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Patience, caution pays off for Ohio landowners on gas lease agreements
In eastern Ohio, the big land rush is on, driven by natural gas and oil exploration. The payout for property owners who lease out their land can be huge or pitiful, depending on the terms of the lease.
Ron Carlton of Carlton Tree Farms in Carroll County and his neighbors have been wooed and hounded by “landmen,” who try to buy up as many land leases as possible in a short time. The intense interest in natural gas exploration has been fueled by the deep lying Marcellus Shale and Utica formations, which experts say could provide enough natural gas for the United States for dozens of years.
Carlton’s family is used to leasing its land and has done so for at least 40 years. Back then the pay was just $1 to $2 an acre per year for a five-year lease. About 20 years ago, his family leased part of the land so a well could tap into the Clinton formation, but it had too much brine in it and wasn’t economically feasible for the company to keep it running. The “landmen” are now back because new technology is allowing companies to reach the rich Marcellus Shale formation, which lies much deeper below the surface than the Clinton formation.
Carlton, who has 1,700 acres, has been dismayed by how unfair and deceitful some of the natural gas/oil companies or investors have been to landowners. He said they aggressively snatch up as much land as possible and use signing bonuses as incentives. For those who had previous leases of $5 to $15 an acre per year, doubling that lease amount coupled with a signing bonus might sound like a good deal but it really isn’t, he said, pointing out that some landowners have been able to negotiate more than $2,000 per acre.
In Carroll County, Carlton said large landowners are being offered much more money per acre than smaller ones. For example, he said one neighbor who has 400 acres was offered $1,000 per acre with 12.5 percent royalty and a nearby neighbor with 100 acres was offered $100 per acre.
“The landman promised the smaller landowner what his neighbor had gotten but he hadn’t even signed up the large landowner. It was a lie. They will hound you, hound you, hound you,” Carlton said.
Another problem is that many land agents are offering easy-to-read, 1990s style leases with rental payments ranging from $5 to $25 per acre, said Dale Arnold, Ohio Farm Bureau Federation’s (OFBF) director of energy policy. Many residents are signing these agreements, only to find out that the leases could be sold at much higher prices to another developer, he said. In many cases, these simple leases do not address the logistic and environmental issues landowners will encounter when new and much larger directional and horizontal drilling technology comes to their farm.
Tired of watching their neighbors being cheated, Carlton and others joined forces to sell their leases as a group. They hired an attorney in Canton who was an oil and gas lease expert to write up a good lease and represent them in negotiations. The bids went out in early October and a month later, the group had a solid bid of $2,250 per acre per year with a 17.5 percent gross (not net) royalty and numerous protections for water, crop damage, roads, pipelines and well locations. They also set the terms for if the leases are renewed. Carlton said some company leases have a phrase that allow it to renew the lease for $1.
“Those company leases are horrendous – don’t sign them,” he said. “They have a lot of trickery written into them.”Carlton’s words of advice for landowners considering leasing their land are to wait for several offers because the price will keep going up, consider negotiating as a large group and hire an attorney who is an expert in gas/oil leases and can protect not only the landowner but the land. He also recommended landowners insist that the entire lease be recorded in the county recorder’s office, noting that some companies are only recording the first and last pages.
“If you lose the lease or if the land is subdivided, how will you know if the oil or gas company is treating you right,” he said. “It makes no sense that they can get away with not recording the whole lease.”
Important Questions To Ask
Dale Arnold, OFBF’s director of energy policy, said he is fielding dozens of phone calls from landowners who have questions about natural gas and oil leases. He said if you answer yes to any of the questions below, that you need to seek legal guidance or get a more detailed lease agreement that covers new, larger and more complex drilling technology.
1. Are the land agents talking to you about deep wells?
2. Have they mentioned the words “shale”, “Marcellus” or “Utica”?
3. Will there be horizontal or directional drilling?
4. Did they mention seismic testing?
5. Does the company selling the lease have a direct connection with the company doing the drilling?