Tuesday, November 3, 2009

Even if you don't have a lease, they can take your gas

At least here in New York. I live in the southern tier, land of rolling hills and forests and hayfields. Underneath is all is the Marcellus Shale, a much-coveted resource that energy companies would like to convert from cold hard rock to cold hard cash.

With so much potential wealth beneath our feet you'd think we'd be inundated with leasing agents. If it weren't for the DEC's year-long break to prepare a Supplemental Generic Environmental Impact Statement (SGEIS) we would be. Still, even though DEC is not handing out permits for horizontal drilling in the Marcellus, they will soon. In fact, Fortuna Energy has 11 applications pending in our little town andn I am sure there are more on the way.

Once DEC approves their final version of the SGEIS the land rush will begin in earnest. You see, to drill a well a company has to show that 60 percent of the land in the drilling unit is leased.  What happens to those not leased? If their land falls within a drilling unit, their gas is taken through a process called "Compulsory Integration".

Now some landmen, when  they come to your door, speak of "compulsory integration" in much the same tone as "the goblins 'll get ya if ya don't watch out".

It doesn't matter that you might not want to lease or have drilling anywhere near your farm or water well. What matters for the DEC is that they can assure that the mineral resources are extracted in the most efficient manner possible. So they pull you in kicking and screaming.

Still, they do have some rules to protect you - er, to make sure that you receive "just" compensation for the extracted gas. And those rules are what compulsory integration is about. Basically they assure that a landowner will receive at least 12.5 percent royalty for gas removed.

Maybe that was OK back in the 1800's when that rule was first written. But now, with landowner groups negotiating for 20 percent and higher royalties, the state's "protection" seems more like a rip-off.

Well, say the gas folks, that's only the floor. The person who is forced - er, "integrated" into the unit will receive the lowest royalty on the unit leases. So if that's 20 percent, they're doing well. BUT given that many of the leases were signed when 12.5 percent was the "going rate" it looks like integrated landowners are screwed.

Not so fast, say the gas folks. Landowners can choose to be "participating owners" in the gas well.  That means you take on some risk - such as covering your part of the cost for drilling the well - but you receive 100 percent of the royalties. For your portion of the well.

Or you can be a "non-participating owner". Instead of forking over the money upfront, you pay a "risk penalty" of 200 percent, plus your costs  - a grand total of 300 percent - before you see any income. But hey, once the costs are recovered, you get to cash those royalty checks.

There are some other options. One idea landowners have considered is incorporating as an LLC and leasing their land to their LLC. The royalty set-up is better, but at this point the insurance agents and lawyers don't seem to be too sure about liability issues.

Some neighbors in the next town over had their own creative solutions to compulsory integration. You can read about it here.

1 comment:

  1. Our government agencies should be protecting us from this kind of abuse. Thanks for bringing it to public attention, Sue.