The Gas Company Wants to Modify My Gas Lease to Increase the Maximum Unit Size:

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