Great Qualities, but Not During Marcellus Shale Contract Negotiations

Growing up in rural Western Pennsylvania my parents instilled in me many values and characteristics that I am very proud of today.  Since moving to Eastern Pennsylvania about seventeen (17) years ago and meeting and working for many landowners across the state, I have seen firsthand that kindness, loyalty and a person’s word serving as their bond are qualities shared throughout the state, especially in rural areas.  

When a farmer agrees in a conversation to sell two hundred fifty (250) bales of hay out of the field for Two Hundred Fifty ($250.00) Dollars, both parties have "given their word" and the deal is done.  These gentlemen do not need formal written contracts with attorneys drafting terms and an integration clause.  Many landowners have unfortunately learned the hard way that handshake agreements  are a thing of the past when dealing with natural gas and pipeline companies.  Oil and gas industry is big business and often involves complex contracts and agreements that are negotiated often over a lengthy time period.  Landowners must unfortunately realize that gas  and pipeline company negotiations are complex and adversarial.  

Remember, natural gas companies have secured gas leases, pipeline right-of-ways, and many other landowner contracts across the country for over one hundred (100) years.  The gas companies and their representatives have tremendous experience dealing with rural landowners and understand how landowner’s admirable character traits may be used by the company to their advantage during the negotiation process.  Traits like kindness, loyalty and trust are often manipulated in the negotiation process to secure a more favorable company agreement.  

Far too often landowners tell me that the landman is "a really nice guy" and that they have reservations in asking for certain terms or do not want to rock the boat.  I have heard many times that the landman told the landowner that he or she were "going to lose their job" if they could not get the landowner to sign the oil and gas lease, pipeline agreement, or other Marcellus Shale Agreement.  Of course if this type of guilt negotiation does not work, you may hear a subsequent fear tactic that the company "will just work around you" or "we will just take your gas from your neighbor's property."  Landowners should not enter into agreements out of guilt or fear.  Landowners should reach agreements because they are fully informed and feel that the ultimate agreement is in their personal and family's best interest.  Just as the gas or pipeline company will always act in their best interest, so should the landowner.  

Landowners must be very careful not to allow landmen or other company representatives to use the landowner’s admirable character traits to their disadvantage during the negotiation process.  Over the past four plus years I have seen many landman and company representatives come and go.  Many landmen that I worked with in 2007 and 2008 are now working as brokers on behalf of different gas companies in Pennsylvania and other states.  I always enjoy the opportunity to question these landmen about how a few years ago they told me Company A was "the best" and "committed to the landowner," and now apparently Company B is suddenly "the best company they have ever worked for" and they are shocked how Company B is "dedicated to landowner fairness and protecting the environment."  

The transient nature of the landman position is a clear indication that their ultimate job is to "get signatures" and move on to the next landowner or project.  I have developed many positive relationships with landmen over the years and many are truly nice people.  However, they have a job to do in working for the gas company to support themselves and their families.  At the same time you have the job to protect your land that is often the most valuable and fundamental asset of the family.  

Landowners must understand that the Oil and Gas Lease negotiation process may be a once in a lifetime opportunity and we must make the absolute most of this opportunity to maximize financial gain and continue to preserve your family's precious land.  Negotiations should always be respectful and almost always negotiations are a friendly and courteous process.  However, the landowner cannot allow kindness, loyalty and trust to result in an inferior Oil and Gas Lease, Pipeline Right-of-Way Agreement, or any other Marcellus Shale contract.  Always remember that the gas companies and pipeline companies are loyal to shareholders and profits and you must do what is best for you, your family, and your land.
 
Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

As rural landowners know, the Clean and Green Act (72Pa.C.S. §5490.1 et seq.) provides landowners a tax break where their property meets certain requirements and is dedicated to agricultural and forest reserved use.

Landowners who are enrolled in the Clean and Green program will face seven years of “rollback” taxes and a six percent (6%) per year penalty if their use of the property is changed to an ineligible use under the Clean and Green program.  Due to inconsistencies in the way in which counties across Pennsylvania applied and enforced the Clean and Green Act relative to gas developments, an amendment to the Clean and Green Act was passed in the fall of 2010.  This amendment has clarified how oil and gas development will impact the Clean and Green program.

