Some Drillers Using Questionable Tactics to Hold Land Under Lease Beyond Original Term
A number of landowners in Pennsylvania signed gas leases with energy companies more than five years ago for very low amounts—$2 per acre in some cases—as a signing bonus. Landowners, realizing that a contract is a contract, waited patiently for the expiration of the lease—typically five years. But then, at the last possible moment, sometimes just hours before the lease is due to expire, the energy company would clear a few trees or park a bulldozer on the land in order to comply with the terms of lease, thereby extending the lease indefinitely because they had “made an effort” to start drilling.
Case in point: Dave and Karen Beinlich. They signed a lease for $2 an acre, for a grand total of $234 signing bonus on their 117 acre farm.
The couple, who live in Forksville, in rural, mountainous Sullivan County [PA], had been looking forward to the end of their 5-year lease, originally with The Keeton Group LLC but later transferred to Chief. They had signed it in haste. Their infant daughter was hospitalized in Philadelphia and "we really needed the money to travel," recalled Karen Beinlich, who pushed her reluctant husband to sign.
Fast-forward five years, to last fall. Their land had not yet been drilled. The couple knew that if Chief failed to begin developing a well by the time their lease expired at midnight on Oct. 24, they would be free to negotiate a new, more lucrative lease with Chief or some other company. Or free not to sign a lease at all.
Chief apparently knew it, too. On Oct. 21, the Dallas-based company placed the Beinlichs into a larger drilling unit with 19 other tracts of land. Then it staked out an access road and parked a bulldozer on one of their neighbors’ parcels – 31 hours before the lease expired. Chief didn’t actually begin clearing land for the access road until three days after expiration, according to the lawsuit.
A contractor tipped Karen Beinlich to Chief’s tactics.
"Chief is hot and heavy all over me to get this bulldozer here because they’ve gotta lock in some landowners," Beinlich recalled the man saying. He was apparently unaware that she was one of the landowners in question.
"They’re not playing fair," Beinlich said in an interview. "We expected them to be good neighbors and sit down with us."
The company asserted, through its lawyer, that its declaration of the drilling unit, and the placement of the bulldozer, constituted "operations in preparation for drilling" and kept the Beinlichs’ original lease in force.*
The Beinlich’s have filed a lawsuit against Chief Oil & Gas charging that clearing their land didn’t happen until after the end of the lease. You can expect more lawsuits from landowners:
"It’s going to be a topic of great litigation over time," said Dale Tice, an oil and gas attorney in Lycoming County, where hundreds of wells have been drilled. "The verbiage that appears in the leases may be relatively clear, but what’s going to be unclear is what exactly the gas company has to do" to hold the land by production. "Does it mean they can just put a stake in the ground?"*
MDN’s opinion: There’s more than enough money to go around when the gas starts to flow. Although Chief Oil & Gas may have complied with the letter of the law (and even that is questionable), they certainly are not complying with the spirit of it. They can afford to fairly compensate landowners like the Beinlich’s. This gives all drillers a bad name.
*KBOI Channel 2/AP (Jul 24, 2011) – Lowball gas drill leases haunt Pa. landowners
That lease should have never been offered and never been signed for $2/acre. 5 years ago in PA Marcellus development was already well underway, and the Keeton Group knew that a lease was worth a lot more, so shame on them. And if the Beinlichs would have done just a little bit of research they would have realized that Keeton was super-lowballing the lease offer. But, they signed it, so a deal is a deal. Now, 5 years later, the new lessee Chief may have realized that they were going to lose the lease if they didn’t do something to hold it, but sneaking in a bulldozer and some stakes without even letting the landowners know was pretty shady. They could have let the landowners know what they were planning to do. My hope at this point is that there is some requirement in the lease that once they are started that they have to move at a reasonable pace to drill and develop the well, because even though the Beinlichs got next to nothing for a signing bonus, now at least they should start to get some royalties, unless Chief can just stall indefinitely by just having a road put in. Of course everyone has their side of the story, but right now Chief does not look like a good driller to deal with, whether or not they are legally right in this case.
Very well stated. My sentiment exactly. Chief may, in the end, have contract law on their side, but they have already lost the battle for public opinion. It’s about being fair and equitable. Do the right thing! It’s not too late.
Alternatively, as you point out, if Chief moves forward quickly with drilling, at least the Beinlichs can get royalty payments, which is where the “real” money is. Still, leaves a sour taste in the mouth.
according to the implied covenants of an oil and gas lease the company must “begin Drilling operations” in order to hold the lease by production. Parking a bulldozer or marking a road, or throwing a pipe on the ground will not pass the reasonably prudent person test for what beginning drilling operations means. Shame on Chief for not being a prudent operator if they in fact did this!
What…they think this is the wild, wild, west? Chief has certainly been behaving like our neck of the woods is Deadwood, where anything goes because the sheriff is firmly in your pocket. Chief also spills alot.