Hancock Gas Lease

Governor Paterson has unveiled his budget proposal for the year beginning April 1. With nearly $1 billion of new taxes and fees, one can only assume it’s an April Fools joke. Some of this is targeted specifically at gas leases. As reported by ABC News:

A 3 percent tax on natural gas extraction from the Marcellus Shale formation in the Southern Tier and in central New York using horizontal wells, raising $1 million starting in 2011-2012.

This isn’t a lot of information, but it does imply a few things.

• Since it says “gas extraction”, I take it to mean taxes on actual gas coming out of wells, as opposed to just leases themselves. Note that some lease contracts make the landowner responsible for these taxes. If you’ve signed a lease you should check on this; if you’re considering it, make sure you understand what the deal will be.
• If they expect to derive tax income from gas drilling, it strongly suggests that they do intend to have wells drilled in 2010, and actively producing gas.
• If they expect $1 million dollars in revenue from a 3% tax, the math says that they expect $33.3 million dollars of gas to be pumped in fiscal 2010.

Fortuna Energy has reached an agreement with the state Attorney General over deceptive practices. They’re to be fined, and landowners who were fooled into extending leases must be allowed to renegotiate. The Press & Sun-Bulletin reports:

Fortuna sent letters to hundreds of landowners whose natural gas leases with the company were about to expire, stating that Fortuna had the right to extend the leases without the landowners’ permission, according to the AG’s office. Fortuna claimed that the leases contained provisions that allowed the company to put the lease on hold until they obtain the required horizontal drilling permits from the state Department of Environmental Conservation. Most landowners’ leases contained no such provisions, [Attorney General] Cuomo’s office said.

…

customers who were misled and ended up extending their natural gas leases with the company [will be allowed] to renegotiate their terms, Cuomo announced Tuesday.

The settlement also stops Fortuna from using misleading and deceptive tactics to secure leases from New York landowners. The company also agreed to pay $192,500 to the state in connection with the settlement, the AG’s office said.

Drilling company East Resources is invoking the fine print of their leases, putting payments to landowners on hold. They’re claiming that they’re unable to make payments because of tight fiscal times, and apparently there’s a clause in the contracts that allow them to defer payments. Luckily, that same clause allows the landowners to terminate the lease at their own discretion.

In late October, East Resources of Warrendale, Pa., mailed about 1,000 letters to those with whom it has lease agreements….

The affected parcels total about 40,000 acres, he said.

In part, the letters state, “Because recent economic conditions in the nation’s financial markets have reduced our ability to obtain extensions of credit, we are at this time not in a position to make payment to you.”

Leaseholders are given the option of voiding their leases with the company or extending the payment terms.

At this stage, [John Sieminski, the drilling company's general counsel] said, most of the respondents are willing to extend the payment terms. He also said there is no time limit in which the landowners must reply.

“No time limit was imposed, just as we hope they wouldn’t impose one on us,” he said.

However, [Elmira attorney Christopher] Denton says he would advise his clients to void their leases with East Resources and start over again, with a keener eye on long-term planning.

“You can’t worry about the money that’s lost. You don’t know if you will get the money anyway because ‘as soon as possible’ is not a legal term,” said Denton.

Considering the hardball that the gas companies play, it seems to be asking a lot, expecting land owners to sit tight.

So you signed a lease. That doesn’t mean you can sit back and wait for the money to roll in. Just as with signing the lease in the first place, the oil companies are likely to push you as far as they can, and maybe a bit more, so you need to know what your rights are. At the same time, everyone wants a piece of what money you do get (look at the efforts in Pennsylvania to assess property taxes on the well).

It turns out that there’s an organization for you, champion your cause. The Wellbore Log writes about it:

What is NARO? This spring I did a Google search, looking to see what organizations exist across the nation that represent Lessors and their interests to gas companies and local, state and national governmental agencies. The main organization that came to the top of the list is The National Association of Royalty Owners (NARO). So one day I called Mr. Jerry Simmons, Executive Director of NARO and had a nice chat about the needs of landowners in Pa and the NARO organization. NARO is the only organization that represents exclusively the rights of mineral and royalty owners. It was quickly evident that as new Lessors in PA, we have no clue as to the issues that are facing us as royalty owners. So I kicked in my $105.00 and joined, looking to learn more from the experienced royalty owners and in the hopes a Pennsylvania Chapter would be formed.

