Lease & Royalty Payments

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    Breaking News: PA Supreme Court Rules Against Landowner Seeking to Invalidate Lease

    Last year, Susquehanna County landowner Herbert Kilmer sued ElexCo Land Services Inc. and Southwestern Energy Production to invalidate his lease. The reason? He said that by deducting drilling costs from his royalty payments, his payments fell below Pennsylvania’s law that a minimum one-eighth share of royalties are guaranteed to the landowner. A Susquehanna County judge ruled against the landowner and in favor of the energy companies. Other people started filing lawsuits, so the energy companies asked the PA Supreme Court to take up the matter. The Supremes did, and today they also ruled in favor of the energy companies:

    Pennsylvania’s high court sided Wednesday with the natural gas industry in a dispute with landowners who had sought to invalidate the leases they signed before the Marcellus Shale rush intensified and drove up land values.

    In a 6-0 decision, the Supreme Court upheld a Susquehanna County judge’s ruling that validated lease agreements that subtract drilling costs from the calculation of landowners’ natural gas royalties.

    Justice Max Baer, who wrote the court’s decision, noted that the term “royalty” and the method of calculating a one-eighth share is not defined by the state’s Guaranteed Minimum Royalty Act. However, he cited various texts on the industry that say a royalty is paid from the net amount remaining after deduction of certain production and well development costs.*

    This case will now force similar pending cases to be settled or dismissed. Landowners beware: (1) There is no such thing as a “standard” contract, and (2) Always have an attorney review a lease agreement first.

    *BND.com (Mar 24) – Pa. justices side with gas industry over landowner

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    A Novel Approach to Signing New Landowners by Chesapeake Energy in Bradford County, PA

    Forget the landmen, Chesapeake Energy wants to talk directly to landowners and is throwing a “signing party” hoping to convince landowners in Bradford County to show up and sign up at the Wysox Fire Hall on March 20th.

    Chesapeake sent letters to unsigned landowners in Towanda, North Towanda, Wysox, Standing Stone, Monroeton, Asylum, Wyalusing and Herrick, inviting them to the event.

    Chesapeake tells landowners in the letter:

    “Our records indicate that you own certain oil and gas rights that Chesapeake is interested in leasing,” the copy of the letter states. “We will have personnel on hand to discuss with you an offer to lease [the oil and gas rights on] your property that will potentially allow you to share in the royalty pool to be established for wells to be drilled in your area.”*

    The letter offers unsigned landowners a 10-year lease for $5,000 per acre and 20% royalties. By comparison, just last September Chesapeake signed a deal with the Wyoming County Landowners group for $5,750 per acre and 20% royalties. Chesapeake has made an offer to Wysox Township to lease town land for the same terms ($5,750 per acre, 20% royalties). However, in January 2010, Northern Tier Career Center in North Towanda approved a five-year lease with Chesapeake for $6,500 per acre and 20% royalties on the school’s 73 acres.

    MDN has not seen a copy of the full letter, but a commenter on The Daily Review website states the Chesapeake letter was sent to landowners with less than 3 acres of land. Landowners with small parcels do not have as much negotiating clout as larger landowners or groups. Even so, MDN cautions landowners about just showing up and signing up. While it may be a good deal, the devil is in the details of a contract. There is no substitute for having a contract reviewed by legal counsel before signing. Landowner groups (who retain legal counsel) are often the best way to ensure your interests as a landowner are protected. If you cannot find a landowner group to join, make sure you retain a good lawyer with experience in mineral rights leases.

    Go enjoy the free coffee and donuts, but be careful about signing anything on the spot.

    *Towanda The Daily Review (Mar 17) – Chesapeake to hold lease-signing event for Towanda-area landholders

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    Energy Companies in PA Must Now Disclose Gas Well Production Numbers Every Six Months

    Faster disclosure of gas well production data is coming to Pennsylvania. On Tuesday, March 16 the PA Senate passed a bill already passed by the PA House that would force drilling companies to disclose gas well production data every six months. The existing law, passed 25 years ago, allows drillers to keep production numbers secret for five years. No more. Gov. Ed Rendell has said he will sign the new measure into law.

    What does it mean for landowners in PA? You’ll now have access to the numbers to ensure your royalty payments are timely—and accurate.

    For more, see: Binghamton Press & Sun-Bulletin (Mar 16) – Pa. to reveal drillers’ secrets in gas shale rush

  • New Directory of Marcellus Landowner Groups

    Marcellus Drilling News has just posted an online directory of landowner groups. One of the best ways for landowners to protect themselves and obtain favorable terms for leasing their land, and protecting their land environmentally, is to collectively negotiate with energy companies. Many landowner groups have sprung up in the Marcellus Shale region over the past 2-3 years for just that purpose. This new directory aims to provide the most up-to-date listing of these groups.

