Over the last decade, advancements in drilling technology have allowed

natural gas producers to profitably extract vast amounts of natural gas

held thousands of feet below the earth’s surface. The Marcellus Shale, estimated

to contain as much as 500 trillion cubic feet of natural gas, is now considered

one of the world’s largest natural gas fields and spans under almost all of

western and northern Pennsylvania. Regardless, before any drilling can take

place on your land, the drillers must lawfully lease your property for the

rights to drill. Hopefully you can use some of this

information as a starting point if you are approached to lease your property.

 

Do I own the oil or gas rights on my property?

 

Unfortunately, the Commonwealth does not maintain ownership records

of surface or mineral properties; county governments have these records. In

Pennsylvania, the mineral estate may be separate from the surface (real) estate.

Ownership of minerals on the same tract may be separated from each other – oil,

gas, coal, hard rock minerals, etc. All surface and mineral owners have property

rights under the law. The Commonwealth recognizes the mineral owner’s right to

recover the mineral, and the landowner’s right to protection from unreasonable

encroachment or damage.

 

If you own property, your deed may state ownership is “fee simple”; that means

you own the entire property (the surface and mineral deposits). Otherwise,

someone else may own mineral properties on the tract. A thorough title search may

discover different ownership rights to the mineral property. If you can’t be sure from

current documents, searching your property’s historical deeds back to the 1860s

might reveal that oil and gas has been separated from the surface estate. A phrase

in an old deed such as “oil and gas excepted and reserved” means that the surface

was sold separately from the oil and gas property at that time. If you find such

a statement in an old deed, the oil and gas would likely not be yours to lease or

develop.

 

What is a lease?

 

A mineral lease is a contractual agreement between the owner of a mineral tract

(the lessor) who grants the right to develop deposits of the mineral to a producer

(the lessee). Oil and gas can be sold or leased separately to different parties.

Different deposits of the same minerals in different formations can also be leased or

sold separately. Usually, a lessee will insist on the right to sell or reassign a mineral

lease to another party. Because a mineral lease gives the lessee a property interest

in the mineral, leases should be recorded at the Recorder of Deeds office of the

county where the leased tract is located.

 

What is in a lease?

 

Poorly written leases can tie up your land for decades and

make it less valuable to others if you should want to sell it.

In fact, they can actually sell certain rights to your land –

completely beyond your control. A lease that “conveys” rights

permanently sells them! On the other hand, a properly done

lease can make money for you for years and still limit what can

be done to your land.

The following phrases are examples of language you might

find, or should include, in a lease and can be negotiated with

specific economic terms or monetary stipulations:

 

Signing bonus – Refers to a monetary amount received

for signing a lease agreement, which can include up-front

money for the price per acre.

 

Royalty fraction percentage – Do not settle for only a

1/8th royalty with a Marcellus Shale well.

 

Delay rental – Determine whether this will be paid up-front

or paid annually.

 

Shut in royalty – Have this included at a determined

percentage.

 

Free gas or payment in lieu – Determine if you want

free gas from a well on your property, as opposed to the

corresponding amount of royalties.

 

Drilling commitment during primary term – As noted

previously, ensure a drilling commitment by requiring

the lease’s termination if not fulfilled. Requiring certain

monetary compensation is another option.

 

Rights of ways and easements for pipelines and

ancillary facilities – Any item or activity occurring on

your property, aside from the actual well being drilled, can

potentially require monetary compensation. This includes

pipelines, storage facilities, etc.