Doug's "Marcellus shale gas Blog"

What Should I Do?

Many oil and gas leases throughout the Marcellus Shale region of Pennsylvania are on the verge of expiring due to the gas companies’ inability to “hold” the property under the lease terms. Natural Gas companies holding expiring leases are often approaching landowners and seeking an “extension” of the expiring Oil and Gas Lease. These “extensions” typically range from six (6) months to two (2) years. Landowners, who receive offers to extend their existing Marcellus Shale Oil and Gas Lease, or top leases from other companies, should contact experienced counsel immediately. Time is very important in these situations so that the landowner can gather as much information as possible to allow them to make the best decision for their particular circumstances. Experience is also crucial in these circumstances as an experienced lawyer can provide valuable insight to a landowner weighing their options.

Even though you may be offered a lease extension, the gas company will often engage in activity that “holds” the expiring lease. Many times the lease is “held” within days of the expiration date and the disappointed landowner has lost a great opportunity. However on other occasions the lease expires and the landowner now becomes a “free agent” to lease the property to any company who is interested. The key is to your decisions rests with information.

The landowner considering an Oil and Gas Lease extension must gather credible information and seek experienced counsel. As usual, there is no set answer for everyone and each case must be looked at individually while using past experience to assist you throughout the evaluation process. I have seen far too many times landowners who decide to “ride it out” only to have the existing Oil and Gas Lease “held” at the last minute by the Oil and Gas Company. This is absolutely not a situation where the landowners should listen to their “expert” neighbor or somebody else offering them advice, unless that person is experienced in working with expiring Leases. Your lawyer should have the ability to communicate directly with the natural gas company or a knowledgeable representative to acquire credible information to aid in determining what is in your best interest. This is not the area for the “first timer” as mistakes can costs hundreds of thousands of dollars, and even millions of dollars depending on the size and location of the property.

If you are presented with an extension for your expiring Marcellus Shale Oil and Gas Lease call our office today for assistance. Immediate action will ensure that the landowner will gain as much information as possible to allow them to make the best decision for the property. I have worked with many landowners in collecting information and talking with the gas company directly and with representatives to gain insight to effectively evaluate the landowner’s options. Remember, time is critical in these circumstances as extension options are often only available for a short period of time. If you are presented with an Extension offer for your existing Oil and Gas Lease, call us for assistance and representation to guide you through this important time.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

What Should I Do?

Marcellus Shale landowners across Pennsylvania are being approached by their natural gas company to agree to a Modification, Amendment, and Ratification of their existing Oil and Gas Lease. First and foremost, ANYTIME THE GAS OR PIPELINE COMPANY WANTS YOU TO SIGN A DOCUMENT YOU MUST THOROUGHLY UNDERSTAND THE DOCUMENT AND ANY AND ALL CONSEQUENCES THAT MAY RESULT UPON EXECUTION OF THE DOCUMENT.

With regard to a Modification, Amendment, and Ratification of an Oil and Gas Lease that seeks to modify the maximum unit size, information is crucial in order to make the right decision. Often there is not an easy answer when asked to increase the maximum unit size established in the original Oil and Gas Lease. What is known is that the landowner must acquire credible and reliable information in order to make the best possible decision.

There are many variables that come into play when considering signing modifications and amendments to your existing Marcellus Shale gas lease. There is no “cookie cutter” answer to these questions. Common considerations include:

  1. The size of the parcel under lease;
  2. The location of the parcel in a “proposed” production unit;
  3. The terms of the existing Oil and Gas lease;
  4. The drilling plans and patterns of the natural gas company making the request to modify or amend the natural gas lease; and
  5. The precise modification language requested and proposed language’s impact on the existing Oil and Gas Lease.

These are all factors that a landowner must consider when deciding whether to execute a Modification, Amendment, and Ratification of their Oil and Gas Lease. However, these factors are not exhaustive and do not always carry the same weight. There are always specific and unique circumstances facing the landowner that will influence the evaluation process.

Of course, gas companies will also ask landowners to sign amendments and ratifications to existing Oil and Gas Leases that do not carry a substantial impact for the landowner. However, many times a Modification, Amendment and Ratification will significantly modify the existing Oil and Gas Lease to the Marcellus Shale landowner’s detriment.

One negative example occurs where the existing Oil and Gas Lease contains a minimum well requirement within a specifically established maximum unit size. For example, maybe the original Oil and Gas Lease requires one well per one 160 acres of property contained in the production unit. Accordingly, a 640 acre unit would require at minimum 4 gas wells. Obviously, 4 producing Marcellus Shale gas wells should yield far more landowner royalties than 1 producing gas well.

