Odebrecht has been talking with major players in the state about the cracker plant that’s been planned for Parkersburg, West Virginia. The current news is that the plant will be changed. Our guess is that the plant will be made smaller, perhaps with an eye to expansion when oil prices rise again someday. Here’s to hoping that they do get around to building it. That plant would be great for our economy.
In an editoria
l published in the Herald-Dispatch out of Huntington, WV, Isaac Sponaugle, a member of the West Virginia House of Delegates, makes the argument that forced pooling is unconstitutional because it’s a “taking” using eminent domain. To be more precise, he points out that the Kelo decision in 2005 actually makes it constitutional, but argues that the Kelo decision was a bad decision, and that eminent domain is now too big for its own britches. I agree entirely.
Allowing oil and gas companies to exercise eminent domain in the guise of forced pooling, fair pooling, or lease integration (whatever you want to call it) is simply wrong. If mineral owners don’t like the lease that’s being offered, they should be able to turn it down flat. It’s up the the mineral owners to determine whether the lease is fair, whether they want development of their minerals, and whether the price is right. Oil and gas companies already have the upper hand in oil and gas lease negotiations, they shouldn’t be given even more leverage.
The Intelligencer out of Wheeling, WV published an article that tells us how much severance tax the oil and gas companies paid to the State of West Virginia in 2014 and how that tax is allocated to the different counties. There’s some pretty good detail in the article. It also points out that Wetzel County has gone from being listed as a depressed county to, well, no longer being listed as such. We suspect that no longer being a “depressed county” really only means that the county government is able to provide all of or most of the services that a county government is expected to provide. It probably doesn’t mean that every citizen of the county is now rolling in the dough, so to speak. Still, going from depressed to not depressed is always good.
Clients of Nuttall Legal have long known about the Upper Devonian formation, also known as the Burket formation here in West Virginia. It’s shallower than the Marcellus, and not terribly thick, but has good potential to produce natural gas. Gas and Oil Mag has an article on the Upper Devonian formation that should be interesting to anyone thinking of signing an oil and gas lease.
The important point to remember is that the Marcellus and the Utica are not the only producible formations down there. The Upper Devonian is probably not the last of the formations, either. As technologies change and the price of gas increases with demand, formations that were previously uninteresting will become financially feasible. The lease that you sign today could be in effect for generations as the original formation is developed and runs low, only to be replaced by a well to another formation. You have to think to the future as much as you possibly can when negotiating an oil and gas lease.
So far this year, there have been seven pipeline ruptures in West Virginia. The average most years is four. At fault is an abnormally wet spring, according to this article.
Also pointed out in the article, though this is hardly news to anyone in the industry, is that there are not enough pipeline inspectors in West Virginia. We have five, and we have roughly 14,000 miles of pipelines. Each inspector would have to inspect about 7.6 miles of pipeline 365 days a year in order to inspect every pipe once a year. That’s just not happening. We could really use a few more inspectors.
Yesterday evening, FERC held a meeting in Jackson’s Mill, West Virginia, to take comments from the public on the proposed Mountain Valley Pipeline. We were unable to attend, but Roger Adkins from the Intermountain wrote an excellent article.
The Mountain Valley Pipeline is going to have environmental impacts, including water quality, erosion issues, safety, and the beauty of the property that it crosses. Some of the impacts will be short-term, others will be generational. Water and erosion impacts will exist mainly during the construction and reclamation process. Trees will be cut down, trenches dug and refilled, and rights of way maintained so that only grass and small bushes can grow there. All of those things will affect water runoff, surface water quality, and stream water quality. Safety and beauty will be factors for as long as the pipeline is there. A 42-inch pipe represents a huge risk if an explosion occurs. Pipelines don’t explode often, but when they do, it’s catastrophic. I wouldn’t want to be within 1000 feet of one if it exploded, or even if it developed a small leak. The right of way is going to be maintained in a constant state of clear cut, in part to help avoid the risk of leaking and explosion, but it will be an obviously man-made scar on the natural, wild beauty of the West Virginia mountains. The right of way will exist for as long as there is gas to transport, which is likely to be for generations.
