Tuesday, May 11, 2010

Proposed legislation would benefit landowners forced into drilling units

New York isn't allowing any horizontal drilling in the Marcellus Shale just yet, but that hasn't stopped some companies from planning ahead. Epsilon Energy is drilling into the Oriskany (just below the Marcellus layer) and at the last meeting with the Van Etten town board the Epsilon representative admitted that they were developing the pads and access roads for future Marcellus wells.

Over the hills, in the town of Maine, Inflection Energy has leased 3,000 acres for future Marcellus drilling. They told the press that they've signed leases for $6,000/acre with 20 percent royalties (minus "a few expenses"). All well and good for the landowners with leases, but what happens to people who are forced into drilling units through the process of "compulsory integration"?

Compulsory Integration assures that landowners involuntarily forced into drilling units will get paid for oil or gas taken from beneath their land - at the lowest royalty rate signed by a leaseholder in the unit, but no lower than 12.5 percent.

This practice does not sit well with most landowners who characterize it as nothing less than theft. So recently the NY Farm Bureau, goaded into action by landowner coalitions and outraged citizens, outlined some legislation changing this practice - and as of last week it looks like they found some sponsors in Albany. Assemblywoman Donna Lupardo introduced Assembly Bill 10956  (Senate bill 7758) that will, if it passes, provide "integrated" drilling unit landowners a royalty equal to the highest royalty in an existing lease in the spacing unit, but no less than 18.75 percent.

That, my friends, is a huge chunk of change! 

Lupardo justifies her bill this way: When a natural gas drilling company applies for a permit from the Department of Environmental Conservation (DEC) to drill a well, the company proposes the drilling unit from which gas will be extracted. Unit boundaries may cut across property lines and include land owned by people that have not signed a lease with a gas company for development.

The gas company only needs to have 60 percent of the land in the drilling unit leased to drill. Any other land in the unit is forced in through compulsory integration. Of course - that only allows the gas company the right to suck up the gas; no surface rights are transferred through compulsory integration.

Now, Lupardo points out, the technical advances in the drilling industry and the prospect of exploration in the Marcellus Shale formation have pushed up both the rental and the average royalty payments dramatically. Royalty payments are consistently in the 18 to 20 percent range, with some lease agreements offering up to 30 percent royalties.

This means that landowners who are involuntarily integrated into drilling units now are receiving considerably lower royalty rates than their neighbors in the same unit. Landowners don't think that's fair. Now they've managed to convince Assemblywoman Lupardo. On May 5 her bill was referred to the environmental conservation committee. That means, should the NY legislature ever pass a budget, the bill might actually get read.


  1. My family's land in under a conservation easement. The value of our land is lied to conservation and preservation, not mineral extraction. Compulsory integration is nothing more than a taking using a questionable legal construct rather than the power of eminent domain. With conventional wells, when oil or gas in a pocket is extracted from the surface, reserves may be drawn from neighboring properties. Hence the need to define a drilling unit and compensate the neighbors for gas or oil under their land. Not so with shale gas. The companies would be siting pads adjacent to our land in order to drill horizontally under it, fracture the shale and extract the gas. There is nothing incidental about it. So what is the compensation for the loss of value of the land as a preserve?

  2. While I sympathize with the outrage over the current lowest possible royalty, I don't think the highest would work. There would be no reason for anyone to lease their land. Why risk getting less than your neighbors who wait for compulsory integration? The average, based on acreage, might work.

  3. Broome County wants to ban waste disposal from drilling and hydrofracking while at the same time "benefiting" from gas drilling. If you want drilling, then deal with the waste, because those of us in neighboring counties don't want it. Also, I understand that Broome County legislature thinks that weight limits will take care of the road problem. Someone is not doing their homework. But that is not surprising for a gullible legislature that eats up an industry "study" which shows all the gain with none of the pain. Its only human not to want to hear the bad news, leave alone take responsibility for the mess you create. The tax payers are going to be taken for a ride and left stranded over road repair costs (unless the legislature wakes up). Meanwhile, people in Broome worry about royalties.

  4. People that don't want drilling on their land don't want their land taken from them at all. No matter what you pay me I will fight compulsory integration. No one can say that this isn't eminent domain, no matter what the price. CI should not be allowed, period.