Landowners must heavily scrutinize any Modification, Amendment, and Ratification to their existing Oil and Gas Lease. Landowners should be very hesitant to give up any terms and protections that they negotiated in their original Oil and Gas Lease. However, that is not to say that the landowner should blatantly refuse to sign any Modification Agreement to their existing Oil and Gas Lease. Some Oil and Gas Lease Modifications and Amendments may work to the landowner’s advantage for future production and natural gas royalties.

Small acre landowners should be especially concerned when approached to sign a gas lease modification and make sure that they understand the potential positives and negatives of the modification document. These gas lease modification decisions must not be entered into lightly and should be made with the assistance of an attorney experienced in Marcellus Shale issues. The wrong decision can result in a landowner being excluded from a royalty producing production unit and be extremely costly to the landowner.

If you are presented with a Modification, Amendment, and Ratification to your Oil and Gas Lease, you should contact an experienced Marcellus Shale attorney to thoroughly review the document so that you understand what is being asked, and how it may impact you in the future. Remember, Oil and Gas companies are not in the business of amending and modifying Oil and Gas Leases solely for the benefit of the landowner. The key is to determine whether executing a Modification, Amendment and Ratification of your Oil and Gas Lease is in your best interest.

Any landowner faced with a difficult decision as to whether to execute a Modification, Amendment and Ratification of their Oil and Gas Lease should feel free to contact my office at any time. I stress that sometimes executing the proposed Modification, Amendment and Ratification of the Oil and Gas Lease is not a major concern. However, in many cases, signing the modification and amendment will have a significant and long lasting negative impact on the landowner. The Marcellus Shale landowner must be informed and make the best decision for their particular situation.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

Do Not Make the Same Mistakes Twice!

For years I have receive countless telephone calls at my office from landowners who are extremely disappointed and frustrated with the financial terms and property protections contained in their Marcellus Shale Oil and Gas Lease.  Virtually every landowner who signed an Oil and Gas Lease early on in the Marcellus Shale gas leasing frenzy is disappointed with the bonus compensation, royalty percentage, and property protection terms included in their Oil and Gas Lease.  Typically, these landowners entered into an Oil and Gas Lease without adequate legal representation and most of these landowners did not fully understand the terms and conditions of their lease and how this gas lease would impact them for many years and even future generations.  

As anyone who has attended any of my seminars or has listened to “All Things Marcellus,” my weekly radio show, knows that I consistently preach that the key for landowners to make the right decision is education, quality legal assistance, and understanding.  In that regard, it is critical that landowners consult with an experienced oil and gas attorney who can assist them in negotiating and understanding the terms of their lease agreements and contracts relating to the Marcellus Shale development.  Far too often landowners contact my office and inform me that before signing they did not understand the terms of their Oil and Gas Lease, or did not even speak with the attorney or representative who negotiated the lease on their behalf.  This situation is simply inadequate and entirely unacceptable.

As most good parents tell their children, “we all make mistakes, but we must learn from those mistakes and not repeat the same mistakes in the future.”  This same principle holds true when dealing with Marcellus Shale contracts.  Specifically, landowners who made mistakes by not consulting a knowledgeable lawyer or fully understanding the terms and conditions of their Oil and Gas Lease must learn from that experience and not make the same mistakes again when confronted with a pipeline agreement or other Marcellus Shale related contracts.  Far too often I continue to see unassisted landowners sign company favored boiler plate Pipeline Right-of-Way Agreements, Water Impoundment Pond Surface Use Agreements, and other Marcellus Shale related contracts.  Unfortunately, these landowners typically do not completely understand the terms in the contracts and how the contract may impact their property during the life of the agreement which may extend for many decades.  Perhaps more importantly, these landowners do not maximize the financial benefits and available property protections by failing to effectively negotiate the terms of these agreements.  I cannot possibly stress enough the importance for landowners to learn from previous mistakes and to secure knowledgeable and experienced legal counsel to assist them in negotiating ANY contracts related to the Marcellus Shale development.  

I know that many landowners are afraid to contact an attorney’s office for fear of exorbitant legal fees.  However, a credible and knowledgeable attorney will educate the client to fully understand the terms and conditions of the Marcellus Shale agreement and often will increase the financial compensation and property protection terms which substantially outweigh the related legal costs.  Of course, all attorneys are different and it is critical that the landowner is comfortable with the attorney who represents them as well as the fee schedule involved in the representation.  Whoever the lawyer is that the landowner may ultimately hire to represent them, that landowner must be completely comfortable with their legal counsel and that attorney’s experience with the Marcellus Shale oil and gas issues that they have been hired to address.

