Getting to the Bottom of NYT’s Latest Story on Leases

 

http://www.energyindepth.org/getting-to-the-bottom-of-nyt%e2%80%99s-latest-story-on-leases/

Getting to the Bottom of NYT’s Latest Story on Leases

Jerry Simmons

Executive Director

National Association of Royalty Owners (NARO)

December 7, 2011

 

As the Executive Director of an organization that represents the rights and interests of millions of mineral and royalty owners across this country, you can bet your bacon I’ve been following closely The New York Times’ ongoing series on natural gas development – and in particular, the stories about leasing, lending and mineral owners in some areas crying foul.

The story posted by NYT reporter Ian Urbina last week fits into this final category. Its basic thesis goes something like this: as shale exploration has continued to ramp-up, land- and mineral owners are increasingly being fooled (or forced) into bad leases – bad because they don’t protect the environment, bad because they don’t protect them in case of an accident; bad because they’re too low on the financial end. I should note here that I actually reached out to Mr. Urbina before he ran this story; none of the information I provided made it into the article. In light of that, I thought I’d take just a few minutes to lay out a few facts, and maybe set straight a few of the things that the Times didn’t quite get right.

For starters, let me say that its clear an awful lot of research went into this piece -- Urbina and his crew say they reviewed 110,000 individual leases before putting pen to pad. Yes, critics will point to the fact that more than 100,000 of those leases came from only one county (Tarrant) in one state (Texas), but sorting through them all is still a pretty big project, so at least give them some credit for that. I also appreciate the fact that people like Ron Staments, Jack Richards and Dave McMahon – all friends and/or professional acquaintances of mine – were interviewed for and quoted in the story.

To my eye, the biggest problem with this latest piece is that the Times attempts to manufacture a narrative in which land-owners at every turn are pitted against energy producers. In reality, it’s a partnership – with the lease document representing the statement of terms under which that partnership will be pursued. It’s true that some statements are tilted more toward one party’s interests than the other’s. Should we be surprised by that? Should we be aghast? As was pointed out in the article by Mike Knapp: “There are bad leases out there, and, as with any industry, there have also been some unscrupulous opportunists.” But is that a basis to shut down an entire industry? Reading the Times’ story, it’s tough not to get the impression that the reporter wouldn’t mind if we did. 

As I’ve said many times before, leasing your minerals for development is more of an art than a science. You make the best deal you can with the best information and advice you can find – and if you find out later that your neighbor did better than you, you walk across the lawn, shake his hand, and let him know that next time, lunch is on him. Often, in the early days of a play, the discrepancies between lease deals can be significant – a natural function of uncertainty. Higher risks on the question of commercial viability have to be offset by lower upfront costs.

But as I’ve seen literally thousands of times over the years, as areas are proved up, and resources start flowing, mineral owners find themselves in a much better position to negotiate a better deal -- at least for the few who may have been unhappy with the original one. Remember: it often takes years, even decades, for operators to fully tap these reservoirs, and lease and royalty payments often represent only a fraction of the costs they’ll encounter over that time. Used to be, drilling a well was a 10-year commitment – now it’s a 40-year one. With the proliferation of electronic media, the incentive to cut-corners on the environment or get away with low-ball lease offers (for very long) is simply no longer there. And even if all of us don’t use Twitter yet, believe me, us mineral owners can be a pretty persuasive bunch once we get going.

The article had four bullet-points in the first few paragraphs that I will attempt to address here:

NYT: “Fewer than half the leases require companies to compensate landowners for water contamination after drilling begins. And only about half the documents have language that lawyers suggest should be included to require payment for damages to livestock or crops.”

  • The amazing thing about this point is that, if you follow the links embedded in the body of the Times piece, the information provided appears to directly contradict the point he’s trying to make.
  • Take a look for yourself: “If a gas company causes property damage or goes beyond what is ‘reasonably necessary’ to drill for oil or gas, the company may be held liable for damages. In many states there are also laws or regulations that govern the extent to which the surface must be returned to its original condition, including rules that require the company to remove unnecessary equipment or repair any damage. Some leases include addenda that specify how and when any wells will be plugged. They also sometimes include language that establishes how the company will handle specifics, like the removal of roads or restoration of the landscape.”
  • In other words, all the protections that the Times laments aren’t included in a standard leaseare included in a different kind of contract – called the law. No oil and gas lease I’ve ever seen includes anything banning a producer from, let’s say, hitting me in the head with a shovel. According to the Times’ logic, though, I guess that means it would be legal for him to do it -- since it wasn’t mentioned in my lease. Can you see why this entire premise is flawed?

NYT: “Most leases grant gas companies broad rights to decide where they can cut down trees, store chemicals, build roads and drill. Companies are also permitted to operate generators and spotlights through the night near homes during drilling.”

  • Again, in most cases a surface-use agreement is required by the state, but if not, we’ve always recommended that the mineral owner (even if not surface owner) include one as part of the deal. In that agreement, you will negotiate compensation for roads, tree removal, crops, livestock, etc. But drilling itself is permitted by the state, and proximity to structures is determined by the appropriate state regulatory agencies. Distances may differ, but the principle does not.

NYT: “In the leases, drilling companies rarely describe to landowners the potential environmental and other risks that federal laws require them to disclose in filings to investors.”

  • As stated above, mineral and surface landowners are protected from liability by state and federal regulations. If you believe a lease clause or addendum is needed to spell out potential risks and liabilities, then you should negotiate that into your lease – as most folks have done for years.

NYT: “Most leases are for three or five years, but at least two-thirds of those reviewed by The Times allow extensions without additional approval from landowners. If landowners have second thoughts about drilling on their land or want to negotiate for more money, they may be out of luck.”

  • Oil and gas leases for decades (perhaps always) have allowed for the option to extend at the end of a primary term.  The reason is that the company may not get to all drilling locations within the primary term and wants the ability to maintain its acreage position in an area.
  • If you sign a lease with an option to extend, you have given your approval to extend the lease if certain stipulations are met. Once a well is producing, your acreage is “Held-By-Production” (HBP) for as long as the well is capable of production. As mentioned, this could be decades -- so leases are serious contractual instruments that one should not enter into without proper knowledge and professional advice.
  • That’s our position as mineral owners – and guess what? It’s industry’s position as well. According to Kathryn Klaber, president of the Marcellus Shale Coalition: “The most educated landowner is going to be this industry’s best business partner, and that means legal review.” (Associated Press, 7/23/11)

It is too bad this article did not attempt to emphasize the need for mineral and surface land owners to accept their responsibility and become educated on the process of mineral leasing and mineral/royalty income.  If it had, the Times could have done a real service to the citizens facing decisions on leasing instead of trying to generate fear in a process that could (and does) pay off a mortgage; send kids or grandkids to college; keep elderly folks off state assistance; keep the family farm in the family; build new fences, barns, houses; supplement retirement; and on and on. 

The point is, of the millions of oil and gas leases in effect in America today, the vast majority are held by folks who are very happy with the process and benefit greatly from the income that this partnership produces. Too bad the Times doesn’t consider that much of a story.