I like…..nay, love maps. I ran across a cool interactive online one today. I don’t think the data is really up to date as I know there’s some drilling going on in the center of Tyler County, and this map doesn’t reflect that. It’s still a good resource for understanding what’s going on in general. Check it out.
There’s another pipeline that burst. This time up in Lycoming County, Pennsylvania. Interestingly, this one didn’t explode, it just broke and spewed natural gas into the air. The breakage was powerful enough to be felt for some distance when it happened, though. It’s a 24″ diameter pipe, and one of three that run on the same right of way. 100 or so homes were evacuated. People a couple miles away said they could smell the gas. It appears the other two pipelines were not affected.
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nyone who has had a lease reviewed by us in the last few years will know that there are multiple producible formations underneath the property they have leased. This is excellent for royalty owners, as the more formations can be produced the more gas can be produced. There’s just one problem with that. It means that the lease that you sign today could possibly be in existence decades, or even centuries from now.
Ignoring the happy fact that the lease will be in effect because the producer will be paying you royalties, let’s look at what the implications of a decades-old lease are. The easiest way is to look into history.
In 1892 a farmer (no names will be used here so as to preserve my clients’ confidentiality) signed a lease on property here in West Virginia. The producer was diligent, and drilled a well on the property within a few months. The well produced gas, which was something of a disappointment because everyone was looking for oil at the time. They didn’t shut the well in though because the producer allowed the farmer to run a pipe to the house and use the gas for heating and cooking.
Over the years gas became a valuable commodity, and the developer put a line of his own to the well and started selling the gas. Of course, the producer paid royalties to the farmer, and all was well. Eventually though, the well produced less and less gas.
Let’s fast forward to today, and that well that was drilled in the late 1800s is still producing in 2015. The production has dropped off to a few hundred MCFs per year. The royalties paid are only a few dollars each year, but it’s just enough production to keep the lease alive.
Now let’s back up to 2007, when the Marcellus boom was just taking off. The current producer of the well was just a small time mom and pop operation. They didn’t have enough money to drill a Marcellus shale horizontal well on their own. They were approached by a big producer who wanted to buy the rights to produce gas from the Marcellus, and the mom and pop jumped at the chance to make some good money from the old lease. They assigned the rights to the Marcellus shale over to the big company for thousands of dollars an acre.
Along with the rights to develop the Marcellus shale came the rights to use the surface in any way that was “fairly necessary”. The big company approached the current owner of the farm. The big company said they wanted to put in a well pad, an access road, and a pipeline. The well pad was going to take up about 10 acres of mostly flat land (flat land is hard to come by in most parts of West Virginia), the access road would be 1/2 mile over property the farmer hunted on, and the pipeline was going to be across other property the farmer owned. All told, the development was going to take up about 15 acres of the farm.
The farmer said no. The big company said, “we have the right to do this because we have this lease that was signed back in 1892, and that lease gives us the right to use the surface in any way that is fairly necessary for the development of oil and gas.” The farmer said, “I don’t see that in there.” The company said, “no, but the courts have said that any lease gives the company that right.” The farmer consulted with a lawyer, who told him the big company was right, but that there were some legal arguments to make and he could take the big company to court, but it would cost $10,000.
Back in 1892 when the first farmer signed the lease, he didn’t expect a well pad, road, and pipeline to take up 15 acres of his good farmland. A well pad took up maybe an acre, and the access road was usually nothing more than a jeep trail. The pipeline was usually just a couple inches in diameter, and was sometimes laid on the surface over rough ground. He had no way of foreseeing the size and extent of modern well sites. If he could have seen into the future, he probably would have made some changes to the lease before he signed it.
That’s just one example of how a lease surviving for decades could be detrimental to those who inherit it, or those who inherit the property affected by it.
It’s impossible to foresee every possible way that a lease could affect people in the future. You can’t protect your heirs from everything. It is possible, however, to do the best that you can with the information that is out there now.
Multiple formations mean that oil and gas companies could produce one formation until it is exhausted, then a second formation until it is exhausted, and then a third and maybe even a fourth. It’s impossible to tell for sure how many producible formations are down there. It’s impossible to tell how long the lease will stay alive.
The reason we’re pointing this out right now is that Rex Energy has completed wells to the Marcellus and the Upper Devonian on the same property in Pennsylvania. The Marcellus produced reasonably well, but the Upper Devonian actually produced a little better. It’s been questionable up until now whether the Upper Devonian would be a good formation to explore. That question is now laid to rest, at least to some extent. 
For our West Virginia mineral owners, keep an eye out for leases that include the Upper Devonian. We can look forward to increased exploration in the usual counties; Tyler, Wetzel, Marshall, Doddridge, Harrison, Ritchie. There may be a renewed interest in Barbour, Upshur, Taylor, and some of the other counties in the Marcellus dry gas area. We hope so, as we have clients who are waiting on leases in those counties.