NARO’s web site is located at http://www.naro-us.org. HancockGasLease has no association or even experience with NARO, but it does seem worth investigation.

The gas companies buying leases aren’t always expecting to drill wells. They also need a means to get the extracted gas to consumers. That means pipelines, and those pipes need to run somewhere. If you think that a gas well is going to make you you money, you should be sure what your lease sells about the use of the land for pipeline rights of way.

Advice from Tom Murphy of the Penn State Cooperative Extension:

If the leases allow the company unrestricted access to the properties in the proposed ROW, they have the green light to move forward without additional negotiation on price. But if the lease(s) have addendums indicating the company would have to return to the landowner to strike a separate deal on the ROW, then the company will be approaching you to broker an arrangement. If that is the case, they will normally offer you an easement agreement that includes a number of provisions and payment terms. …

The width of that easement is normally 30 feet but companies often will ask for additional work space ranging up to 30 additional feet for a total of 60 feet of width. Keep in mind if the ROW is being developed through a wooded area with marketable timber, you need to determine whose timber it will be upon purchase of the ROW, who will place value on the timber, and if it reverts to you, where will it be placed after it is cut and stacked. If your lease allows, you should get a third party forester who will make a determination of the fair market value of the timber before it is cut. …

Another important consideration with pipeline is during the actual construction phase. Always make sure the double ditch method is agreed upon to be used when the excavation is started. It is always important for the topsoil to be separated and saved apart from subsoil. And when the site is re-graded, the topsoil needs to be placed back on the surface, not used to bed the pipe.

Many people who have pursued leases have done it alone; others have formed coalitions in landowner groups. The Sullivan County Democrat reports that there’s a third approach: land brokers.

“The difference between us and a coalition is that in a coalition they try to gather as many acres as possible. They then turn around and try to sell them to a gas company…When they [the gas companies] sign the coalition, it’s one parcel, one contract, one deal.”

[Mike Schwartz, broker for RSL Group] went on to explain that, with RSL, “every landowner and every piece of property is different. I’m a broker. It’s my job to get you as much as I can from the buyer. In this case, the landowner is the seller, and the gas company is the buyer. I work for the seller only.”

This sounds like an interesting approach. As you can see if you look through our archives, leasing gas rights is very complicated — and if you get it wrong, the consequences can be serious. Perhaps the expertise of firms like Mr. Schwartz’s can help our neighbors make money while effectively protecting the environment. (Naturally we have no specific knowledge of this company, and can make no endorsements.)

In line with our previous reports that Chesapeake is scaling back its drilling plans, we’ve just learned that offers on behalf of Chesapeake to landowners in Delaware and Sullivan counties, as well as Susquehanna and Wayne in Pennsylvania. As reported in iStockAnalyst (apparently initially from Towanda’s Daily Review):

A consulting firm has informed Northeast Pennsylvania landowners Chesapeake Appalachia has revoked and rescinded offers for natural gas leases.

Based in Olean, N.Y., the Long Consulting Group LLC states in a September letter “Chesapeake is refocusing its oil and gas efforts and is scaling back its leasing efforts.”

The company said the “re-focusing is due to regulatory issues and current economic conditions.” Long Consulting Group project manager Myrna Coleman would not comment and referred questions to Chesapeake.

We’ve written before that the prospects from gas drilling are likely to have slowed down, if only temporarily. Here is further evidence, from the National Post:

Flashy unconventional natural gas plays attracted considerable excitement this summer, but observers — as well as the largest U. S. natural-gas producer — now expect drilling and spending plans to be axed as new discoveries are resulting in a glut of gas hitting the market. …

“The development has been so rapid that it probably overran the market a little bit,” said Richard Smead, project manager and co-author of a recent report, North American Natural Gas Supply Assessment, prepared by Houston-based Navigant Consulting Inc. for the American Clean Skies Foundation. “Right now we have enough supply. We probably have more than we need in the short term.”

The result, he says, will be a slowdown in exploration and production in unconventional North American shale plays. …

It doesn’t make financial sense to produce gas at certain wells when prices dip below US$7.50, [Aubrey McClendon, chief executive of Chesapeake] said.

“If those prices stay out there for very long, the industry will have to restrict its capital expenditures.”