Saturday, December 3, 2011

Learning Too Late of the Perils in Gas Well Leases

After Scott Ely and his father talked with salesmen from an energy company about signing the lease allowing gas drilling on their land in northeastern Pennsylvania, he said he felt certain it required the company to leave the property as good as new. So Mr. Ely said he was surprised several years later when the drilling company, Cabot Oil and Gas, informed them that rather than draining and hauling away the toxic drilling sludge stored in large waste ponds on the property, it would leave the waste, cover it with dirt and seed the area with grass. He knew that waste pond liners can leak, seeping contaminated waste.

Americans have signed millions of leases allowing companies to drill for oil and natural gas on their land in recent years. But some of these landowners — often in rural areas, and eager for quick payouts — are finding out too late what is, and what is not, in the fine print.

Energy company officials say that standard leases include language that protects landowners. But a review of more than 111,000 leases, addenda and related documents by The New York Times suggests otherwise:
¶ 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.
¶ 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.
¶ 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.
¶ 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.

The leases — obtained through open records requests — are mostly from gas-rich areas in Texas, but also in Maryland, New York, Ohio, Pennsylvania and West Virginia.

In Pennsylvania, Colorado and West Virginia, some landowners have had to spend hundreds of dollars a month to buy bottled water or maintain large tanks, known as water buffaloes, for drinking water in their front yards....
Thousands of landowners in Virginia, Pennsylvania and Texas have joined class action lawsuits claiming that they were paid less than they expected because gas companies deducted costs like hauling chemicals to the well site or transporting the gas to market.
To be sure, many landowners have earned small fortunes from drilling leases. Last year, natural gas companies paid more than $1.6 billion in lease and bonus payments to Pennsylvania landowners, according to a report commissioned by the Marcellus Shale Coalition, an industry trade group. Chesapeake Energy, one of the largest natural gas companies, has paid more than $183.8 million in royalties in Texas this year, according to its Web site. Much of the money has gone to residents in rural areas where jobs are scarce and farmers and ranchers have struggled to stay afloat....
At least eight states specifically require companies to compensate landowners for damage to their properties or to negotiate with them about where wells will be drilled, even if the lease does not provide those protections.
Some landmen show up in poorer areas shortly before the holidays, offering cash on the spot for signing a lease. They might offer thousands of dollars per acre as a bonus to be paid shortly after the lease is signed. Royalties, which usually run between 12.5 percent and 20 percent of what the companies make for selling the gas, can mean tens of thousands of dollars per year for landowners.
In 2005, [Dave] Beinlich and his wife, Karen, signed a lease for $2 an acre per year for five years on 117 acres in Sullivan County in north-central Pennsylvania. They soon realized they had gotten far less money than their neighbors, so they planned on negotiating a new lease when theirs expired in 2010. A day before their lease term ended, no well had been drilled on their land, but the gas company parked a bulldozer nearby and started to survey an access road. A company official informed them that by moving equipment to the site, Chief Oil and Gas was preparing to drill and was therefore allowed to extend the lease indefinitely.

Lawyers say that drilling leases are not like other contracts. “You’re not buying a refrigerator or signing a car note,” said David McMahon, a lease lawyer in Charleston, W.Va., and co-founder of the West Virginia Surface Owners’ Rights Organization, adding that once a well is drilled, it can produce gas for decades, locking landowners into the lease terms. “With a gas lease, you’re permitting industrial activity in your backyard, and you’re starting a relationship that will affect the quality of living for you and your grandchildren for decades,” he said. Mr. McMahon and other lease lawyers say that unlike many contracts, oil and gas leases are covered by few consumer protection laws, in part because drilling has been most common in states with less regulation.
“When it comes to negotiation skills and understanding of lease terms, there is a gaping inequality between the average landman and the average citizen sitting across the table,” said Chris Csikszentmihalyi, a researcher at the Massachusetts Institute of Technology who created a Web site last year called the Landman Report Card that allows landowners to review landmen’s professionalism and tactics.

Some lawyers also say that there are major differences between what drilling companies tell landowners and what they must disclose to investors.
“It’s been one expense after another since our water went bad, and the company only has to cover part of it,” said Ronald Carter, 72, of Montrose, Pa. Mr. Carter and his wife, Jean, said they signed a lease in 2006 for a one-time fee of $25 per acre on their 75 acres and annual royalty payments of 12.5 percent. The Carters live on $3,500 a month, including the $1,500 per month they average in gas royalties. But they had to spend $7,000 to install a water purifier when their drinking supply became contaminated in 2009 after drilling near their property. The Carters joined a lawsuit with about a dozen neighbors ...
by Ian Urbina and Jo Craven McGinty
The New York Times www.NYTimes.com
December 1, 2011


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