On the other hand, the Mountain Valley Pipeline is also going to have economic impacts, and they will be enormous. Right now there is more gas in the Marcellus/Utica region than existing pipelines can handle. Wells are shut-in because producers can’t get a good price for the gas, in part because the transportation cost is so high ($1/MCF) because the demand for transportation service is so high. Demand for gas is growing, and will continue to grow, but our ability to transport it is limited. We really need this and other big pipeline projects for gas development. As pipeline projects are completed, the cost of transportation will go down, and more gas will flow out of the ground, allowing for more royalties to be paid. The money that comes into the state from this pipeline will benefit everyone indirectly.
Indirect benefits don’t get people excited, though. West Virginians would be more excited about this project if more of them could look into the future and expect to be paid royalties. Unfortunately, many West Virginia oil and gas rights are tied up in heirships, and those heirs are scattered around the United States. The huge majority of them have no idea that they own oil and gas rights in West Virginia, and only own a tiny fraction of an oil and gas right. West Virginia needs a Dormant Minerals Act, but that is a subject for a separate post. The point is that not enough West Virginian’s are going to directly benefit from this pipeline project. Surface owners will be compensated for disturbance to their property, but neighbors and communities won’t see direct benefits. They will be able to see the gap in the trees going across hilltops and hollers.
We supporte these big pipeline projects, but we also think it’s important to know what all the consequences and impacts are going to be. Forewarned is forearmed.
For most of my clients, getting a Pugh (pronounced “pew”) clause in their lease is going to be tough, but worth it. It’s tough because oil and gas companies don’t like to give Pugh clauses to people who have a tiny net mineral interest in a large tract. It’s worth it because a Pugh clause makes it so you can regain control of your mineral rights.
A Pugh clause comes into effect at the end of the primary term of the lease. On that date, any portion of the property that is not actually producing oil or gas will drop out of the lease. Here is why that’s important.
Every oil and gas lease has a primary term. Most leases taken in West Virginia of late have had five year primary terms. The primary term is the period of time during which the oil and gas company can explore, drill, and perform work to achieve production of the oil and gas. At the end of the primary term, if there’s no production, there’s no lease. If there is production, the lease continues.
Every oil and gas lease also has language in it that says if part of the leased property is producing oil or gas, then all of the leased property will stay leased. In the industry, we say that it’s “held by production” or HBP for short.
Every modern oil and gas lease gives the company the right to combine the leased tract with other leased tracts to form a drilling unit or a pool. (While there’s a difference between units and pools, it’s not necessary for understanding a Pugh clause.) That unit or pool can include all or just a part of the leased tract. Only the part of the leased tract that is in the unit or pool is going to have royalties paid on it, as only that part of the leased tract is considered to be producing gas. Any little part of the tract could be included, down to one square inch, and it would still keep the lease alive on the entire tract.
A Marcellus Shale Drilling Unit in Doddridge County, WV.
I’ve posted a picture of a real drilling unit above, one that’s been filed at the Doddridge County courthouse and is actually producing gas today. I’ve redacted any identifying information, except for Antero Resources, since they want people to get in touch with them. Notice Tract B in the upper left hand corner. Only a portion of that tract is included in the drilling unit. Only that portion of the tract is going to have royalties paid from the drilling unit. The rest of Tract B will be held by production for as long at the unit is producing oil or gas.
In real life Antero is going to be putting the rest of Tract B into another unit that is right next to this one. However, if things don’t go according to Antero’s plan, it’s quite possible that the rest of Tract B could have a lease on it for decades without producing gas, and consequently, not producing royalties or any payments of any sort. That’s neither fair nor right.
That’s where a Pugh clause comes into play. A typical Pugh clause will say that any acreage that’s not producing at the end of the primary term will drop out of the lease. When the primary term is up, the mineral owner will get the right to lease the property again, hopefully with a better bonus and a better royalty amount. The mineral owner won’t have to sit around wondering whether the company is going to develop the minerals or not.
