Drilling Down
Articles in the Drilling Down series from The New York Times examine the risks of natural-gas drilling and efforts to regulate this rapidly growing industry.
Learning Too Late of the Perils in Gas Well Leases
Americans have signed millions of leases allowing oil and gas companies to drill on their land, but some landowners are finding out the hard way what their contracts actually say
By Ian Urbina and Jo Craven McGinty
After Scott Ely and his father talked with salesmen from an energy company about signing the lease allowing gas drilling on their land in northeastern Pennsylvania, he said he felt certain it required the company to leave the property as good as new.
So Mr. Ely said he was surprised several years later when the drilling company, Cabot Oil and Gas, informed them that rather than draining and hauling away the toxic drilling sludge stored in large waste ponds on the property, it would leave the waste, cover it with dirt and seed the area with grass. He knew that waste pond liners can leak, seeping contaminated waste.
"I guess our terms should have been clearer" about requiring the company to remove the waste pits after drilling, said Mr. Ely, of Dimock, Pa., who sued Cabot after his drinking water from a separate property was contaminated. "We learned that the hard way."
Americans have signed millions of leases allowing companies to drill for oil and natural gas on their land in recent years. But some of these landowners — often in rural areas, and eager for quick payouts — are finding out too late what is, and what is not, in the fine print.
The leases — obtained through open records requests — are mostly from gas-rich areas in Texas, but also in Maryland, New York, Ohio, Pennsylvania and West Virginia.
In Pennsylvania, Colorado and West Virginia, some landowners have had to spend hundreds of dollars a month to buy bottled water or maintain large tanks, known as water buffaloes, for drinking water in their front yards. They said they learned only after the fact that the leases did not require gas companies to pay for replacement drinking water if their wells were contaminated, and despite state regulations, not all costs were covered.
Thousands of landowners in Virginia, Pennsylvania and Texas have joined class action lawsuits claiming that they were paid less than they expected because gas companies deducted costs like hauling chemicals to the well site or transporting the gas to market.
Some industry officials say the criticism of their business practices is misguided. Asked about the waste pits on Mr. Ely's land in Pennsylvania, for example, George Stark, a Cabot spokesman, said the company's cleanup measures met or exceeded state requirements. And the door-to-door salesmen, commonly known as landmen, who pitch the leases on behalf of the drilling companies also dismiss similar complaints from landowners, and say they do not mislead anyone.
The Sales Pitch
"There are bad leases out there, and, as with any industry, there have also been some unscrupulous opportunists," said Mike Knapp, president of Knapp Acquisitions and Production, a company in western Pennsylvania that brokers deals between landowners and drilling companies. "But everyone I know who does this work is on the up and up, and most of the bad actors that there may have been before are no longer in business."
He said that his company's leases ensure that landowners will get replacement water. The company also encourages landowners to visit an existing drilling site before signing a lease to get an idea of the potential noise and truck traffic. Some of the complaints about leases, he said, are just sour grapes from landowners who are envious about the amount of money they believe their neighbors are earning in bonuses and royalties.
Protecting Landowners
Jim Gipson, a spokesman for Chesapeake Energy, said any claims of damage can be investigated by the state and federal authorities and, he added, noise or other disturbances that may come with drilling tend to be brief.
"The most frequently asked question we receive from our mineral owners is, ‘When are you going to drill my well?' " he said.
Mr. Gipson said that most leased properties do not end up having a well placed on them, so those leases do not need added protections. But some consumer advocates and lawyers say that protections are needed for all leased properties, even those without wells, because drilling may occur underneath them. These advocates also say that landowners' eagerness to start earning royalties has made them vulnerable to deceptive tactics by landmen.
Clauses With Consequences
"When it comes to negotiation skills and understanding of lease terms, there is a gaping inequality between the average landman and the average citizen sitting across the table," said Chris Csikszentmihalyi, a researcher at the Massachusetts Institute of Technology who created a Web site last year called the Landman Report Card that allows landowners to review landmen's professionalism and tactics.
Some lawyers also say that there are major differences between what drilling companies tell landowners and what they must disclose to investors.
Under federal law, oil and gas companies must offer investors and federal regulators detailed descriptions of the most serious environmental and other risks related to drilling. But leases typically lack any mention of such risks.
Jeremy Ashkenas and Kitty Bennett contributed research.
Glossary of Terms
Force Majeure: Gas companies have argued that this clause allows an extension on a lease in the event of an "act of God," also called a "force majeure," like a flood, fire or other disaster. In other words, if drilling is unexpectedly delayed because of events outside of the company's control, the lease may be extended. The clause has led to litigation in New York, where companies have invoked force majeure to extend leases during the state's ban on the types of hydrofracking used to produce shale gas.
Extension Clause: Leases are typically for three to five years, but often they include clauses that allow the lease to extend for longer periods. Sometimes these clauses allow companies to extend the leases at their discretion. Other times, the extension depends on whether the well is producing enough gas. Landowners sometimes overlook the importance of these clauses. If landowners have second thoughts about drilling on their land or want to negotiate for more money, they may be out of luck.
Royalty Clause: This clause determines how the gas company can calculate the amount of royalties it will pay the landowner for gas produced from the leased land. Royalties are payments the company gives the landowner, and they are calculated as a percentage of the total value of the gas extracted. Typical royalties are between 12.5 and 25 percent. The formula often used for royalties is the revenue the gas company has received minus the cost of transport, treatment and processing. Some lawyers have advised that landowners specify that the royalty be calculated on "gross proceeds". In addition, these lawyers say, the Royalty Clause is where the mineral owner will want to insert language granting him or her the right to audit the company's production records to make sure that the royalty is being properly calculated and paid.