Salem, OH to Sign Lease Deal with Chesapeake for $7K+20%

The City of Salem, Ohio, which straddles both Columbiana and Mahoning counties, is due to sign a three-year oil and gas lease with Chesapeake Energy today for 381 acres of land owned by the city.

The deal calls for an initial $3,500 per acre signing bonus and 20% royalties, with an additional $3,500 per acre for a three-year extension. All told, it will be $7,000 per acre for a six-year lease—one of the highest amounts MDN has seen (if the three-year extension is exercised).

A three-year oil and gas lease agreement between the city and Chesapeake Exploration may be signed today for $3,500 an acre for non-surface rights, a 20 percent royalty on gross proceeds and a three-year renewal option worth another $3,500.

“That would be $7,000 over six years,” city Councilman Dave Nestic said, if the company chooses to renew the deal. “I think it’s a good move.”

Mayor John Berlin told city council about the final proposal Thursday night, with city council voting to give him the authority to enter an agreement to sell the mineral rights. The agreement will cover about 381 acres of land owned by the city, located outside of the city limits.

Signing a shale lease deal was one of the priorities set by council in January. It had been discussed at length last year, but never got completed. Council officially gave Berlin the power to negotiate for a lease deal in March, which he and city Law Director Brooke Zellers have been working on since then.

Previous offers had been for $3,500 an acre for non-surface rights and 17 percent royalties on net proceeds, then 18.5 percent royalties on net proceeds. Berlin explained that the difference in price between what some other entities had recently secured had to do with surface and non-surface rights. He said the $5,800 an acre deals were for entities allowing surface drilling on some of their acreage.

Zellers, who put a lot of time into the agreement, said he was satisfied with the language, especially the fact that they were able to negotiate away the market enhancement the company wanted on the royalties. Basically, instead of the company being able to deduct its costs off the top, such as for transportation, and then giving the city it’s proceeds from the net income, they’ll be giving the city 20 percent off the top first, from the gross proceeds. He also talked about the renewal option and how the city has a chance to get paid an additional $3,500 if the company chooses to extend the term of the contract.*

*Salem (OH) Salem News (Jul 6, 2012) – Salem Council gives go-ahead on drill lease