Legal Issues Surrounding Marcellus Shale
Marcellus Shale has recently become a very common topic. Along with this, many issues surrounding Marcellus Shale are beginning to surface. Because of conflicting views of whether this new gas activity is beneficial or detrimental, many people are seeking legal services.
Gas companies encourage landowners to sign leases quickly, which ultimately leaves the landowner disadvantaged. Many issues need confronted when deciding to lease land for gas development.
If you are unfamiliar with Marcellus Shale, here is a quick education. Marcellus Shale is rock formation stretching from New York to West Virginia, 5000 – 9000 feet beneath the surface. In Pennsylvania it runs from the Northeast to the Southwest in an arc. Because of the depth level of the gas it is necessary to use horizontal drilling. The gas is then extracted by forcing a mixture of water, sand and chemicals under pressure through the well to fracture the rock and displace the gas. This process is called hydraulic fracturing.
A tremendous amount of water is necessary for the drilling process. Therefore, it will be necessary to truck water to the well site. The water and other necessary equipment to be used for the drilling process will take up approximately five acres of land and be housed there for many years. New roads may need to be built to get all the necessary equipment to the site locations. As you can see, this is a major industrial activity. Many landowners were not aware of these issues when they signed their gas leases.
1. Is gas drilling compatible with the landowner’s use of property?
2. Should drilling be restricted to reduce interference with use of the landowner’s property?
3. Is the financial return worth the unavoidable interference caused by the gas extraction?
4. Does the lease protect my property structures and natural resources?
The leverage a landowner has in the financial terms of the lease depends on the size of the property.
The two major financial components surrounding the Marcellus Shale are: the upfront bonus and the royalty. The Upfront Bonus is decided on a per acre basis within a specified period of time after the lease is signed. This amount has varied from a few hundred dollars to $5000 per acre. This is the only money guaranteed to the landowner.
The Royalty is the portion of revenues received by the gas company from the sale of the gas drilled from the property. These monies are usually paid annually or quarterly. The percentage paid to the landowner must be at least 12% but has been seen as high as 21%.
The lease agreement needs to state clearly that the royalties are calculated based on revenue without deducting expenses of developing and marketing gas. It is also important for the lease to provide the landowner the ability to audit relevant gas company records.
The Right to Store Gas and construct a pipeline on the property should be negotiated and paid for separately. The term of the lease generally ranges from 5 – 10 years. It is better to sign a shorter lease and have the opportunity to renegotiate. Eliminate any mention of automatic renewal in an agreement.
Marcellus Shale is causing landowners to receive a considerable amount of new wealth. Landowners are therefore requiring strategies to protect their assets, reduce tax consequences and enhance return on their assets for future generations.
If you or someone you know has questions regarding Marcellus Shale and the above mentioned issues, or are in need of assistance to protect your assets, please contact our law firm today. We are dedicated to solving your legal issues in a cost effective manner.