Jan 18 2010

Sweet Lease 1

Do You Ride 1st Class or Coach with Your Gas Lease?

How Much is Your Royalty vs. Public Lands?

How do you get the best gas or mineral lease deal?  Easy.  Find out what lease deals the gas companies give to the government.

  • The royalty percentage paid on government leases, for example, could be more than 50% higher than the royalty rate offered to private property owners.  Want to see a copy of such a lease?  Keep reading.

Sweetheart lease deals with government is a rock the gas industry would rather not turn over.  Negotiate with a government lease as your benchmark, not with your neighbor’s lease.

The gas industry has practiced a two-tiered leasing program for decades, but many property owners do not realize it.  First-class lease agreements go to state (or federal) government.  Coach-class lease agreements go to private property owners.

Public Lands

When we speak of gas lease agreements for government (state or federal), we are talking about drilling leases on public land.  Public lands, of course, refer to any taxpayer-financed land, such as game lands, state forest lands, or national parks.

Why would government get better lease deals from gas companies than citizens?

Governments are big and scary to energy companies; and landowners are not. So guess who gets preferential lease treatment?

In the politics of energy, gas companies are good at “managing up.”  They work hard to placate the “big and scary” government.  Government regulators monitor you and have many ways to penalize you, whether via the permit process, environmental inspections, violation notices, financial penalties and more.

This helps to explain the staggering amount of money spent to influence government.  The oil and gas industry spent $120 million lobbying the federal government alone in 2009, according to The Center for Responsive Politics.  Link: http://www.opensecrets.org/lobby/indusclient.php?year=2009&lname=E01&id=

Based on our own experience in Pennsylvania, fair compensation for the state is very different than fair compensation for private property owners — even when the acreage is next door.

Your Right to Know

After filing a right-to-know request with the Pennsylvania Game Commission, I received copies of two leases, both for State Game Land 49 in Monroe Township, Bedford County, PA.  (1See Links & Resources at the bottom of this post for a pdf file of the Game Commission lease discussed here.)

The lease under discussion is an oil and gas lease signed in February 2002 – initially between the Pennsylvania Game Commission and Cabot Oil & Gas Corporation.  As it turned out, Pennsylvania General Energy Corporation (PGE), headquartered in Warren, PA, replaced Cabot and became the “successor to the initial lessee.”

This is a “drilling lease,” which involved recovery of native gas.  Ultimately, the wells were drilled into the Oriskany formation – so it was not a Marcellus Shale play.  Regardless, the difference in lease terms is revealing.

In 2003, approximately 90 landowners in the Clearville area of Bedford County, PA, signed lease agreements with Pennsylvania General Energy Corporation (PGE).

Landowners received royalties based on their lease agreements over a period of 3-4 years, until the wells were “depleted,” according to PGE.  In March 2007, PGE notified landowners via letter that it had “sold its Bedford County wells, pipelines, and associated equipment and leases to Steckman Ridge, LP.”

Steckman Ridge is a joint venture between Spectra Energy Corporation and New Jersey Resources.  We’ll have more to say about underground gas “storage” leases in a future post.

57% Higher Royalty Rate

According to the document, the Game Commission’s lease agreement included a royalty payment of 25 cents per thousand cubic feet of gas or 19.6% of the market value — whichever amount is greater.  [Sections 4.1, 4.2 of lease; p. 3; see pdf file below.]

In contrast, the royalty payment for roughly 90 property owners was 12.5% regardless of whether they owned 10 acres, 100 acres or more.  This is the minimum royalty rate set by Pennsylvania law — the traditional one-eighth royalty. Link:  http://www.dep.state.pa.us/dep/deputate/minres/oilgas/fs2834.htm

In other words, the Game Commission’s royalty rate is 57% better than the private property owners’ royalty rate – and many of those properties are next door to the Game Lands.

Size Matters

The Game Commission lease with PGE runs 26-pages, and that does not include another 18 pages of “exhibits.”  In contrast, the proposed lease that PGE first sent to us runs five pages.  (Never, ever sign the proposed lease given to you by an energy company.)