As a message to landowners across the state, I implore to not repeat the mistakes of the past.  Landowners should secure high quality, credible, and experienced legal counsel to assist them in their Marcellus Shale negotiations.  Do not be afraid to ask the attorney about their experience in negotiating similar contracts and their knowledge of the market for that type of agreement in their region.  There are many professionals who hold themselves out as so called “experts” who have relatively limited experience in negotiating these sophisticated contracts.  Obviously, at some point every attorney is inexperienced in a particular area, but it is important that the landowner know their counsel’s experience level and that the landowner is comfortable in proceeding with him or her as their Marcellus Shale oil and gas attorney.  Remember, landowner knowledge and education will always be key to allow you to make the right decision for you and your property.  Let us all learn from the mistakes of the past and not repeat them in future.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

Experience and Knowledge are Key

A Compressor Station is a facility in which the pressure of natural gas is increased to facilitate the transportation of natural gas though the gas pipelines.  Targeted landowners across Pennsylvania are being approached to consider the installation of a Compressor Station and/or Metering Station on their Marcellus Shale property.  The Compressor Station site size varies, but all are an enormous and lengthy property investment for the landowner.  

Many natural gas and pipeline companies seeking to negotiate a Natural Gas Compressor Station location will demand a "buffer zone," or an area of land surrounding the Compressor Station Limits of Disturbance (LOD).  The LOD is essentially the outermost boundary that the installation company must stay within during the construction of the Compressor Station facility. This LOD is largely determined through surveying and the permitting process through the Pennsylvania Department of Environmental Protection.

As is my repeated theme, I first advise clients to assess location and compensation before deciding whether to move forward with more detailed Compressor Station negotiations.  If the landowner is unsatisfied with the proposed location, size, and/or compensation for any proposal, and especially a Compressor Station, the landowner should simply say "NO."  Of course, effective negotiation may result in reaching an agreement on an acceptable location and sufficient compensation for the landowner.  

Once this negotiation framework is established, it is time to roll up the sleeves and turn to the detailed terms and provisions of the Compressor Station Agreement.  I have seen many Compressor Station Agreements from different natural gas and pipeline companies across Pennsylvania and virtually all of the Compressor Station Agreements are different.  The Compressor Station Agreements are typically "Option" agreements that require serious scrutiny and strong negotiations to protect the landowner and their property for future generations.

Compressor Station Agreements typically involve hundreds of thousands of dollars of compensation and may escalate to millions of dollars over the decades that the compression facilities remain in place.  Due to the extensive size, noise level, and sheer length of landowner commitment, the compensation must be substantial to even justify consideration.  Natural gas companies typically approach the landowners with their form Compressor Station Option Agreement, and often with a check in hand, and offer to pay the landowner several thousand dollars to sign the "option" agreement with the promise of a potentially higher payday should the company exercise the option and place a Compressor Station on the property.  SHOULD YOU BE APPROACHED BY A NATURAL GAS COMPANY OR A PIPELINE COMPANY TO EXECUTE A COMPRESSOR STATION OPTION AGREEMENT - CALL MY OFFICE IMMEDIATELY AT: 570-307-0702.

I have not seen or heard of a natural gas company making their initial Compressor Station offer to the landowner their strongest offer.  In fact, in one Compressor Station negotiation through my office, the offer increased by more than fivefold during the course of less than one week!  In another case, a landowner who I have worked with on several contracts was approached with a Compressor Station Option Agreement and a financial offer for a Compressor Station on his property.  The gentlemen told the natural gas company that I would be representing him in any negotiations for the Compressor Station and to kindly send the official Compressor Station Option Agreement to my office for review and discussion.  The offer that I received the following day was more than double the offer that the landman presented to my client landowner just the night before.  I cannot say that because of me the offer doubled, but I suspect that the company knew that I had experience in the market price for Pennsylvania Compressor Stations and they needed to significantly increase their offer if they wanted serious landowner consideration for this substantial project.

I preach over and over the importance of understanding the market value for all gas company projects, and Compressor Station negotiations is an outstanding example.  I have seen landowners leave literally hundreds of thousands of dollars on the table because they were not in tune with the market and did not effectively negotiate the financial and property protection terms of the Compressor Station Agreement and other Agreements.  These Compressor Station contracts are exceptionally burdensome on the property and require serious consideration and careful craftsmanship to maximize current and future compensation while eliminating surprise and reducing property impact.  Compressor Station Option Agreements should not be entered into lightly and certainly not without the assistance of experienced counsel.  

