Tuesday, November 25, 2008

Things to Think About Before Signing A Gas Drilling Lease

Hello Neighbors.

When you get a request to sign a gas drilling lease, your natural first question is: How much money will I get? But signing a drilling lease is serious business. There are other things you need to consider.

The Highland Heights citizens’ group, Love Our Green Space (LOGS), would like to help by suggesting several more things to think about, before signing your name on the dotted line.

First, here are some background facts:

1. Just because someone in your area has signed a lease does not mean that an energy company can automatically start drilling in your neighborhood. Energy companies need at least 20 contiguous (i.e., physically touching) acres to drill a well. That’s why they have contacted (or may contact) you. If a company doesn’t get enough other nearby property owners to sign leases, they can’t drill. It’s as simple as that.

2. When you own a piece of property, you don’t just own the earth you can see, but also anything underneath that earth. When you sign a drilling lease, you are giving some of your property rights to the energy company.

3. Even if you are offered a “non-development” or “no trespass” lease, an energy company might still be able to put a well very close to your home. State regulations allow energy companies to place wells as close as 100 feet away from inhabited residences. OAC Ann. 1501:9-1-05.

4. Ohio has a “mandatory pooling” law (O.R.C. § 1509.27) that allows energy companies to force property owners to join in drilling parcels if the companies obtain almost, but not all, of the 20 acres they need to drill. By signing a lease, you may be allowing the energy company to strong-arm your next-door neighbor to drill on his land, too.

First thing to think about: Should I talk to an attorney?

Drilling leases are legally binding contracts. They are written by and for energy companies. If you don’t understand what the lease says, you might want to ask an attorney to explain it to you. Here are some things you might want to know:

1. How long does the lease term really last?

Leases usually say they are for a set number of years (for example, 5 years). But they frequently include other language that allows the energy company to keep using your property indefinitely after that.

A question to ask: how long am I (and my property) really going to be bound by this lease?

2. What can the energy company do on or to my property?

There are several types of drilling contracts. Some leases allow an energy company to put well heads and other “surface installations” on property, while “non-development” or “no trespass” leases give the company the right to drill into and through property from a nearby entry hole. Not all wells are drilled straight up and down. “Slant” or diagonal wells are just that—they are drilled down and across property.

Questions to ask: Are there any restrictions on where the company can drill or how many shafts they can drill on my property? Can they drill right under my house? Do I have any say as to just how much drilling they do?

3. How much money will I really get from this lease?

Typically leases will offer to pay a stated amount of money if you sign the lease---but usually an energy company won’t owe you even that much if they don’t actually start drilling.

Royalty clauses can be confusing and extremely hard to understand. For example, a lease might say something like: “You will be paid a proportionate share of 1/8th of the proceeds realized on all oil and gas sold commercially off the unit, as the amount of your acreage bears to the total unit,” with “proceeds” being defined as being “net of severance, ad valorum, and other taxes and charges levied against production.” Huh? Because the potential royalties are the main reason for signing a lease, you need to understand precisely what the company is promising to pay you.

Questions to ask: What royalties am I really going to get? What unit are they talking about? How competitive is this royalty offer? Do other companies offer more? Who does the accounting? How often will I get paid? How will I know I am being paid correctly? What are my rights if I don’t think I’m being paid the right amount? What kinds of “charges” can the company deduct, to reduce the amount of royalties they owe me? And what taxes will I owe?

4. Is this the only company I will deal with?

Depending on how it is written, the company may have the right to sell, transfer or assign your lease to someone else.

Questions to ask: Can my lease be transferred? Do I get to choose who else I do business with?

5. What additional legal obligations am I taking on by signing the lease?

Some leases may require you, at your own cost, to defend the title to your property. Or they may give the energy company the right to get involved in your personal financial affairs, by paying your taxes for example.

Questions to ask: What things does the lease require me to do? How much will that cost? What other legal rights am I giving to the energy company, if I sign this lease?

6. What happens if something goes wrong or if I want or need to get out of the lease?

It’s always helpful to hope for the best, but plan for the worse. Your personal circumstances may change. And any kind of drilling presents some risks. The byproducts of drilling are considered to be toxic industrial waste, and chemicals used in drilling mud can be toxic.

Questions to ask: What are my options, if I change my mind? Can I end the lease? What rights can I enforce in court? What happens if there is an environmental leak on my property? Who is responsible for the clean-up? What if there is an explosion? Can I be held legally liable since I signed the lease? What happens if a sink hole develops or my foundation cracks? Who is responsible for paying for that repair? Will my homeowners’ insurance cover me?

Second thing to think about: Will the lease affect the value of my property?

Besides talking to an attorney, you might want to talk to a real estate agent to find out if or how signing a drilling lease will affect the resale value of your home. Think of it this way. You are a homebuyer. You like two houses. One is a normal house and one sits on a lot that is subject to a lease that allows an energy company to drill into and through the property. Which would you choose to buy? Which house would you pay more for?

Third thing to think about: What about my neighbors and my neighborhood?

How do your neighbors feel about having gas well drilling going on near or under the homes in your neighborhood? It is important to talk to them because, collectively, you and your neighbors control whether or not drilling will occur-- by deciding either to sign, or not to sign, a drilling lease with an energy company

Last thing to think about: What do I know about this energy company?

In every business transaction, it is always worth finding out about your proposed business partner. What do you know about the company who contacted you?

There are lots of energy companies out there. For example, Ohio Valley Energy is the company involved in the December 2007 drilling-related house explosion in Bainbridge. Bass Energy is suing the city, trying to drill in the Community Park. Osborne just put in a well in the Shoppes at Alpha near I-271. The News Herald, the Sun Messenger, and the Chagrin Valley Times newspapers all have stories posted online about drilling in the area. The Gates Mills Fire Chief has a log of the emergency calls that the Gates Mills fire department has made to wells in that community. There’s a lot of information out there, which can help you make a good decision.

Questions? Want to get added to the LOGS email list? Call Amy Feran at (440) 446-1327

1 comment:

Queenie Regner said...

I agree with this, Jeanette. Ultimately, we should always have enough knowledge about gas drilling leasing before signing an agreement. This includes determining/evaluating the cost of your property and weighing the pros and cons of the drilling process to you, your family, and the neighborhood.