ENVIRONMENT: What you should know before leasing land for oil/gas exploration

The recent increase in gas prices has left in its wake angrier people than just truck drivers and others who depend on over-the-road transportation and hauling. Specifically, the effect of increased demand for all hydrocarbons has brought with it the result and necessity of additional oil and gas exploration and production. This affects everyone from the person standing at the pump to the landowner upon whose property the oil or gas is produced. It is the latter of these concerns which has resulted in a great deal of public policy debate ranging from the rights of landowners to require prudent use of their land, to the controversy of drilling for oil under the Great Lakes basins.

Even though legislation exists to assist in balancing landowners’ property rights against oil and gas exploration and production interests, the vast majority of issues and concerns should be addressed through private contractual negotiations.

Frequently, landowners are approached by oil and gas land agents who’ll essentially say just about anything to get the landowner to sign an oil and gas lease. Rarely are there frank discussions about the necessary result from the execution of such a lease.

In most cases, the landowner is not told that the oil or gas company will require roads and pipelines to be built on their property to service the facilities. They’re also usually not informed of the noisy equipment that may be on the property, nor the possibility of hydrocarbon-related odors. Nor are they informed of the possibility of pollution that may result from the exploration and drilling operations.

These and many other lease issues have even greater importance with the recent interest in expanding oil and gas exploration and production.

Certainly, there are many reasons to despise the practices of some of the members of the oil and gas industry. But to gain some balance and perspective, one must understand that the industry plays a necessary role in the American way of life.

Without the industry, there would be no modern day conveniences enjoyed by most Americans. The oil and gas industry makes it possible for you to drive to work or school, to heat your home, and to use electric lights.

It is possible, however, to protect the rights of landowners without impeding the production of the oil and gas necessary for our society. Keeping in mind the issues of roads, pipelines, operational issues and pollution is a good start. Property owners should also consider the financial implications of oil and gas leasing.

Frequently, leasing minerals can be financially advantageous, more so if an individual is armed with some important financial information about how the oil and gas industry operates. While property owners are frequently confronted with a “boiler plate” lease that does not appear to have any room for negotiation, the decision to lease oil and/or gas rights should be done with the knowledge that almost all of the terms of such a lease are negotiable.

Some terms every property owner should require are those that require full indemnification and protection of the property owner in the event the oil and gas operator causes any liability or claim to be made against the property owner.

Further, while the boiler plate lease frequently offered provides for a royalty interest at 1/8, a 1/6 royalty interest is usually obtainable without too much difficulty.

Third, if the property owner is to continue to occupy the surface of the property over which the oil and/or gas is being produced, the owner will want to require that they be consulted and give their written consent before any surface facilities are installed. Such facilities may include oil or gas wells, pipelines, roadways, power lines, disposal wells and sometimes processing facilities. It’s frequently possible to require additional compensation when granting these additional rights.

While compensation for surface facilities may be desirable to some landowners, others may want no such facilities on their property for various reasons. Restricted or prohibited development may be obtained through a lease that’s usually referred to as a non-development lease. Such a lease allows the oil or gas company to drain minerals from reservoirs beneath the surface of the property without actually going on the property.

It’s also important to remember that the person asking a landowner to sign a lease now is almost never the same person who will be talking to the landowner about drilling, installing and operating the surface facilities. Accordingly, landowners should not believe everything they’re told by the oil and gas leasing agent, unless those promises are made in writing and are part of the lease document itself.

These are just a few of the issues which need consideration from a thoughtful property owner prior to granting an oil and gas lease.

As long as we remain a society depending upon fossil fuels to support our life style, we will need oil and gas. However, utilization of oil and gas does not necessarily have to come with the burden of impaired property. Educate yourself and know your rights prior to signing the lease.

Joseph Quandt is a partner with the Traverse City law offices of Zimmerman, Kuhn, Darling, Boyd, Taylor and Quandt, PLC. His practice focuses on environmental and business matters. Prior to private practice, he was an enforcement specialist with the Michigan Department of Environmental Quality. This article is intended to address information of general interest. It does not provide nor is it intended to provide any legal advice regarding any particular situation or subject. BN