Prior to the amendment, landowners who own large acreage parcels could be penalized with seven years of back taxes for their entire property, even though only a few acres may have been impacted by oil and gas development.  The amendment to the Clean and Green Act provides that rollback taxes are only imposed only on the portion of the land devoted to the oil and gas production. This is a great benefit to the landowner as there were several cases where landowners with hundreds of acres had only a few acres impacted by gas exploration but were charged seven years of back taxes for the entire parcel.  Further compounding the problem in this scenario is where the landowner originally signed for Five to Twenty-Five ($5.00-$25.00) Dollars an acre, and received a tax bill for tens of thousands of dollars which greatly exceeded their signing bonus. Fortunately, this situation should no longer be a problem for Pennsylvania landowners.

With respect to natural gas pipelines, THE CLEAN AND GREEN AMENDMENT CLARIFIED THAT PROPERTY DEVOTED TO GAS PIPELINES IS NOT SUBJECT TO ROLLBACK TAXES. The amendment provides that a pipeline right-of-way and easements should not remove landowners’ property from Clean and Green.  However, it is a practice of our office to cover all bases and include an addendum provision to the Pipeline Right-of-Way Agreement that requires the pipeline company to pay any and all rollback taxes for Clean and Green and other agricultural and tax beneficial programs.  Companies have typically been very quick to permit such an addendum.
 
Of course, the Clean and Green addendum is only one of many addendum terms that landowners should seek to have added to any Pipeline Right-of-Way Agreement.  Pipeline Right-of-Way Agreements are significant contracts that typically seek to give the gas company or pipeline company the ability to transport gas and potentially other substances indefinitely, and often without limitation. Pipeline Right-of-Way Agreements should be carefully scrutinized and negotiated with the assistance of qualified legal counsel.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

Is There a Trend Towards Larger Production Units?

Many states have unit spacing requirements that dictate the size of natural gas production units. However, Pennsylvania does NOT have a statute to regulate either the size or shape of Marcellus Shale gas production units.  Accordingly, unless your Oil and Gas Lease has specific language limiting the size of the production unit (often 640 acres is stated in leases) the gas company has substantial freedom in determining the size and shape of the production unit.  

Many landowners are fearful that the gas companies' power in forming production units will result in the company manipulating the shape of the unit  or "gerrymandering" the production unit in order to "hold" as much acreage under lease as possible.  The fear is that the gas company will design a production unit such that it only incorporates a small portion of the landowner's property while the remainder of the property is "held" by the lease.  As we know, landowners (or natural gas rights owners) are only paid royalties on the acreage that is included in the production unit.

Landowners are understandably concerned that larger production units increase the company's ability to gerrymander the design of production units to hold as many leases as possible.  This potential to increase the gerrymandering power of the gas company is an important concern when considering signing an amendment or modification of your Oil and Gas Lease.  However, there are numerous other variables and factors the landowner must consider.

There is a trend in Pennsylvania for gas companies to increase the size of production units.  Although some companies, like Cabot Oil and Gas, are currently keeping the production unit size below 640 acres, most of the unit designation documentation that I receive from various companies involve Marcellus Shale units well in excess of 640 acres.  The standard company selling points are that larger units create less of an environmental impact by reducing the number of well pads, truck traffic and the numerous other "inconveniences" and impacts that accompany natural gas drilling.  These arguments are certainly true.  However, with larger production units comes greater company power to design the shape of the unit and the ability to hold more parcels under lease from even a single well.  Landowners considering unit size modifications often ask for assurances that all or a majority of their property will be unitized or a guarantee of a certain number of wells in future units. Unfortunately, this is a promise that gas companies are very rarely (if ever) willing to make.

It is important to carefully review your Marcellus Shale Oil and Gas Lease language as it relates to unit size.  Landowners often believe they have a production unit size limitation only later to learn they misinterpreted the pooling and unitization language in their lease.  For example, I often see Oil and Gas Lease language to the effect of "the company cannot exceed a 640 acre production unit unless permitted or authorized by law."  Because Pennsylvania oil and gas law does not mandate a maximum production unit size for Marcellus Shale wells, this sample language allows the company essentially unlimited authority when creating production unit.  Of course the gas company is in the business of making profits and they will normally seek to create production units that will maximize the use of their leaseholds.  To that end, we are currently not seeing 2000 acre units, but as drilling technology advances it seems sensible to expect the trend of larger production unit sizes to continue.  