For everyone that’s thinking about signing a lease — do try to think about the future as much as you can. If you need some help, give us a call.
The Joint Standing Committee on Energy is meeting today in the House Chamber down in Charleston. On the agenda, “Study of unitization of interests in horizontal well drilling units.” Also, presentations from WVONGA, WVROA, Joe Hatton who is an Agribusinessman, and a Study of Royalty Payments by Kevin Ellis from Antero Resources. Doesn’t look like the opposition to forced pooling was invited today.
Oh, there’s also Miscellaneous Business on the agenda.
Time to start calling legislators again, it seems.
While we’re fans of development, we’re not fans of eminent domain being used to force leases onto West Virginia mineral and surface owners. It’s just not right.
Here’s an excellent quick article by Byron C. Keeling about the differences in how royalties are supposed to be calculated (by law) in many of the oil and gas producing states. Note that in West Virginia a producer has to calculate payment from the first point of sale, and can’t deduct any costs up to that point. The only exception to that rule will be if the lease specifically lists post-production costs that can be deducted. Even then, they may not have gone far enough according to the West Virginia Supreme Court of Appeals, which said that there also has to be a method of calculating those costs. See Tawney v. Columbia Natural Resources.
The Stonewall Gas Gathering Pipeline has been in the works for a while, and if you drive around certain parts of West Virginia you’ll see stacks of big green pipe sitting just off the highway. For some time, trucks have been bringing pipes in. Just today I saw trucks taking pipes away. I’m assuming that means that they are starting to lay pipe in the ground.
This article from last week says that the pipeline should be completed by the end of this year. It will take gas away from the Doddridge and Harrison county areas and put it into an interstate pipeline down in Braxton County. Hopefully this will ease some of the congestion we’ve got around these parts, and hopefully the cost to transport gas out of here will ease up some. If it does, some royalty owners will be looking at bigger checks.
One recent study, reported on by Marcellus Drilling News, suggests that building methanol plants would be an excellent use for the prolific natural gas production taking place in the Appalachian region. The plants are comparatively quick to build, don’t need infrastructure such as pipelines, and use lots of natural gas to produce methanol, which is widely used.
The low price of natural gas is a concern. Per BTU, it’s quite a lot cheaper than oil. Finding ways to put natural gas to use should be a high priority for anyone interested in this region. Building methanol plants sounds like one excellent solution.
Somewhat Reasonable, the Heartland Institute’s blog, has an excellent post which shows just why the pipeline projects which are criss-crossing West Virginia right now are so important.
To sum it up, lack of pipeline capacity hurts the price of gas in the Marcellus shale region, which means lower royalty payments to owners; and lack of pipeline capacity means that more oil is being moved by rail, with more spills as a result.
We agree that pipelines are necessary. We want pipelines. We just want people to know what they’re getting in to when they agree to a pipeline crossing their property. Informed property owners will make better decisions and be happier with the results than uninformed property owners. Informed property owners may refuse a pipeline across their property. That’s their right. Either way, it needs to be an informed decision, not a knee-jerk reaction.
When we talk with people about pipelines we make sure to discuss noise. Most people don’t realize that there could be a lot of noise associated with a pipeline. The pipeline itself won’t make noise, but the associated machinery could. The gas needs to be compressed for transportation, and if you’ve signed a pipeline agreement you may have given them the right to put a compressor on your property, too. Compressors make a lot of noise.
As you could see in that video, a lot can be done to muffle the sound of the compressor station. Make sure when you negotiate for pipeline or compressor station rights of way that you address the noise issue. You’ll be sorry if you don’t.
It appears that an oil and gas company is trying to push landowners around a bit, again. The Mountain Valley Pipeline (MVP) sent workers out to survey the proposed route of the pipeline, but some landowners have turned the surveyors away. Those landowners have gotten letters from MVP threatening legal action if they didn’t allow the surveyors onto their property. Some of those landowners have checked with attorneys (not this one) and decided that MVP doesn’t have any basis for legal action.
The MVP cited West Virginia’s eminent domain statutes, which are located at 54-1-1 et. seq. of the West Virginia code. The trouble is, the company seems to have misrepresented the law in its letter to landowners.
While there is apparently a lot of grey area in West Virginia’s code, and I haven’t seen a copy of the letters that were sent out, it’s still upsetting that an oil and gas company can feel like it can get away with these kinds of tactics. This is the kind of thing that gives lawyers a bad name. Sure, you’re supposed to represent your client zealously. But you’re not supposed to bully, harass, and take advantage of people either.
There is a better way. It costs more initially, but saves money in the long run. Hire a landman who knows how to work with people. Pay people a little money. Ask them where they think a pipeline would best be run on their property. Go around tracts if you need to. It’s hard work, but it’s worth it.