    If you belong to a landowner group and do not see your group listed, please email us! And if your group is listed but the entry needs updating, send along the changes.

    If you have suggestions for how to make the Directory better, or if there are other resources you would like to see added to the MDN website, drop us a line at: jim@marcellusdrilling.com.

    The address for the new MDN Directory of Marcellus Landowner Groups is:
    //marcellusdrilling.com/landowner-groups/

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    Landowners Beware of Post-Production Expenses Deducted from Your Royalty Checks

    An informative article with a lot of background on the issue of gas royalty payments and the practice of deducting post-production expenses from those payments is published in today’s The State Journal. The article covers in detail the case of Tawney v. Columbia Natural Resources that was settled by the West Virginia Supreme Court in 2006. That decision said, in essence:

    [G]as producers cannot deduct “post-production” expenses — those incurred between the wellhead and market, such as dehydration, compression and transportation — from royalty payments unless explicitly spelled out in the lease.*

    West Virginia is in the minority of states that have ruled against post-production expenses. Other states disallowing post-production expenses (unless specifically spelled out in the lease) include Arkansas, Colorado, Kansas and Oklahoma.

    However, because gas “at the wellhead” is not in “marketable condition,” a number of other states do allow deduction of post-production expenses from royalty payments in cases where it’s not specifically enumerated in the lease. Those states include Louisiana, Mississippi, Texas, California, Montana, New Mexico and some others.

    Kentucky and Pennsylvania have not yet ruled on the matter, although the Pennsylvania Supreme Court is due to rule soon in Kilmer v. Elexco Land Services Inc.

    The lesson for landowners: Make sure the language in your lease is spelled out in detail about what kinds of post-production expenses can and cannot be deducted from your royalty checks. And if you have a contract that is not specific, get legal advice and be sure you’re receiving the money you’re owed.

    *The State Journal (Mar 11) – State Courts Continue to Evaluate Gas Royalties

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    Marcellus Leasing & Drilling in the West Virginia Panhandle Heats Up

    West Virginia Marcellus Shale is getting hot. From an article* in the Steubenville (OH) Herald-Star, we get a mountain of good intelligence on what energy companies have and are paying in the West Virginia panhandle:

    • AB Resources is paying the New Vrindaban Hare Krishna Community in Marshall County $2,500 per acre for approximately 4,000 acres, and 18.75 percent production royalties. That works out to $10 million in lease payments.
    • Chesapeake paid $750 per acre and 14 percent royalties to the Wheeling Park Commission for leases in the Oglebay and Wheeling Parks in 2009. The park commissioner is not happy that Chesapeake is planning to pay more this year to lease public lands in neighboring Ohio County.
    • Chesapeake paid $2,800 per acre and 18.75 percent production royalties last month to the Marshall County Board of Education for rights to 177 acres in Sherrard.
    • Chesapeake has 11,000 acres under lease in Ohio County, and 45,000 acres (with 26 wells drilled) in Marshall County.
    • Trans Energy owns and operates 300 active wells in Marshall, Wetzel and Marion counties, with 40,000 acres under lease.

    Also, according to the article:

    Current lease contracts range from as low as $5 per acre to as high as $2,800 per acre, with production royalties ranging from 12.5 percent to 18.75 percent. Landowners are being urged to think carefully before signing any contract.*

    *Steubenville Herald-Star (Mar 8th) – Steubenville Herald-Star – Natural gas could bring riches to Panhandle

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    Energy Company EQT Buys Rights to 58,000 Acres in PA, Now Holds 500K Net Acres in the Marcellus Shale

    EQT Corp. said today it is buying mineral rights to 58,000 net acres in the Marcellus Shale from a group of private operators and landowners for $280 million in stock and cash. That works out to $4,828 per acre. While the names of the sellers were not disclosed, most of the land is located in the Pennsylvania counties of Cameron, Clearfield, Elk and Jefferson.

    The deal includes a 200 mile gathering system and approximately 100 producing vertical wells. The deal is expected to close on April 30th, at which time EQT will then control approximately 500,000 net acres in the Marcellus Shale.

