Apr 13 2011

Broken Lease Agreements

Can You Trust Nat Gas Companies to Honor Leases?

Broken Promises Raise Questions & Lawsuits

Right to Lease vs. Right NOT to Lease?

NY Compulsory Integration = ‘Taking’ of Property Rights

“Butter job” is a phrase coined by a property owner I know to describe how natural gas companies substitute words for deeds.  The difference between words (“butter jobs”) and deeds is important to property owners who want to lease their mineral rights to nat gas companies.

Do signed leases mean nat gas companies will do what they promise?

Maybe not.  News reports and property owner testimonials are emerging about natural gas companies breaking signed lease agreements for a variety of reasons.

  • Range Resources apparently could not read its own production volumes from wells in Pennsylvania and sent letters last August to an unspecified number of Pennsylvania lease holders stating it had overpaid them in royalty checks over “several production periods.”1
  • As a consequence, Range said it would deduct the alleged overpayment from future royalty checks.  This raises lots of questions including the competence and financial reporting accuracy of a company that admits it can’t read its own production volumes.

My inquiries to Range Resources about this issue were met by silence.

Legally, leaseholders might have a beef with such “broken promises.”

Such lawsuits do not always go in favor of the nat gas industry wallet.  A federal judge in Erie, PA, recently approved a class-action settlement between some 25,000 Pennsylvania landowners and Range Resources.

The property owners’ lawsuit, filed in 2008, claimed that Range improperly calculated royalties, according to a news report in the Pittsburgh Tribune-Review.4

Range Resources “denies it was wrong in the settlement, but ageed to change its methodology,” the article notes.  It also agreed to pay landowners and attorneys millions of dollars over the next five years.  As the article reported:

“U.S. District Judge Sean McLaughlin approved a settlement — which was agreed upon last year — that gives the landowners about $1.3 million initially and increases their royalties by an estimated $16.6 million over the next five years. The attorneys for the landowners would receive $437,500 initially and $4.2 million over the next five years.”  Link:  Judge approves settlement in Marcellus shale class-action suitPittsburgh Tribune-Review, March 23, 2011 http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_728609.html

  • All this from the company that calls itself “the white hat guys” in its annual report – “not because we are perfect, but because we are committed to doing things right.”
  • All this from the company that, last August, Forbes Magazine crowned “King Of The Marcellus Shale.”5

Is it possible that “the white hat guys” who are “King Of The Marcellus Shale” cannot correctly read production volumes from its wells; and cannot correctly calculate royalty payments?

Does the Board of Directors at Range have a “risk management” issue?

These parables from shale gas production zones, also underscore that property owners who do superb due diligence in the process of developing signed lease agreements can find those agreements ignored by nat gas companies.

A Pennsylvania property owner recently told me his experience of being part of:

“a group of over 1000 families and 70,000 acres [who] worked for a year on a lease with a Philadelphia law firm … and finally signed a lease incorporating ‘best practices’; well testing; plan review by the property owner; and other safeguards. We did this because we did not trust natural gas companies and Land Men.”

Now that they have done their homework, they are ready to lease but cannot.  They can’t, he says, because of “environmentalists” who have “pressured the Delaware River Basin Commission [a federal and interstate regulatory body] to declare a moratorium” on drilling.

Fair enough, but the flip side of this is equally problematic – maybe more so.

Property owners in New York State effectively do not have a right not to lease - even if they own the mineral rights.

New York State’s compulsory integration law is eye opening in its punitive measures against landowners who prefer not to lease.6

In poker face prose, the “Landowner Option Guide” on the Department of Environmental Conservation’s (DEC) website warns property owners in the fourth paragraph:

“Each option presents different risks and potential rewards. The option you select may subject you to certain costs and obligations, and there is no guarantee that a well will make money. You should carefully consider all the implications of your decision.” Refer to link:  http://www.dec.ny.gov/energy/1590.html

If you choose to go along peaceably by electing to “be integrated as a royalty owner” – no problem.  Welcome to the club.

