Oil and gas leases: Learn how to reap the benefits


By Karl Henkel

khenkel@vindy.com

Third of a five-part series

YOUNGSTOWN

Leasing vs. Selling

inline tease photo
Video

Attorney Alan Wenger of Harrington, Hoppe, & Mitchell explains the differences between leasing and selling mineral rights.

Most Mahoning Valley landowners who sign oil and gas leases will never see a Utica or Marcellus shale well on their property.

But that doesn’t mean they won’t reap the benefits of oil and gas production.

A process called unitization, where drilling companies combine plots of land into one large unit, can help or hinder landowners’ abilities to earn fair compensation, said Alan Wenger, an attorney at the Youngstown law firm Harrington, Hoppe & Mitchell.

“For deep wells, the minimum [unit] size is 40 acres,” Wenger said. “What the lessees are asking for is an unlimited unit size in their standard request, which can water down the owners’ interest a great deal.”

Drilling companies will combine many properties into one “unit” to maximize drilling efficiency, because underground horizontal drilling allows oil and gas companies to reach miles of potential oil from one well.

Unit sizes vary — under Ohio law there is no maximum size — but are commonly 640 or 1,280 acres. If a landowner is part of a 640-acre unit, he or she will receive a percentage of royalties based on how much of that 640 acres he or she owns.

For instance, if a landowner has 100 acres of land in a 640-acre unit, that landowner has a 15.6 percent share of the unit.

Assume that same landowner signed a lease guaranteeing 17.5 percent royalties from produced oil or gas.

To calculate the adjusted royalty percentage, he or she needs to multiply the royalty rate (17.5 percent) by the unit share (15.6) percent.

The landowner in this example will receive 2.7 percent of the value from produced oil or gas on the unit.

One of the most important aspects of a lease, Wenger said, is that a landowner stipulates a maximum unit size to ensure appropriate compensation.

Had the same landowner from the previous example leased the same 100-acre property on a 1,280-acre unit, he or she would only receive 1.3 percent of the value from produced oil or gas on the unit.

But Sean Moran, co-chairman of the Energy section and Oil & Gas Practice at the law firm of Buchanan Ingersoll & Rooney PC in Pennsylvania, said there is a benefit to having land in a large production unit.

“You can think about a 1,280-acre unit as diluting an individual landowner, but it allows the company to drill much longer horizontal legs,” he said. “It encourages them to put multiple wells on a single unit and the economic prospects [of that] are quite impressive.”

If a landowner is part of a large drilling unit, Wenger also said there’s a better chance that land could be “held by production,” which means as long as a well is producing anywhere on the unit, none of the landowners will have a chance to sign a new lease down the road.

Wenger says it is a problem dealt with by landowners with existing Clinton Sandstone wells throughout the Valley. If those wells are still producing and landowners still receive royalties — no matter how miniscule — then in most circumstances, the leases remain valid.

If a landowner signs a lease with a maximum unit size, he or she is not necessarily out of the water.

“There are masses of amended lease documents being sent out to existing lessors asking them to amend their leases to allow larger unit sizes,” Wenger said.

By using this site, you agree to our privacy policy and terms of use.

» Accept
» Learn More