FUNDAMENTALS OF
GEOTHERMAL LEASING
Presented By
Jerry R. Fish
(503) 294-9620
jrfish@stoel.com
Christopher M. Heaps
(503) 294-9864
cmheaps@stoel.com
STOEL RIVES LLP
March 27, 2009
Oil & Gas vs. Geothermal
Leasing
• Target geology: broad oil and gas traps in
sedimentary rocks vs. geothermal heat
concentrated along narrow fault zones or
hot spots.
• Ownership: oil & gas are always
“minerals” – geothermal resources treated
differently by state law.
Oil & Gas vs. Geothermal
Leasing
• Injection: fluids are sometimes injected for
secondary recovery of oil and gas; but
reinjection of geothermal fluids is always
required for geothermal reservoir
recharge.
• Water: after drilling, negligible water
needs for oil and gas vs. substantial
cooling and makeup water needs for
geothermal.
Oil & Gas vs. Geothermal
Leasing
• Limited surface structures for oil and gas
production vs. a significant plant for
geothermal electricity.
• Both oil and gas and geothermal
production can go on for many years –
though geothermal production will likely
last much longer.
Industry Forms?
• Oil and Gas has the “Producers’ 88”
– But it’s usually a company form
– Many oil and gas leases are heavily
negotiated
– Federal and state leases look very different
than private leases
• There is no standard for private
geothermal leases – examples found in
SEC filings.
Title Due Diligence
• Are you negotiating a lease with the right
person?
• Consult the state laws on ownership (are
geothermal resources private property?).
• Review the deeds to the property in
question (are surface and minerals
severed?).
• Many developers want title opinions -- no
title insurance for minerals.
Ownership
In a severed estate, are rights
to geothermal resources
held by the surface owner or
the owner of the mineral
estate?
– These questions are resolved
under state property law.
– Geothermal resources are
minerals in some states,
surface rights in some states,
water rights sometimes, and
not defined in others.
– Deed language often
determines ownership, with
the intent of the parties
controlling.
Ownership - California
Geothermal Kinetics, Inc. case:
In California, geothermal
resources belong to the
mineral estate.
“Magma No. 1” well (1955)
1951 Deed: conveyed “all
minerals in, on or under” the
property.
The Geysers
Ownership - Nevada
Nevada Revised Statutes
Section 534A.050:
Ownership of geothermal
resources. The owner of
real property owns the
rights to the underlying
geothermal resources
unless they have been
reserved by or conveyed to
another person.
Ownership - Washington
Revised Code of Washington
Section 78.60.040:
Geothermal resources deemed
sui generis.
Notwithstanding any other
provision of law, geothermal
resources are found and hereby
determined to be sui generis,
being neither a mineral resource
nor a water resource and as such
are hereby declared to be the
private property of the holder of
the title to the surface land above
the resource.
Ownership - Oregon
Oregon Revised Statutes
Section 522.035:
Ownership rights to geothermal
resources shall be in the owner of
the surface property underlain by
the geothermal resources unless
such rights have been otherwise
reserved or conveyed. However,
nothing in this section shall divest
the people or the state of any
rights, title or interest they may
have in geothermal resources.
Ownership - Colorado
Colorado Revised Statutes 37-90.5-104:
(1) Where a geothermal resource is found
in association with geothermal fluid which
is tributary groundwater, such geothermal
resource is declared to be a public resource
to which usufructuary rights only may be
established according to the procedures of
this article. No correlative property right to
such a geothermal resource in place is
recognized as an incident of ownership of
an estate in land.
Ownership - Colorado
Colorado Revised Statutes 37-90.5-104:
(2) The property right to a hot dry rock resource is
an incident of the ownership of the overlying
surface, unless severed, reserved, or transferred
with the subsurface estate expressly.
(4) Nothing in this section shall be deemed to
derogate the rights of a landowner to nontributary
groundwater.