If a landowner’s entire property is "held" within a unit, and production from the far end of the horizontal well is as efficient as the first stage of the well, it certainly makes environmental sense to design the largest production as possible.  However, if you own acreage at the far end of a large production unit and only a handful of your available acres are unitized, the larger units are obviously very distressing.  It once again falls back to education and the accumulation of all relevant information available when considering negotiating the size of a production unit or agreeing to an extension of the unit size currently authorized under your existing lease.

If you are faced with this dilemma and are looking for assistance please feel free to contact our office or call us at +1 (570) 307-0702.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners

The abundance of Marcellus Shale natural gas throughout Pennsylvania has required natural gas and pipeline companies to seek “Option” Right-of-Way Agreements for the installation of thousands of miles of natural gas pipelines. As any regular listener of our weekly radio show “All Things Marcellus” knows, my first rule in assessing whether to enter into a Pipeline Right-of-Way Agreement is to determine whether the landowner has the ability to say “No,” or if the gas pipeline is permitted under the terms of the existing Oil and Gas Lease.

In most cases, my experience is that the landowner often has the ability to say “No” to the proposed natural gas Pipeline Right-of-Way Agreement. The initial assessment of the landowner’s rights and leverage is critical in the negotiation process for a Pipeline Right-of-Way Agreement. Pipeline Right-of-Way Agreements must be carefully negotiated to maximize present benefits with an eye towards potential future compensation and crafted carefully to protect and preserve your valuable property.

Most landowners are approached to sign a Pipeline Right-of-Way “Option” Agreement. The “option” language is very powerful as it gives the company the “option” to install a pipeline pursuant to the terms of the Pipeline Right-of-Way Option Agreement. A Pipeline Right-of-Way Option Agreement often presents a common dilemma for the landowner. The “dilemma” is that the landowner wants to use an experienced lawyer to maximize the Pipeline Right-of-Way Option Agreement, but the landowner understandably does not want incur more expenses in legal fees than compensation they receive under the terms of the Pipeline Right-of-Way Agreement.

Generally, the Pipeline Right-of-Way Option Agreement presented to the landowner requires a small upfront payment upon signing with a larger “per linear foot” or “per disturbed acre” payment due at or around the time of installation of the gas pipeline. Again, the dilemma facing the landowner is that the landowner does not want to incur legal expenses that exceed their initial signing payment without the promise of the more significant future payment due at the time of installation. However, many times there is the opportunity for the landowner to hire an attorney to increase the benefits and terms in the Pipeline Right-of-Way Option Agreement, while reducing or eliminating the concern of losing money by hiring an attorney.

I negotiate regularly with several Pipeline Right-of-Way companies who have agreed to pay increased non-refundable compensation to the landowner at the time of signing and in many cases this non-refundable payment exceeds the legal expenses for the landowner. The pipeline companies are often willing to increase the signing compensation for the landowner so that the landowner reduces or eliminates their risk of incurring greater legal expenses than Pipeline Right-of-Way Option Agreement compensation. However, typically the pipeline right-of-way company will ask for the additional payment to be deducted from the subsequent per foot or disturbed acre damages payment that is due at or around the time of construction.

For example, the pipeline right-of-way company may be willing to increase the signing payment by One Thousand ($1,000.00) Dollars or more, but should the company execute the “option” and install a pipeline, the company will deduct the thousand dollars from the subsequent damages payment. In other words, if a landowner was due Fifty Thousand ($50,000.00) Dollars at the time of construction, the payment to the landowner in this example would be Forty-Nine Thousand ($49,000.00) Dollars since the landowner already received the non-refundable One Thousand ($1,000.00) Dollars upon signing the Pipeline Right-of-Way Option Agreement. This arrangement has worked very well for client landowners who are concerned about incurring legal fees, but realize the significant importance of having an experienced attorney negotiate the Pipeline Right-of-Way Option Agreement their behalf.

I have negotiated Pipeline Right-of-Way Agreements with approximately a dozen pipeline companies across the state of Pennsylvania. This experience and history with multiple companies has yielded great benefits to our landowner clients. If you are presented with a Pipeline Right-of-Way Option Agreement, or any water line agreement, contact our office today and we will discuss the negotiation process and the potential to increase the upfront signing money to offset legal fees. Our goal is to make sure that landowners across the state are properly represented and I negotiate all Marcellus contracts to insure that the landowner is not leaving any benefits on the table and that their property is protected for generations.

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners