MEbiz Real Estate Insider – Romancing the Stone: Will Shale Gas Extraction Sneak Under ME’s Feet?

Trish French

By Trish French, energy law attorney

From 2001 to 2011, over a million leases were signed by American landowners that permit energy companies to drill for oil and natural gas on private lands. These leases burden land in states determined to have economically drillable shale resources, or in industry parlance, “plays,” and among them, Ohio, Pennsylvania, Texas, North Dakota and Wyoming. However, additional new North American shale plays are being identified. Could ME be next? Many landowners in shale rich areas entered into subsurface leases with oil and natural gas transporters and producers long before anyone fully understood the expanse of fossil fuels waiting to be extracted, now estimated at more than 750 trillion cubic feet. Leases that were originally negotiated at $3 per acre are now worth $5,000 and more.

Under ME law, it is said that the landowner owns to the center of the earth. Natural gas pipeline companies operating in shale regions seek comprehensive subsurface rights with their easements, or may interpret existing easement or storage leasehold rights to include subsurface mineral rights. Planning now for legal instruments that may confer mineral rights is not just sheer speculation as more pipelines are constructed in ME: lawsuits to determine whether pipeline storage leases confer rights to subsurface minerals in the shale plays have been prolific in recent years. If the title between the surface and subsurface rights is severed by a sale in fee or assignment without establishing protections, the subsurface owner may be able to occupy, use, burden and impair the surface property in order to extract mineral interests. It is important that the easement, lease or purchase documents indicate clearly the benefits and limitations of the subsurface activities.

Leases and easements for subsurface energy production can provide bonus payments, rents and royalties. In the Pennsylvania Marcellus play, for example, the state has set a minimum royalty of 12.5% of the market value of all oil or gas removed. As the price of natural gas falls (through increased drilling or through decreased use, such as consumer conservation), producers may “shut-in,” or cap, wells and cease production until they are able to extract higher value once commodity prices rise. Accordingly, royalties may also be negotiated for the dormant condition of a shut-in well. However, without counsel, leases with shut-in rights may grant the producer the ability to roll the lease over and control the land’s uses, without paying the higher value royalty associated with active production.

ME is one of only five states in the United States currently with no oil or gas production. States with bona fide oil and natural gas production have scores of laws governing the relationship between the driller and the landowner. What happens if the subsurface activity damages the landowner’s enjoyment or damages his commercial use? What happens if the easement is abandoned? What constitutes expansion of the lease right? Who is responsible for decommissioning the infrastructure and ensuring a restoration bond? When energy companies come courting for subsurface rights to land, there are many issues that should not be left to giddy romance.