Ownership – Private Surface;
Federal Minerals
See United States v. Union Oil
Co. of California, 549 F.2d
1271, 1272 (9th Cir.1977)
(holding that "the mineral
reservation in patents issued
under the Stock-Raising
Homestead Act of 1916
reserved to the United States
geothermal resources
underlying the patented lands")
Ownership – Private Surface;
Federal Minerals
• The Geothermal Steam
Act, 30 U.S.C. § 1020(b):
Geothermal resources in lands the
surface of which has passed from
Federal ownership but in which the
minerals have been reserved to the
United States shall not be
developed or produced except
under geothermal leases made
pursuant to this chapter.
Key Lease Provisions
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Grant of Rights
Bonus & Rent
Royalty
Term
Surrender/Pugh
Clause
• Express/Implied
Covenants
• Water Rights
•
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Unitization/Contraction
Surface Impacts
Fee, Easements
Information
Indemnity & Insurance
Taxes
Default & Remedies
Grant of Rights
• Exclusive rights to explore for, extract, and
produce geothermal resources.
• Non-Exclusive rights to:
– construct and maintain necessary roads, wells,
pipelines, plants, electrical and communization
transmission lines, and all associated facilities.
– use water needed for operations.
– cross-utilize with adjacent lands.
– access property to exercise rights.
– maintain and/or obtain easements after lease
term.
Grant of Rights
• Lessor and its other lessees will not
unreasonably interfere with geothermal
operations.
• Specify areas, if any, where the
geothermal lessee will not unreasonably
interfere with other surface uses.
• “No surface occupancy” clause can be
negotiated for small areas only.
Grant of Rights
No Surface Occupancy
Except as provided in this section, Lessee shall not have
the right to enter onto the surface of the Property or to
place any wells, plants, or other structures on the surfaces
of the Property for the purpose of conducting activities
under this Lease. Lessee shall have the right to enter
onto the surface of the Property for the purpose of
conducting inspections or environmental surveys of the
Property or for the purpose of facilitating surface
operations on adjacent lands. All wells drilled into or
through the Property shall enter the property at or greater
than 200’ below the surface of the Property.
Bonus and Rent
• Signing Bonus – Federal leases have bonus
bidding. Private leases sometimes have a
negotiated bonus payable at signing in
addition to first year’s rent.
• Annual Rental – Be clear whether “unless” or
“or” rental clause (oil and gas case law).
– $2 to $3 per acre in federal leases; sometimes
higher in private leases
– Clarify whether rental stops when production
begins
Royalty
Federal geothermal royalty is a reference:
• Lessee pays 1.75% of gross proceeds during the first
10 years of production and 3.5% thereafter from
commercial sales of electricity by lessee or its
affiliate.
• “Gross proceeds” means “the total monies and other
consideration accruing to a geothermal lessee for the
sale of electricity…” 30 CFR § 206.351.
• “Affiliate” means a person under common control with
the lessee. Affiliation is conclusively presumed if two
persons share 50 percent or more of ownership
interests. Id.
Royalty
• Minimum royalty vs. production royalty
(recoupable?)
• Pay percentage to lessor for
– Electricity sales (at Plant)
– Geothermal resource sales (steam, hot water)
– Extractable mineral sales
– Direct use (fee-based)
Key Royalty Negotiating Points
• Gross vs. Net
– Transmission to point of sale deducted?
– Taxes deducted?
– Contract penalties deducted? (e.g. delay
commencing production)
• What payments are counted?
– Capacity payments?
– Damages for early termination?
– Environmental Attributes?
Royalty
• Environmental Attributes
– State Renewable Portfolio Standards have
created significant value in Renewable
Energy Certificates (“RECs”).
– Many states allow REC trading, e.g., Oregon,
Washington, Nevada. Does a Lessee pay
royalty on separately-sold REC proceeds?
– Where RECs must be sold with electricity
(e.g., California), can REC price be deducted
from royalty proceeds?
– Western Climate Initiative carbon offset
credits?
Royalty
• Arm’s length Sales vs. Affiliate
Transactions
–
–
Lessee may be challenged if it sells to an
affiliate that resells for a higher price.
Federal geothermal regulations apply to
electricity sales “at arm’s length” by the
Lessee or its “affiliate,” ignoring any earlier
sales for royalty purposes.