My experience in Compressor Station Agreements shows that the financial benefits and property protections negotiated by an experience attorney dwarf the legal fees incurred during the negotiation process.  Landowners considering or approached for a Compressor Station Agreement should immediately contact my office for assistance.  I guide the landowner through the evaluation process and then assist by negotiating compensation and invaluable property protection terms.  Our approach is always non-pressure and my first conversation with the client involves the assessment as to whether this is an appropriate facility that the landowner should consider.  I encourage any landowner considering a Compressor Station to visit a similar site to that proposed on your property.  I have attended field reviews of the Compressor Station with clients and find this experience invaluable.  Always remember that this is your property and you are the person in control of how this property is going to be used for today and future generations with the proper guidance and assistance a landowner can maximize the compensation and property protections in the Compressor Station Option Agreement.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

What Should I Do?

Natural Gas Companies are approaching Landowners currently under lease across the Marcellus Shale region and are requesting that the landowner sign a "Subordination Agreement" or similar document(s).  When a landowner is approached to sign a "Subordination Agreement" or similar documentation, they should immediately consult with a knowledgeable attorney to ascertain their rights and to explain the content of the subrogation documents.  

Subordination Agreements are typically sought by natural gas companies who intend on developing the resources from a leasehold where there exists a current mortgage or other lien.  The concern for the gas company is that Pennsylvania is called a "race to the courthouse" state.  This means that if there is a mortgage or lien on the property that was filed at the courthouse before the gas lease or gas lease memorandum was filed, the mortgage or lien will take precedence.  In other words, if a landowner already had a mortgage or lien recorded on the property before they entered their gas lease and they failed to pay their mortgage and a foreclosure occurred, the party taking over the property would do so as it existed on the date the mortgage or lien was filed.  Accordingly, the purchaser would take over the property without the oil and gas lease encumbering the property.  Clearly natural gas companies do not want to risk their often significant investment or future stake in development and natural gas production because the leasehold was sold in foreclosure.

Many Oil and Gas Lease Agreements contain language within the Lease that provides for the assignment of royalty or other payments from the landowner to the creditor.  This is designed to make sure that the creditor is paid and that foreclosure proceedings may be avoided.  By including this language in the Oil and Gas Lease, the natural gas company is seeking to increase the security of their investment.  The gas company may then look to the bank (or other creditor) to reach an agreement to "subordinate" the mortgage or debt to the Oil and Gas Lease.  Remember, the primary concern for the gas company is to not lose the Oil and Gas Lease because a creditor purchased the property pursuant to a lien that pre-existed the Oil and Gas Lease.

Another tool that natural gas companies will use is a separate "Subordination Agreement" or similar document(s).  These “Subordination Agreements” are typically sought in cases where a mortgage or other lien encumbers the leasehold.  The company will seek to reach agreements, typically with the bank holding the mortgage, to "subordinate" the lien to the Oil and Gas Lease.  A Subordinate Agreement is a legal document used to make the claim of one party inferior to the claim of another.  

The landowner must review any Subordination Agreement documents very carefully and should consult with an attorney to discuss their rights.  As with any contract related to the Marcellus Shale development, landowners must make sure they completely understand the content of the contact and how the agreement will operate and impact them moving forward.  The "Subordination Agreement" language typically varies from company to company and bank to bank.  It is important to review the detailed language in a “Subordination Agreement” to understand what rights the landowner is giving up and at what point royalties or other payments may be withheld for the benefit of the creditor.

A skilled attorney can explain the subordination agreement to the landowner and potentially work to make the Subordination Agreement more landowner friendly. A landowner does not want to be away on a family vacation, miss a mortgage payment, and find that their royalty payments have been suspended due to their failure to make timely mortgage payments.  Landowners also need to consider how much authority is provided to the company and creditor to withhold royalty payments and designate these payments towards the lien.  In other words, does the Subordination Agreement authorize the gas company to withhold royalties until the balance of the lien is extinguished or only until the debt is current and out of delinquency?  Another important concern is how quickly the royalty payments may be withheld for payment of the mortgage or lien.

Remember the natural gas company is ultimately looking to reach a deal with the bank (or other creditor) to subordinate the mortgage or lien to the Oil and Gas Lease.  If the gas company is successful, it will guarantee that if a third party purchases the property in foreclosure, the third party will purchase the property with the Oil and Gas Lease intact.

If you are approached to sign a “Subordination Agreement” or related documents, contact a knowledgeable attorney to discuss the contents of the documents and the rights you may have in the process.  Landowners can always contact my office at 570-307-0702 for any and all Marcellus Shale representation across Pennsylvania.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

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