Draft - 12/20/13
The Case for a Proactive Landowner Policy in Pennsylvania
Prepared by Scott Brion 570.404.5664
What do Marcellus Landowners care about?
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Finding a “Level Playing Field” in leasing OGM and managing royalties
Having elected officials that are more concerned with Citizens than Gas Companies
Adequate state protection from unfair lease practices and negative environmental impact
Continued success of PA oil & gas development
Balance of property taxes and taxes/fees paid by oil & gas companies that reflect impact of drilling
without adversely impacting development — Oil & gas companies to pay their fair share
What do Landowners Need?
1.
2.
Government committed to acquiring the institutional knowledge to understand oil & gas development in
PA
Comprehensive legislation and regulatory framework that would:
a) Level the contractual playing field in oil & gas leasing;
b) Meet the minimum protections afforded to landowners in other states;
c) Seek to promote competition for leaseholds among oil & gas operators; and
d) Dedicate resources to promote education, knowledge and transparency in all aspects of oil &
gas development in the Commonwealth. ,
e) Fair & adequate taxation of produced gas.
f) Specific Oil & Gas regulatory body to separate from DEP (continue environmental oversight)
Issues faced by PA Marcellus Landowners:
1.
Oil & gas leases are contracts between fundamentally unequal parties (literally Grandma & Exxon
Mobile.) In this respect landowners are much like consumers and are in need of basic protections.
Landowner are specifically disadvantaged by:
a) Oil & gas companies employ predatory leasing practices that take advantage of ignorance and are
difficult for even the most sophisticated landowners to overcome;
b) Intentionally left blank
c) Intentionally left blank
d) Litigation & arbitration is largely an ineffective remedy given the deep pockets of oil & gas
companies and landowner's general inability to recover litigation costs ;
e) Landowners generally lack business sophistication and experience. Correspondingly many
landowners are grateful for the windfall of unanticipated value from oil & gas properties and there
are strong social pressures that make citizens reticent to attempt to assert fair dealing with oil & gas
companies;
f) Oil & gas leases are highly complex contractual documents with a high level of idiosyncratic
language and concepts that are not fully understood by even the most sophisticated landowners. It is
arguable that there is no way for a landowner to fully obtain the knowledge necessary to fully
evaluate leases; and finally many leases are drafted with vague language, and gas companies use
conflicting interpretations to suit their position of the moment.
g) Information disparity between industry and landowners (including landowner accessible resources
such as experienced & knowledgeable attorneys, consultants and advisers); and
h) Oil & gas companies do not really negotiate the non price terms of an oil and gas leases except in
very few instances (est. far less than 1% of leases)
2.
3.
4.
5.
6.
7.
Pennsylvania is lacking in modern law and regulation / oversight in all non-environmental aspects of oil
& gas development. This is particularly problematic as Lessors have no way to determine if Lessees are
meeting the agreed terms of leases.
Landowners generally care very deeply about the environmental impact of oil & gas development on their
property. There is a lack of transparency and access to relevant information that limits information on
which landowners can adequately evaluate risks.
Unfair (non-equitable) treatment by some oil & gas companies. It is becoming apparent that by plan or
circumstance, Gas companies are taking aggressive often contractually unjustified positions and forcing
landowners to seek remedy through legal action.
Today oil & gas companies for the most part operate in monopolistic local environments due to the
practice of pooling and unitization. Operators are increasing their monopolistic position as they
consolidate leasehold positions for development.
Landowners currently have a limited voice in public policy arena. Gas companies are well represented by
industry lobbyist and supported by extraordinary marketing and public relations budgets. This presents
problems in a variety of ways:
a)
Industry has strongly argues that industry needs legislative and tax support for hydrocarbon
exploration and development to succeed in Pennsylvania.
b)
Industry lobbyist have been very successful in achieving defeat of severance tax, and development
friendly regulatory environment.
c)
Legislators are generally unaware of the breadth and scope of lease abuses.
d)
Industry disinformation has created environment where sub-par leases that are not understood are
typically viewed as better than nothing (which is now the typical alternative.)
In some respects PA Marcellus development is the prefect storm for Landowners. Oil & Gas development
has never been particularly equitable for landowners, but the unprecedented size of the Marcellus play
coupled with the still very new form of development driven by new methods and technologies and the
near complete lack modern oil & gas development local knowledge and legal / regulatory framework
amplify the sum of issues stated above. In this respect issues faced by PA landowners are far greater than
those faced by western and southern landowners with a modern tradition of oil & gas development.
