Thoughts on Leasing the Right to Produce Oil and Gas
By S. Thomas Bond
Leases, like many things, don’t get much deep thought by lessors or by lawyers. They just “are.” They are talked about, used, and sometimes fought over. Often there is much unhappiness as the result of features someone didn’t think out thoroughly. Lets clear away some of the fog.
Leases are almost always presented by a landman who approaches several people every day. He is a skilled practitioner of applied psychology. His interest is getting the mineral owner to sign. He does it every day, over and over. His pay depends on “taking the lease.” What he says doesn’t make any difference afterward. What counts is the signature on the bottom line, and what the lease says. Once “taken” the lease can be, and likely will be, sold to another company, making a profit for the company which took it originally.
The vast majority of lessors have but one property and “give” a lease only once. They don’t know the technical terms. To get paid for “dry gas” means the water is taken out, right? No, it means the gas liquids are taken out, the most valuable part. The lessor who signs a lease that stipulates “dry gas” gives away the most valuable part.
When “giving” a lease the owner usually doesn’t know what others are getting. People don’t like to talk about financial affairs. Many don’t realize it pays to be coy, the first offer is always as low as the corporation thinks it can use to get lessors. And “divide and conquer” is as old as leasing itself, making neighbors compete against each other.
The lease is an agreement in the form of a legally binding contract. It binds one person (the corporation, long thought of as a person in legal circles, recently elevated to personhood by the Supreme Court) which lives forever, and a single person, sometimes infirm of mind, for him/her self and all the heirs and whoever might buy the property for the indefinite future – actually, forever.
While the lessor thinks of one transaction, removal of one geological formation, to occur in the foreseeable future, the corporation is free to rope in as much else as possible. Getting additional geological formations in addition to the initial target is almost universal. Other benefits, such as using the leasehold for transportation to or from another leasehold, recovery of other types of minerals and storage of gases, are sometimes also “taken.” The lessor will try to get the most broad use of your surface as possible. Think to yourself, “What does he really need?”
Sometimes use of unanticipated methods of removal occurs with technology change. (Think of strip mining, when all anyone had known before was deep mining, or the souped-up form of drilling now used in place of the wooden rigs that were used when leases were taken decades ago.) The old terms still apply!
If you give a lease the Marcellus, your property will become part of one or more “drilling units,” which are designed with the geology and efficient use of the current technology for drilling in mind. If you refuse to lease, this interferes with the engineering plan and your gas may be taken anyway. A large part of the leasing objective is to tie up as much land as possible. The “reserves” put together this way, with the drilling rights, are much more valuable than the original, individual tracts. It is very profitable to put together large tracts that can be engineered to efficiently drill many wells.
“Separation of estates” as it is called, is great for the corporation because “remote owners,” people who own the oil and gas or the “minerals,” tend to see the income from their estate as “manna from heaven,” and don’t bargain or watch royalty closely, just accepting what comes their way. Damage to other estates means nothing to them.
Many of the provisions of oil and gas leases were first conceived by corporations in the “Robber Baron Age” one hundred years or more ago. They are so ensconced in practice no one considers them unfair anymore. Even lawyers who have their own property to lease accept these provisions which have nothing to do with the business at hand, but are rip-offs by the corporation in anticipation of some future benefit.
Can lessors write the contract? Technically, they can, of course. A corporation might accept terms if they were good for them, but since they prefer secrecy and confusion, they might not, especially if the terms were made public.
If the lessor finds certain clauses objectionable, they can be struck out, or the lease retyped without them. Additional clauses may be added, too. These are called an addendum, and must be signed by both parties
A lawyer’s advice on modification of a lease is highly desirable. The lessor may not see every ramification of the wording. Don’t expect a lawyer to point out all the ways a lease is slanted in favor of the corporation, though. From Law School on, lawyers have seen many of these provisions as standard practice, and haven’t given a thought about whether they are really necessary for allowing the corporation to achieve its immediate objective of removing the resource that society is willing to pay for.
Lease language tends to be full of long, tedious sentences, full of technical terms. Many words have special meaning in law. The lease handed you by the landman is written by lawyers for lawyers. However, not every lawyer is good at oil and gas law. On the other hand, some are specialists. Most know there is more to be gotten from the drilling companies than from property owners. This is a sad fact of life. Ask around among knowledgeable property owners for a lawyer you can trust to represent you fairly. Take time, think about it, talk to others, the company can wait. Never, ever, sign any lease on the spot when it is handed to you. The first offer is for suckers.
Never forget you are in an adversarial position (your interests and wealth against their interests and wealth) with respect to those getting your minerals. The old saying “Nice guys come in last” was never more true than it is here. How do you suppose the industry leaders got to positions of wealth and power?
>>> S. Tom Bond farms 500 acres in Lewis County. He is a retired chemistry professor and is now active with the Guardians of the West Fork and with the Monongahela Area Watersheds Compact <<<