If, however, you resist and elect (are forced?) to be integrated as a “participating or non-participating owner,” it gets ugly.  “You will be held liable for your share of the additional costs,” according to the DEC website.

What additional costs, you say?

  • Actual well costs – your share of “The actual cost to drill or plug the well….”
  • Completion and operating costs – “If the well is successful, it will cost money to complete and operate ….”
  • Gathering line costs – “If the well is a producer, the well operator will provide you with the estimated costs to install a gathering line to bring the gas to market.”

The list goes on.  Check the DEC website.  Perhaps that explains why some Texans refer to the gas industry as “Gasa Nostra.”

In Pennsylvania, some legislators are talking up “forced pooling” – which proponents cheerfully label as “conservation pooling.”7

In the nat gas world, rights are not sacrosanct — even when you have a signed lease.  And legal agreements can be abrogated from many angles, including eminent domain in sheep’s (or wolves’) clothing.  After all, eminent domain is the “taking” of property and/or property rights under the badge of government.

Links & Resources

1 ‘White Hat’ Gas Guys – For details of Range Resources’ August 2010 letter stating that the “King of the Marcellus” can’t do arithmetic, and alleging that royalties were overpaid for “several production periods,” see this post (which also refers to a court case involving Range Resources ‘breaking’ an agreement to pay a leaseholder a bonus payment): http://www.spectraenergywatch.com/blog/?p=742

2 Chesapeake Energy:  What’s Up With These Lawsuits - Forbes by Christopher Helman (Fuel), Jan. 21, 2011  http://blogs.forbes.com/christopherhelman/2011/01/21/chesapeake-energy-whats-up-with-these-lawsuits/?partner=yahootix

EXCERPT: “So imagine their surprise when a few weeks later instead of getting cash the landowners instead got letters from Chesapeake claiming to void the leases and stating ‘we will not be funding the order of payment.’ Try doing that with your landlord sometime and see what happens.”

3 Norse Energy unexpectedly changing terms of signed leases — in which the company apparently agreed to provide leaseholders with “free” gas.  If you haven’t seen this yet, here is a link:  http://www.syracuse.com/news/index.ssf/2011/02/norse_energy_unexpectedly_chan.html

4Judge approves settlement in Marcellus shale class-action suitPittsburgh Tribune-Review, March 23, 2011  http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_728609.html

See also:

Range Resources Settles Royalty Lawsuit from Landowners for $22 MillionMarcellus Drilling News (Landowner News & Resources).  http://marcellusdrilling.com/2011/03/range-resources-settles-royalty-lawsuit-from-landowners-for-22-million/

5 Range Resources Is King Of The Marcellus Shale - Forbes Magazine, August 9, 2010, by Christopher Helman  http://www.forbes.com/forbes/2010/0809/companies-energy-range-resources-bp-gas-blowout-beneficiary.html

6 Compulsory integration is the law in New York State. For an eye-opening introduction to current law on the books in New York State, go to this “Landowner Option Guide” link on the Department of Environmental Conservation’s website: http://www.dec.ny.gov/energy/1590.html

7 Forced Pooling in Pennsylvania – In Pennsylvania, some legislators are talking up “forced pooling,” which has been described as eminent domain in sheep’s clothing.  For information, refer to this post: http://www.spectraenergywatch.com/blog/?p=770

NM jury rules gas royalty owners are owed millions – For a different example of legal disputes over royalty payments (this one involving BP America Production), refer to this Associated Press story that ran in Bloomberg Business Week (March 28, 2011)  http://www.businessweek.com/ap/financialnews/D9M8DD180.htm

NOTE: This article is cross-posted on the Accountability Central website at this link: http://www.accountability-central.com/nc/single-view-default/article/voices-from-the-shale-should-leaseholders-trust-nat-gas-companies-to-honor-signed-leases/

Accountability Central is part of the Governance & Accountability Institute, Inc.

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