Looking for a model lease?  On top of a much better royalty payment, the Game Commission lease has additional examples of built-in protections that landowners should consider.

  • Free gas – and the gas company pays for the hook up;
  • Control of surface rights even where the company’s drilling operations are located.

Free Gas

Growing up in Pennsylvania, it was conventional wisdom that property owners often received free gas as part of their lease agreement.  That no longer appears to be the case today, though there must be some exceptions.

One of those exceptions is the Game Commission lease which says it is entitled to free gas, assuming sufficient production quantities.  And the gas company, at its expense, is responsible for setting up the facilities to do this, including putting in place the meter, regulator, lines and connections.  [Section 4.3 of lease; pp. 3-4; see pdf file below]

Surface Rights

Worried about well location, roads, pipelines and equipment?  In the current Marcellus Shale craze, we’ve talked to property owners who are livid about how their property is treated once drilling operations begin.

That is not going to happen in a lease with the Pennsylvania Game Commission.  This lease makes clear that, “The surface rights of Commission shall be considered dominant and the oil and gas rights of Lessee [i.e., PGE] servient.”  [Section 33.4 of lease; p. 24 of pdf file and print version; see pdf file below]

In fact, the Game Commission lease is very specific:

“Commission reserves the right to approve in writing all plans for the construction upon the leased premises of structures, rigs, machinery, communications facilities, ways and roads, well locations, pipelines and equipment and fro drilling wells.  Detailed written plans for any such construction shall be submitted to Commission at lease thirty (30) days prior to planned commencement of construction on the leased premises ….”  [Sections 33.3 of lease; p. 24; see pdf file below]

Next Steps

Regardless of where you live, and whether a potential lease offer involves the Marcellus or other formation, consider the following steps:

  1. Even in an area where lease values are rising, that does not guarantee you will get the 1st class lease agreement (versus coach class).  If there is public land in your area (e.g., state game or forest lands) find out if that is leased or a candidate for leasing.  Get a copy of that lease, either from the state or from the energy company.
  2. If you have to file a right-to-know or freedom-of-information request, do so.  If the gas company holds a lease on public lands but declines to share that information with you – you already know the answer.
  3. Seek out other benchmarks.  You already have access to a copy of one Pennsylvania Game Commission lease attached to this blog post.  Go on the internet.  Some states post sample leases which should be helpful.  Recently, the Associated Press reported that Pennsylvania solicited bids for drilling leases on public forest land in north central Pennsylvania.  The production royalty is pegged at 18%.2

As always, educate yourself and exercise informed tenacity.  It is your property; and you cannot depend on the kindness of strangers from the energy companies to do the right thing.  Negotiate from a position of knowledge.  You may not get everything you want in a lease; but there is no reason to settle for less.

Understand the power of numbers.  In states across the country, we are seeing more examples of property owners banding together in order to negotiate better gas leases.  Make it work for you.

If you negotiate a drilling lease, remember this is a business transaction.  It is not about making a new friend who is going to give you money and leave your property in pristine condition.  Be as tough minded as the gas companies and landmen.  If you set low expectations for yourself, they will be happy to meet them.

Decision Making — Important

By the way, as part of your education, if you are thinking about signing a gas lease – perhaps because of the hoopla over opportunities in the gas-rich Marcellus Shale, read the advice and perspective in our post, “Marcellus Powerball.”

Link: http://www.spectraenergywatch.com/blog/?p=494

Links & Resources

1 Drilling Lease between Pennsylvania Game Commission and PGE for Game Lands 49, Bedford County, PA: Pennsylvania Game Comm Oil & Gas Lease 2002.pdf (file size 20mb)

2 “5 Firms Submit High Bids for Gas Drilling in Pa.” – News report, January 13, 2010:  5-firms-submit-high-bids-for-gas-drilling-in-pa

Lobbying $$$ — See what Spectra Energy spent in Pennsylvania and in Washington.  Its 2008 expenditures put it in the top 10% of the oil and gas industry’s federal lobbying: http://www.spectraenergywatch.com/blog/?p=438

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