8 Considerations for Marcellus Shale Leasing

The recent Marcellus Shale gas & oil leasing phenomenon has created a lot of excitement for landowners throughout West Virginia, Pennsylvania, and Ohio.  For many it’s turned into a windfall of money and a lot of decisions that need to be made.

web-oil.jpgDecisions to ensure you not only secure favorable leasing terms but protect the assets you now have.

I’ve not only had personal experience dealing with lease negotiations directly as a land owner but gained valuable knowledge attending a variety of seminars on the topic. Keep in mind, nothing herein should be deemed legal advice.  You should consult with a licensed attorney for specific advice based on your particular circumstances.  Here are some things I’ve learned:

Rule of CaptureRead this carefully. Gas companies can take your gas WITHOUT your permission!  They can’t drill on your property without permission but they can drill on nearby property and extract the gas from right under you- LEGALLY.  Remember this when negotiating your lease and know that playing hardball may backfire.

Pugh Clauses add protection. In the event the leasing gas company only identifies a portion of your leased land in the drilling unit (typically 640 acres), a Pugh clause will release the unused acreage you own to negotiate with another gas company.

Renewal Clauses. The standard renewal clause seems to be at the same rates as the original lease.  An alternative would be to negotiate a first right of refusal.  This would give you the ability to negotiate a better deal with another gas company giving the original lessee the right to match the offer.

What Dictates the Value of My Land? Lease payments can vary dramatically.  Understanding what drives the price can help you secure the best deal.  First, the more acreage you have generally the higher price you can demand.  Second, where your property falls within the Marcellus Shale footprint and proximity to existing productive wells.  And third, the number of companies competing for your lease.

Future Royalties Unknown. Since there is no historic data in the Marcellus Shale gas play, well production is relatively unknown and unpredictable.  Because of this we have no accurate way to determine future output and therefore future royalties.  You can calculate theoretical returns but should never rely on them as it may not be a reliable source of future income.

Royalties can impact your Taxable Estate. If you were to die while engaged in a gas & oil lease, future royalties could be factored into your taxable estate.  Although the future estate tax exemption could change, it is set to be just $1 million starting in 2011.  With a large enough plot of land and a handsome royalty rate, your future royalty value could reach these figures.

Consider the Tax Consequences. The bonus money generally paid up front can create a hefty tax bill.  Find out what your liability will be and consider taking payments over time vs. all up front.  This can potentially save you thousands in taxes.

Everything is negotiable. The initial offer and associated lease documents are all open for negotiations and you should take special care in making sure you receive the terms most suitable to your specific situation.  I’d recommend consulting with an experienced gas & oil lease attorney prior to entering into any contract.

I’m sure you’ve heard all the lottery winner horror stories.  The gas & oil lease play is no different and you can easily end up worse off than you are today by mismanaging the financial windfall a gas & oil lease can provide.  Be informed and plan accordingly.