    More Details: Yahoo Finance (Mar 2) – EQT Announces Strategic Marcellus Acreage Acquisition; Increases EUR per Marcellus Well; Provides Update on Latest Marcellus Well

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    Susquehanna County, PA Landowner Offered $800K for Mineral Rights to 153 Acre Farm

    A landowner in Brooklyn Twp. (Susquehanna County), Pennsylvania faces a big decision. Denise Dennis owns 153 acres and a farm that is eligible to be placed on the National Register of Historic Places. Her ancestors moved to the land in 1811. They were African American and they were free landowners during a time when slavery was legal.

    Ms. Dennis does not want to “destroy the property or the landscape,” but she needs money to fix up the buildings, the cemetery and the stone walls. According to a news report, she has been offered $800,000 for the “mineral rights” to the farm. No word on which drilling company made the offer, and what those rights entail (i.e., does that include royalties?).

    Ms. Dennis is mulling over the proposition.

    See: WBNG-TV (Mar 1) – The Price of History

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    Vestal, NY Landowner Coalition Still Shopping for a Deal, Comes Down on Their Price

    Binghamton Press & Sun-Bulletin (Feb 20)
    Vestal Coalition gives broker an extension to get deal on Marcellus Shale drilling sites

    A Vestal, NY landowner coalition with some 550 people has given their designated broker another few months to try and negotiate a lease on behalf of the group. According to the article:

    Members of the group, called the Vestal Coalition, have agreed to settle for a minimum of $5,750 an acre, plus 20 percent royalties, for a five-year lease of mineral rights, and a three-year extension.

    The opening offer was $7,500 an acre and 25 percent royalties. There were a few counter offers, but no deals for those terms.

    Drilling companies, for now, are in a holding pattern for New York deals until the New York State Department of Environmental Conservation issues drilling guidelines. Once that happens, and once permits start to be issued, the Vestal Coalition expects to get a deal done.

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    Millionaire Landowners – In New York State?!

    Crain’s New York Business (Nov 1):
    The new gold rush

    With heavy dollops of anti-drilling sentiment (so the reporter keeps his job), this article is worth a read because of the fountain of good information about economics for landowners in the Marcellus Shale. The theme that runs through it is the story of a truck driver with 120 acres outside of Binghamton, NY who stands to become a millionaire many times over if and when drilling starts to take place in New York. The truck driver, Jeff Decker, is not allowed to divulge the terms of his upcoming lease, but it’s thought to be in the neighborhood of $700,000–and that’s just the signing bonus for his 120 acres. If they drill on his property and he gets, oh say a 20% royalty, he’s easily into millions of dollars.

    This nugget of useful detail from the article:

    An 80-acre swath of the Marcellus can eventually produce $42 million worth of natural gas, says Dean Lowry, president of Fort Worth, Texas-based Llama Horizontal Drilling Technologies. With drilling leases now giving landowners 20% royalties on productive wells, Mr. Decker could become a millionaire several times over.

    Drillers, whose cost to develop an 80-acre parcel is about $4 million, would also prosper. “Fifty percent of the gas could be extracted in the first three or four years,” Mr. Lowry says. “You get your investment back in the first year to 18 months. Then you get seven to nine times your money over the next 20 to 25 years.”

    I would also caution about what’s coming in the way of taxes when drilling finally does start in New York. This rather sobering paragraph from the article:

    In New York the Paterson administration, heeding the cries of landowners and local officials in economically depressed upstate communities, has issued draft regulations to allow it here. Landowners are keen to lease their property. Cash-strapped municipalities are eager to tax the extracted gas. Business groups say drilling would bring jobs and jolt local economies. The state would collect more income tax and, if it imposes one, a tax on gas production.

    You can expect local municipalities to not be able to resist putting their hands into landowners’ pockets to relieve them of some of their new found money. And New York State will undoubtedly not be able to resist either. Politicians are like drug addicts who need an economic “fix”. Just a warning so you’re not surprised when it happens.

    We also have the obligatory couple of paragraphs on “don’t you dare drill in the Catskill watershed” for fears of contaminating New York City’s water supply. The stated reason is this:

    New York is one of five big cities not required by the federal government to filter its water, and revocation of that waiver would necessitate a filtration plant costing $10 billion to $20 billion.

    It seems Crain’s New York Business is a bit behind the eight ball. Chesapeake Energy, the only leaseholder with land in the Catskill watershed, has already said they won’t drill there. Makes no difference, this particular political issue is just too juicy to not use–even if it’s no longer an issue.

    We learn from this article that Hess is New York’s largest energy company, and that Chesapeake Energy and Fortuna Energy are the most active leasing companies (so far) in the Marcellus Shale in New York.

