Drillers Want ‘Another Bite at Apple,’ ALOV Warns
YOUNGSTOWN, Ohio – Be careful when landmen knock on your door, promising more royalties from even more gas wells if you amend your mineral lease, attorney Alan Wenger told some 500 members of the Associated Landowners of the Ohio Valley gathered Monday evening at the Covelli Centre.
“The largest protagonist for amendments is Chesapeake,” he said. “They have such huge holdings in our area, it’s very difficult for them to drill enough wells to hold all the parcels during the primary terms of their leases.”
ALOV convened the meeting to inform its membership – 5,500 people representing the ownership of more than 250,000 acres in 10 counties -- of new legal challenges they face, including even higher taxes on the combined $500 million in income they have already received from bonus payments and future royalty payments.
Of immediate concern to Chesapeake and other drillers is the unit size of the leases landowners have signed, Wenger began. ALOV leases stipulate units of 640 acres per well, which must be drilled within a specific time frame, typically five years. Should landowners agree to expand the unit size by amending their lease, they give drillers greater flexibility.
“They’re coming back and trying to get another bite at the apple,” Wenger warned. “They try to appeal to the [landowner] by claiming they’ll drill more wells” and pay more royalties, “but in fact there’s no assurance of either of those things.”
And it’s not just the unit size some lease amendments seek, he continued. “We’ve seen amendments that are an effort to gut your lease, not just through utilization issues but also with royalties,” Wenger said.
Shale drillers also are negotiating pipeline rights of way, a one-time income option for landowners that requires legal advice, said Wenger, whose firm is employed by ALOV.
And in Trumbull County, where ALOV secured leases with BP for some 86,000 acres, “defect notices” from BP continue to prevent many landowners from receiving their bonus payments. The defects, explained attorney Tom Carey, also from Harrington Hoppe, include problems with the deeds, banks repeatedly reselling the mortgages, or old leases on the property that remain in effect.
There is also the issue of how royalties will be divided among landowners, which the National Association of Royalty Owners (NARO) calls the “fractionalization puzzle,” a term used long before hydraulic fracturing revolutionized oil and gas exploration.
“Fractionalization and ‘dilution of interest’ are buzz words frequently used to describe the transfer of mineral interests into smaller and smaller pieces, sometimes to the point where owners end up with practically zero interest,” said Robert N. Hart, president of the Appalachia region of the National Association of Royalty Owners. Hart explained the importance of “division orders” that drilling companies will demand landowners sign. “Unfortunately, many interest owners have not taken the fractionalization problem into consideration and have assumed that their interests will be passed along for the benefit of their heirs,” he said.
The Utica shale formation in eastern Ohio is highly valued for its wet gas and oil but the huge quantities of dry natural gas are also valuable, despite depressed prices in the current market, said Bob Rea, ALOV director. He urged members to support the development of natural gas vehicles and construction of fueling stations for compressed natural gas (CNG).
“We are standing on the mother lode of North America, the second largest reserve in the world. It’s here. It’s accessable. Now we need to put it to work,” Rea said.
ALOV wants tax incentives “put in place through our legislators and the administration to accelerate the development of the infrastructure that’s necessary to get natural gas into our vehicles.” Such incentives should include “the banking industry to finance these retrofits or new units, the pipelines and the filling stations that need to be put in place,” Rea said.
“This is not a lot of leaps. These are short steps to get where we need to be.”
A much larger leap -- in fact, a huge political hurdle -- is the severance tax Gov. Kasich wants to levy on the oil and gas industry,” he continued. As proposed, as much as 25% of severance tax revenues “would be borne directly on the back of the mineral owner,” Rea said. “The companies will be able to pass through that tax as a cost of doing business in Ohio. We will just have to bite the bullet so [Kasich] can supposedly put it in a general fund and declare to those people in Cincinnati or wherever that [he] didn’t have to raise their taxes.”
Copyright 2012 The Business Journal, Youngstown, Ohio.
Copyright 2013 Youngstown Publishing Co. DBA The Business Journal
Developed by Tyler Clark Consulting.