operator) is in compliance with the "Habendum Clause" that places them into the "secondary term" of the lease. A typical habendum clause might read something like "This lease is in effect for a period of five years, and so long as there is a producing well in the unit".

The five years is referred to as the "primary term" and this is what the "lease bonus" (rent) is for. If a well is drilled and producing before the five years is up, the lease moves into its "secondary term".

The mineral rights owner won't receive rent once the royalty provision kicks in. So if there's a 20% royalty rate, the owner collects royalties based on amount of gas produced.

Here's where the HBP trips up the landowner. By opening the well valve just a little bit, the owner is "held". He or she will get 20% royalty, but on very little production. The checks are tiny. As long as this continues, the lease can be held indefinitely, even for decades. The owner can do nothing about it.

Rivers is a New York State freelancer.

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