If you are fortunate enough to own significant acreage in a rural or semi-rural location in the eastern portion of Ohio, someone may have already contacted you about leasing your land for oil and gas production; and if not, there is a good chance someone will contact you soon. In fact, even owners of just a few acres are receiving attention in those portions of the state where test wells have produced good results.
What has excited drillers is the apparent abundance of oil and “wet gas” in Ohio’s Utica shale formation. With the price of dry gas reaching new lows, companies are moving their rigs from the dry gas Marcellus formation in Pennsylvania to the liquid rich Utica formation in Ohio. Oil and wet gas (butane, propane, ethane, and other similar hydrocarbons) found in the Utica remain in strong demand on the world market.
- The controversy – The new technology developed to release the gas and oil from shale formations is not without controversy. The fear is that the process will affect aquifers that are several thousands of feet shallower than where the fracking occurs. If the well is not adequately cased as it goes through the aquifers, significant damage can be done to the aquifers and drinking wells can be contaminated.
- The economics – With oil and gas companies offering bonus payments in some counties in excess of $5,000 per acre and landowner royalties of 20 percent or more, you may be sitting on top of what a major financial asset. It is important, therefore, to understand the options, and negotiate a lease that meets your particular needs. For the area as a whole, the prospect of substantial oil and gas reserves promises a tremendous boost to the economy – not only in the way of new jobs in the industry itself, but as a huge shot in the arm to local steel, chemical, manufacturing, and construction companies.
Lease issues to consider include:
- Bonus payments: How much and when?
- Royalty payments: Net of postproduction expenses?
- The lease term: Five years with a five-year right to renew is typical.
- Storage and disposal: Prohibit in the lease.
- Unitization clause: Standard in a lease, this permits the oil and gas company to combine your acreage with that of your neighbors. Include a PUGH clause in the lease to free up any of your acreage that is not included in a unit.
- Surface rights: Minimize impact to the surface. Require large setbacks from homes, barns, streams, and other sensitive areas. Negotiate a non-drilling lease if possible.
- Prior lease: If your land is subject to a prior oil and gas lease, you need to determine whether the lease is still valid. Consider contacting the holder of a prior lease and negotiating a settlement.
- Compliance with state laws: Add a provision to the lease that requires the company to comply with all local, state and federal laws, rules and regulations.
- Water testing: Have your water tested before and after drilling.
- Indemnification: Require the company to indemnify you for any losses incurred because of its failure to follow the law or comply with the lease.
- Water usage: Restrict the company’s ability to use water located on or under your property.