Underground Gas Storage Leases
Driven by Threat of Eminent Domain;
Very Different From “Drilling” Leases
Toss Old Playbook;
Negotiate Smart, Identify True Comparable Value!
For landowners who want the best gas or mineral lease deal, your benchmark isn’t the person next door, or the “real estate” appraisal of your property. It just might be the lease deal your government gets for public lands (which you pay for with tax dollars).
This is true even in cases where property and/or property rights are seized under the threat of eminent domain, such as underground natural gas storage fields or gas pipelines. Storage leases are not mineral leases, and they come with their own challenges.
Storage leases often involve the threat of eminent domain. Several states will see an increase in “taking” of private property rights for pipelines and underground gas storage fields.1 (See Links & Resources at the bottom of this post for government details on underground gas storage fields.)
In the Northeast, much of that activity will be driven by gas and pipeline companies eager to cash in on the gas-rich Marcellus Shale. This geological formation runs through parts of Pennsylvania, New York, West Virginia and Ohio.
We’ve also talked with property owners in Western states who are fighting underground gas storage fields.
A recent Pittsburgh Tribune-Review report on pipeline expansions in Western Pennsylvania says it all in this headline: Texas Eastern Transmission’s tactics leave landowners feeling bullied. Texas Eastern is the pipeline division of Spectra Energy; and it is bringing the threat of eminent domain to Pennsylvania and New Jersey. Pdf file: texas-eastern-transmissions-tactics-leave-landowners-feeling-bullied-pittsburgh-tribune-review
Our two-year battle against Spectra Energy which seized our property rights for the Steckman Ridge 12-billion cubic feet underground natural gas storage field in Bedford County, PA, led to the development of this website.
Any property owner facing eminent domain quickly learns that they are not standing on a level playing field legally, economically or politically. The 5th amendment to the U.S. Constitution states, “… nor shall private property be taken for public use, without just compensation.”
But there is a lot of play in the “just” of just compensation. If you are impacted by underground gas storage fields or gas pipelines across your property, you need to know whether the gas or pipeline company has a sweetheart lease deal with the government.
Here’s why: The gas or pipeline company’s “perfect world” business model is to seize your property rights - with the help of government - then pay you pennies on the dollar for its legal theft.
Gas companies treat government very differently, however, and the difference is educational.
For example, in lease agreements for underground gas storage fields:
- Private property owners typically receive a modest one-time payment driven in part by the number of acres.
- In contrast, state government leases typically include a long-term cash royalty payment for the amount of gas withdrawn and/or injected into the underground field.
Comparable Value Game
This is a huge discrepancy in what is known as comparable market value. Politically, this different treatment is not sustainable in today’s world where we speak of transparency and equitable treatment under law. It is time for landowners to throw out the old playbook.
If you want to know how to do that, keep reading.
After filing a right-to-know request with the Pennsylvania Game Commission, I received a copy of the storage lease for State Game Land 49 in Monroe Township, Bedford County, PA.2 (See Links & Resources at the bottom of this post for a pdf file of the Game Commission “storage” lease discussed here.)
The difference in value between the Game Commission lease and a proposed offer we received from Spectra Energy (Steckman Ridge) is sobering.
In a letter dated April 16, 2008 from Ronnie L. Acorn, Rights-of-Way & Land Manager for the project, we were made a proposed offer of a total one-time payment of approximately $1,600 on our ten acres of land.
Your Right to Know
In contrast, the company’s lease agreement with our next-door neighbor (PA game lands) contains the following provisions:
- An annual minimum payment (”base rate”) of $15,067 OR a fee of $0.03 per thousand cubic feet (MCF) for 4.322% of the gas withdrawn from the total storage reservoir during the year — whichever is greater.
- In addition, a one-time bonus payment of $48,460.
- On top of that, there is a rental adjustment, which means that every 5 years, the base rate and the withdrawal rate will adjust upward by 3%.
Thus, along with a bonus payment and a 3% increase in the lease payment every 5 years, there is a 25-year annuity stream back to the state, in the form of a royalty for the amount of gas withdrawn from the underground storage field.
So “just compensation” for the state is very different from “just compensation” for private property owners — even when the acreage is next door. That is where comparable fair market value must be applied — not on a real estate “appraisal” that does not take into account actual lease benchmarks like the one cited.
Now that you know what the true benchmark of value is (the gas company’s lease with state or federal government), it is time for a very strategic discussion with your attorney.
Remember the phrase, “But this is the way we’ve always done it?”
Change Strategy - Toss the Old Playbook
You and your attorney must collaborate to develop an assertive legal argument that positions a gas company’s lease with the state as a legitimate measure of fair market value.
Fair market value in cases like this must be more than surface use, or what similar acreage sold for. It is very important to include the value of other storage leases - in particular gas company leases with the state.
Traditionally, few have made a big deal about the different lease agreements (state versus private property owners).
The law says you are entitled to just compensation, so here is what you and your attorney can do:
Wherever possible, the best benchmark of comparable fair market value is from the lease agreements that gas companies like Spectra Energy have with the government.
Beware of what I would call a “real estate” appraisal cobbled together by expensive consultants who may not even describe your property correctly. If it does not take into account a lease like the Game Commission lease (see pdf file below), you and your attorney will want to shift strategic gears.
If your property is out west, look at all such leases, including any that may be on federal or tribal land. This is your comparable fair market value benchmark. It exists in real life.
Your Goal: Just - Not Less - Compensation
Your goal is a mirror-image lease agreement (with adjustments for acreage and surface use) similar to what the gas company offered the state for use of taxpayers’ public lands.
You and your attorney need the following:
- Understand what kind of appraisal is needed;
- Include the right data as a foundation for the appraisal - specifically, locate similar storage lease agreements with the state;
- Identify a knowledgeable expert witness who is comfortable with technical issues in the gas industry and can include an analysis of the state lease in the appraisal.
Your argument for fair market value might be stated along the following lines:
“Since Big Gas Corporation was willing to pay ($X) for the state acreage, then we should conclude that the value of other owners’ acreage in the same area used for the same purposes should be comparable.”
It is time to change the gas industry’s playbook. Eminent domain is a large enough affront to property owners without adding separate and different forms of just compensation - one for citizens, and a better one for the state.
Links & Resources
1Underground Gas Storage Fields - Energy Information Administration of the Department of Energy
According to this government source, there were just over 400 underground natural gas storage sites in the U.S., at the end of 2007. “During the year, four new storage sites were added, one in Michigan, Mississippi, Pennsylvania, and West Virginia, while 18 existing storage fields underwent expansions, and two storage fields were abandoned (ceased operations).” (See subhead, “Underground Storage by U.S. Region.) Link: http://www.eia.doe.gov/pub/oil_gas/natural_gas/analysis_publications/ngpipeline/undrgrnd_storage.html
2Storage Lease between Pennsylvania Game Commission and Spectra Energy (i.e., Steckman Ridge) - See especially all of Section 4: “Annual Payment - Storage Fee/Rental.” Pdf file: PAGameCommGasStorageLease09.pdf (9 MB)