    Overall, some good info in this article, but as always with mainstream media, be sure to read between the lines.

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    Vestal Landowner Group Shops for a Drilling Contract

    Binghamton Press & Sun-Bulletin (Oct 28):
    Vestal landowners offer lease plan for gas drillers

    The Vestal Coaltion, a group of landowners in Broome County, NY, has created a draft lease agreement on behalf of its members and is now shopping it, looking for an energy company to sign the lease. According to the Press & Sun-Bulletin:

    A coalition of Vestal landowners has a deal for you: Roughly $46 million and 20 percent royalties for mineral rights to about 8,000 acres.

    A group of about 400 property owners signed a lease that would make it attractive for energy companies to do business with them, said Marty Leab, a coalition organizer. They have commissioned Dean Lowry and Llama Horizontal Drilling to find a taker in 90 days or less.

    Specifically, the lease would pay landowners a minimum of $5,750 an acre, plus 20 percent royalties, for a five-year lease of mineral rights, and a three-year extension, according to a copy of the lease obtained by the Press & Sun-Bulletin.

    According to the website for the Vestal Coalition, they’re still accepting new landowner members. Visit their site: www.coalitionconnection.com.

    Also, this tidbit of older news from the article, but still valuable to know:

    The market heated up as natural gas prices rose in spring 2007, and XTO bought mineral rights to land in the Deposit area for about $2,500 an acre. Since then, offers in the region have shot up to between $3,000 and $6,000 an acre and 20 percent royalties

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    Fortuna and Hess Royalty & Signing Bonus Numbers

    Elmira Star-Gazette (Oct 17):
    Slow down in gas drilling activity allows chance for consideration

    A generally anti-drilling “article” by the business writer for the Elimra Star-Gazette. But he includes some helpful and interesting information for landowners:

    I’m also watching how Fortuna and Hess are slugging it out for leasing rights in the counties to our east. What started here as a 12.5 percent production royalty and signing bonuses of a few hundred dollars per acre has morphed into the 20 percent royalty figure and signing bonuses of several thousand dollars per acre being offered in Broome and the surrounding counties on either side of the border.

    Landowners and landowner groups take notice! Be sure you’re getting the best prices you can from your contracts.

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    $25K Per Acre for Lease Deals? Not in the Marcellus — Yet

    An interesting tidbit from a story about energy giant ConocoPhillips. The article, published on the Houston Chronicle’s website, was about recent efforts by ConocoPhillips to “debunk Wall Street’s view that the Houston-based oil major grows by acquisition rather than finding its own oil and gas.” Buried far down the story is a statement (not a direct quote but a summary statement) from Larry Archibald, company vice president of exploration and production. The statement, as summarized by the reporter, was this:

    He [Archibald] said ConocoPhillips shied away from “feeding frenzies” at high-profile shale plays where some companies rushed in and spent $25,000 or more per acre amid the pre-recession boom in gas production. Those plays included the Haynesville in East Texas and northern Louisiana, and the Marcellus in Pennsylvania, New York, Ohio and West Virginia.

    He said ConocoPhillips will keep spending in more established plays, such as the Barnett shale near Fort Worth, and the lesser-known Eagle Ford in South Texas, where the company has a leading acreage position.

    Everyone drools to see energy companies spending $25K per acre for leasing rights. But don’t get your hopes up too high. Marcellus Drilling News has not (so far) found any instances of leasing deals that approach anything near $25K per arce. It’s been more like $5K per acre on the high side in the Southern Tier of New York. If you know of high paying deals in the Marcellus, please let us know!

    The other interesting point about the statement is this: It looks like ConocoPhillips will not be a major player in the Marcellus anytime soon, which is unfortunate.

    Read the full article: ConocoPhillips flaunts its exploration finds

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    Range Resources Hands Out $1.2M in Royalty Checks in PA

    Breaking news, this just in from the Wilkes Barre Times-Leader:

    A leading company drilling on the Marcellus Shale natural gas formation in Pennsylvania says it handed out nearly $1.2 million in royalty checks last week.

    Range Resources Corp. spokesman Matt Pitzarella said Monday the distribution is the first significant royalty the company has paid from its 120-plus Marcellus shale wells.

    People in the exploration industry say they haven’t yet heard of such a large distribution of royalties from Marcellus shale gas wells in Pennsylvania.

    The money went to 31 landowners who have wells on or near their land and live near Range’s gas-processing plant about 20 miles south of Pittsburgh.

    Read the article: Marcellus shale wells royalty checks go out (Wilkes Barre Times-Leader)