There’s one more point that needs to be made. A Pugh clause can also state that any formations which are not producing will drop out of the lease. This is extremely important in West Virginia as there are multiple shale formations with the potential to produce oil or gas under most of the acreage that is being leased today. Most people know about the Marcellus Shale and the Utica Shale. There is also the Barnett Shale, which is a little shallower than the Marcellus Shale. There are other Upper Devonian formations (the Marcellus and the Barnett are both Upper Devonian formations) which could potentially produce gas or oil. There is also the Point Pleasant formation, which is directly below the Utica Shale. In the western part of the state there is the Rodgersville Shale, the Berea sandstone, and the Trenton-Black River which are currently being explored. There is also some work being done to explore traditional shallow oil formations for possible oil production using new techniques. At this point, we simply can’t say how many formations are down there that could produce oil or gas. So it’s important to get a Pugh clause that says formations drop out, too.
For the large majority of my clients, it’s going to be difficult to get a Pugh clause because they own such a small portion of the minerals. Most oil and gas companies are not going to give up the rights to a small portion of the tract at the end of the primary term for one person when everyone else has agreed to a lease without a Pugh clause in it. The companies will give a Pugh clause if they get desperate, though. Sometimes it’s worth it to push the issue. Of course, you have to balance the importance of a Pugh clause with other considerations as well.
In short, get a Pugh clause if you can, and make sure that it affects both acreage and formations.
If you find yourself in negotiations and think or feel that you need help, give my office a call. It’s what we do.
I haven’t read the background to this case, but I’m willing to bet that I know what happened. I expect that the landowner signed a lease with Chesapeake and found out after the fact that they could have gotten a much better deal. Fast forward a few years and Chesapeake decided to exercise the right to extend the lease. Knowing that there was better money out there for a new lease, the landowner decided to fight the automatic extension.
The landowner tried to argue that the wording of the extension clause required Chesapeake to negotiate a new lease. Chesapeake disagreed, and they ended up in court. The court found the landowner’s argument to be not persuasive, as well it should. I don’t side with the companies, and I think the automatic extension only works in the company’s favor, but when you have signed your name to an agreement you abide by that agreement. If you didn’t read it and understand it, that’s your own fault.
The moral of this story is that you should read every part of your lease, understand every part of your lease, and find competent counsel to explain the parts you don’t understand. Then you need to negotiate for a better lease. You won’t get everything you want in negotiations (which is why you always ask for more than you think you can get) but you can make the lease better. Once you’ve signed the lease, you have to live with it.
It’s been quite the busy two weeks here, and posts to this blog have suffered accordingly. Just so that people are aware, and also so that people know this blog is not being ignored, we’d like to make a short but important announcement. Nuttall Legal now has the ability to process all major forms of credit cards. Ask about paying by credit card when you call or email.
A Penn State study from a few years ago has found its way into the news. Marcellus Drilling News has posted an article here. If you have trouble viewing the article through that link, do a Google search for “Penn State Finds Chemical Migration in 3 PA Water Wells from 2010”. MDN links to a bunch of the articles that have been published about the study.
The gist of the articles you will find at most news sources right now is that frack water is bad, and was found in three water wells, so fracking must be bad.
The reality is that the researchers thought the frack water had come from a bad casing job in the vertical portion of the well (the part that is not fracked) or from a frack water containment pit on the surface that was shown to be leaking. It is splitting hairs to say that fracking is not the cause as it was a fracked well that was the cause, but the reality is that the actual fracking was not the cause. If one reads far enough into most of the articles at most of the news sites one will find that they all point to something other than the actual fracking being the cause.
I can guarantee that fracked wells communicate with other wells in the area, pushing gas through naturally-occurring weaknesses in the formations between them, and probably pushing some frack fluid through, too. It’s quite possible that fracked wells communicate with water wells and the surface. There is not solid evidence yet that that’s the case.
Evidence of communication with the surface and with water wells has probably been covered up by oil and gas companies. Affected landowners have most likely been given excellent settlements with confidentiality agreements attached. If I were an oil and gas attorney working for one of the development companies, that’s what I would try to do. One of these days a surface owner is not going to take the settlement, a case will go to court, and then we’ll all have the evidence at our fingertips. Until then, it’s all just “he said, she said” and hearsay. If anyone out there has hard evidence to the contrary, please give this office a call.