Appendix A
1.
2.
List of Specific Land Owner Abuses that need to be addressed:
Deceptive leasing practices. Contract Landman ofien relate false information and or understanding of
specific lease terms to potential Lessors.
Pooling and unitization is by contract typically at the complete discretion of Operators with no concern as
to equitable treatment of landowners.
a)
Landowners can be omitted from pools without penalty
b)
Operators generally use pools with a primary purpose to extend lease terms and often disregard
geology and or equitable lease development in order to achieve the technical extension of a lease to
secondary term.
c)
Secondary considerations such as accounting and or cost to the operator prevent operators from
strictly adhering to the payment of landowners their full proportionate share of pooled royalty.
d)
Lack of statutory pooling requirements severely limits leasing competition.
3.
4.
5.
6.
7.
8.
The use of pooling, land swaps, areas of mutual interest and efforts to technically extend leases via
constructive production effectively create local monopolies by eliminating competition for leases. The
effect is very poor terms for PA landowners. The national average royalty is over 19%. The average
royalty in PA is not known, but is likely to be near the 12.5% state minimum royalty and not more than
15%. This is despite the world class nature of the Marcellus shale.
Royalty deductions / Minimum royalty
Definition of lease term and clarification as to lease termination.
Surface use and failure to comply with agreed upon lease terms.
Opaque nature of operations and failure to adequately notice landowners of development, pooling,
assignments and production.
Delay in payments due to landowners benefit cash strapped operators. Royalty owners are unwillingly the
"1st national bank of PA.”
Appendix B
Examples Highlighting Issue
1.
Low royalty
 Average US royalty is over 19% and PA is effectively probably less than 12.5% after deductions.
2.
Bad Faith extension of leases
 Royal Dutch Shell's use of Bad faith drilling to extend over 100,000 acres of leases in Tioga County.
Shell has drilled 140 uneconomic wells it never intends to finish to hold leases resulting in Shell
benefiting by not having to release the properties and maintaining a 12.5% net royalty (effectively
10% or less) rather than incurring a 15% or higher royalty common to new leases. The resulting
savings to Shell in landowner payments could reach over a $1 Billion.
3.
Bad faith pooling
 V_ retired elderly couple leased to Chief O&G in 2008. Talisman formed unit and began producing
gas on properties surrounding the V_ property in 2010, V_ 's were excluded as Chief and Talisman
did not agree to work together. Talisman acquired the V__ lease from Chief in 2011, but failed (even
upon landowner request) to include the lease in the unit indicating that the unit would be changed
and the V___ s would be placed in a new unit. In 2013 Talisman added the lease to the unit 1 day
before the V_ lease was set to expire and deny the V__ payment of $185,000 in royalties they would
have received in put in the unit from day one.
 CHK ~ Harper Unit Bradford — increase unit size seek to recover royalties already paid and
redistribute to new acreage added. Threaten legal action.
4.
Inflated royalty deductions
 Chesapeake - Bradford County. Landowners have been charged as much as 80% of natural gas’ sale
price for gathering and third party expenses. One royalty check posted on the State impact PA
website showed a sale price for $3.49/MCF for Dec 2012 and deductions of $2.87/MCF this
calculates to a gross royalty of 2.22% considerable less than a national average of over 19%. At the
same time Chesapeake‘s latest 10K shows that CHK had revenues of $6.2 B for sales of Oil & Gas
and $5.4B for Marketing Gathering and Compression. Chesapeake is using accounting to inflate fair
marketing expenses. As counterpoint to CHK $2.87 in gathering in expenses. EXCO resources pays
the negotiated rate of $.66 per MCF for compression and gathering for all gas produced in
neighboring Lycoming county. APC /STO ~ Lycoming county
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Brion — Cogan House — Taking deductions on Royalty despite royalty defined as paid on
Revenue with market enhancement clause. Different owners different production figures.
 C — Lewis Twp. Same lease (w/ not deductions) four lessees two development units. Production
started in May. 2 producers have paid on both units but one is deducting expenses in one unit and
one is deducting in both units. Two other producers have paid royalties in only one of the 2 units (but
not the same unit) and it is unclear if the production used for calculating payment is the same for all
producers and exactly what producer owns how much of the lease.
Deceptive leasing.
5.