Download I have just finished reading the December 2, 2011 article in the NY

I have just finished reading the December 2, 2011 article in the NY Times “Learning Too Late of
the Perils in Gas Well Leases” by Ian Urbina and Jo Craven. While disappointed that none of
the information we provided made it into the article, I believe overall the article was well
researched and appreciate the fact that people like Ron Staments, Jack Richards and Dave
McMahon were interviewed.
It appears that the point of the article was that the big bad oil and gas companies are out to get
you if you are a landowner/mineral owner. As was pointed out in the article by Mr. Knapp
“there are bad leases out there, and, as with any industry, there have also been some
unscrupulous opportunists.” The key here is “as with any industry”. Oil and gas companies are
no different than any other businesses in this country each one is out to make as much profit as
possible. And as Mr. Knapp points out, especially in times of heightened activity, you must be
ever aware of the opportunists.
It also appears that the article gave some press to some folks who now wish they had made a
better deal a couple of years ago. In mineral leasing you make YOUR best deal at the time and
be happy with it and move on. If your neighbor does better say congratulations and get them to
by you lunch. If an oil and gas company enters a new area with the intent to drill some
exploratory wells they will seek to get the least costly entrance possible. The risks are high and
need to be offset by lower costs. So early in a play it is not unusual to see very short “stock”
lease agreements offering 1/8 royalty and under one hundred dollars per acre bonus payments.
Then in a few months or a year or so a few wells get drilled and start production, other
companies enter the play and the mineral owners are able to negotiate much better bonus and
royalty payments along with other lease clauses. Does that mean the early leased mineral owners
were taken advantage of? Even given the company economics, if the mineral owners signing
leases early in a play know what they were doing they will be able to negotiate better than 1/8
royalty and most likely a higher bonus as well.
The article had 4 bullet points in the first page that I will address here:

Times: “Fewer than half the leases require companies to compensate landowners for water
contamination after drilling begins. And only about half the documents have language that
lawyers suggest should be included to require payment for damages to livestock or crops.”
Response: First use the link the Times provided and you get this . . .” Often, if a gas
company causes property damage or goes beyond what is “reasonably necessary” to drill for oil
or gas, the company may be held liable for damages. In many states there are also laws or
regulations that govern the extent to which the surface must be returned to its original
condition, including rules that require the company to remove unnecessary equipment or repair
any damage. Some leases include addenda that specify how and when any wells will be plugged.
They also sometimes include language that establishes how the company will handle specifics,
like the removal of roads or restoration of the landscape.”
Additionally, Mineral and surface landowners don’t usually need to be concerned with
water, surface or air contamination as there are state and federal regulatory programs that
the companies must be in compliance with at all times. If you want some lease clauses
specifying duties, responsibilities, testing, liabilities etc. then by all means negotiate that
into your lease. However, if a company operates within the state and federal regulatory
frame work and you simply don’t like the outcome take that up with the proper regulatory
authority.

Times: “Most leases grant gas companies broad rights to decide where they can cut down trees,
store chemicals, build roads and drill. Companies are also permitted to operate generators and
spotlights through the night near homes during drilling.”
Response: Again, a surface use agreement may be required by the state, if not we
recommend the mineral owner (even if not surface owner) include one. In that agreement
you will negotiate compensation for roads, tree removal, crops, loss of livestock etc. etc.
Drilling is permitted by the state and proximity to structures is determined by the state
regulatory authority. Once drilling begins it is a 24 operation with lights and generators
running to power the rig. However, the drilling process is relatively short in duration.

Times: “In the leases, drilling companies rarely describe to landowners the potential
environmental and other risks that federal laws require them to disclose in filings to investors.”
Response: As stated above, mineral and surface landowners should be protected from
liability by state and federal regulatory programs. If you believe a lease clause or
addendum is needed to spell out potential risks and liabilities then you should negotiate
that into your lease.

Times: “Most leases are for three or five years, but at least two-thirds of those reviewed by The
Times allow extensions without additional approval from landowners. If landowners have
second thoughts about drilling on their land or want to negotiate for more money, they may be
out of luck.”
Response: Oil and gas leases for decades (perhaps always) have allowed for the option to
extend at the end of the primary term. The reason is that the company may not get to all
drilling locations within the primary term and want the ability to maintain their acreage position
in an area. If you sign a lease with an option to extend, you have given your approval to extend
the lease if details are met. Once a well is producing your acreage is “Held-By-Production” HBP
for as long as the well is capable of production. This could be decades so leases are serious
contractual instruments that one should not enter into without proper knowledge and
professional advice. Also the Times article had an example of a mineral owner who did not
know what “preparation to drill” meant. In our MM 101 class we offer a lease clause that states
. . .”having a rig on location that is drilling and capable of reaching total depth. . .” They should
have been educated in Oil and gas lease clauses before they signed.
It is too bad this article did not attempt to emphasize the need for mineral and surface land
owners to accept their responsibility and become educated on the process of mineral leasing and
mineral/royalty income. If it had the Times could have done a real service to the citizens facing
decisions on leasing instead of instilling fear in a process that could: pay off the mortgage; send
kids or grandkids to college; keep elderly off of state assistance; keep the family farm in the
family; built new fences, barns, houses; supplement retirement; and on and on. The point is, of
the millions of oil and gas leases in effect the vast majority are held by folks who are very happy
with the process and enjoy the income (these are the educated ones).
Jerry R. Simmons
Executive Director
NARO