Royalty
• Production and Sale by a Utility
–
–
–
Utility may produce at its own geothermal
plant and deliver directly to its customers.
Customers pay electricity rates that include a
return on utility equity in all plants, poles and
wires, not just the geothermal facility – bad
for royalty purposes.
Utility with geothermal plant will want to
specify an appropriate price or index as the
deemed sale price of electricity from the
geothermal facilities.
Term
• Primary term
– Usually 10 years or longer
– Held by payment of annual rental
• Extension term
– “…for so long thereafter as producing in
paying quantities.”
– Can also be held by continuous drilling
– Minimum royalty for wells capable of
producing but not yet producing
Surrender/Pugh Clause
• Lessee has right to surrender all or any
part of lease subject to outstanding
obligations (e.g., reclamation).
• Pugh Clause: at end of primary term,
lands from which there is no production
are dropped from lease.
Express vs. Implied Covenants
• Oil and gas case law produced covenants
implied in leases:
– Diligent development
– Diligent marketing
– Protection from drainage
• Better to make express covenants and
negate implied covenants.
Water Rights
• Availability of water for exploration and
production is important for development.
• Lessor may be willing to allow use of ground
or surface water appropriated by Lessor.
Application to change use of water and place
of use is likely required.
• Lessors generally require no impact to their
existing water rights/use, Lessees want right
to appropriate using new wells.
Water Rights
• State water law may have special
provisions for water used in geothermal
drilling or production.
• See NRS 534.050(2): waiver of
appropriation requirement for exploration.
Unitization/Contraction
• Royalty paid in proportion to acreage in
unit or participating area.
• Can be voluntary (per lease terms) or
forced in some states (not for federal
units).
• Contraction: After specified time, Lessee
may be required to release non-productive
areas from the unit. Lease should specify
how contracted acres may be held.
Surface Impacts
• Operational Standards: workmanlike, industry,
all commercially reasonable efforts to prevent
waste.
• Compliance with law; exclusive responsibility
for obtaining permits and dealing with
government – require landowner cooperation
• Bond (lessee prefers only BLM or state bond).
• Reclamation – state law and negotiated terms.
Surface Impacts
• Operations
– fencing of operations
– road use & maintenance
– minimum well, pipeline, and plant distance to
structures
– fire protection and suppression
– right of inspection
• Damages
– repair/replace structures & roads
– market value for crops & livestock
Fee, Easements
• Additional rental payments for exclusive
surface use for plants, pipelines, wells,
lines, and offices.
• May negotiate to buy fee for plant site.
• May negotiate to buy an easement for
plant, pipelines and transmission lines.
• Pipelines, roads, transmission lines, etc.
may survive the lease for use in
connection with adjacent lands.
Indemnity & Insurance
• Indemnity
– Mutual between parties, including contractors,
invitees, lessees, officers, employees, etc.
– Procedure for handling third-party claims
• Insurance
– Commercial general liability, comprehensive
auto, workers comp
– Required prior to operations
– Lessor named as additional insured
Information
• Applications, permits and operating plans
– copies to lessor
• Well logs and cores?
• Drilling reports?
• Exploration and production data?
• Confidentiality provisions
Taxes
• Lessee pays all taxes on operations and
lease interest, including improvements, and
any fees or charges imposed by government
attributable to lessee activities.
• Lessee reimburses lessor for increases in
property taxes attributable to lessee activities.
• Lessor responsible for other taxes.
• Lessee may pay Lessor’s tax liens, be
subrogated to rights, and deduct from future
lease payments.
Default & Remedies
• Distinction between monetary & nonmonetary breaches (time for cure)
• Tension between lessor’s desire for fast
consequences and lessee’s need for
stable leasehold rights
– Notice and cure periods
– dispute of breach, continuing operations
– resolution (mediation, arbitration, or judicial)
Conclusion
• Geothermal leasing is similar in many
respects to oil and gas leasing.
• But geothermal law and the nature of the
resource is different.
• Have fun!