OFBF Self-Help Energy Programs

Older Lease Issues

Energy Markets – Current Trends

Natural Gas Crude Oil Electric Generation

No Silver Bullets…

?

Energy Trends and Their Impact …A Lot of Silver Buckshot…

 Electric System Upgrades  Advanced Metering Infrastructure (AMI)  Pipelines; Transmission   On-Site Generation 25 x’25 Energy Policy

Energy Trends and Their Impact …A Lot of Silver Buckshot

 Marcellus and Utica Shale provide resources.

Oil and Gas Lease - Implications

“Size Does Matter”

Oil and Gas Lease - Implications

“Size Does Matter”

Oil and Gas Lease - Implications

 If you hear during the conversation… • “Shale” • “Deep Wells” • “Marcellus” • “Utica” • “Devonian” • “Directional Drilling” • “Horizontal Drilling” • “Seismic Testing”

Oil and Gas Lease - Implications

 An oil & gas lease is defined as a deed by which a landowner authorizes exploration for and production of resources on his/her land; usually in consideration of a royalty.

 Deed – Legal transfer of interest; right on property.

 Certified, properly witnessed, notarized and filed copy at the County Recorder’s Office is the only enforceable copy of record.

Oil and Gas Lease - Implications

 A lease is made between individual parties; Landowner (Lessor) and Developer (Lessee) will be partners. There is no such thing as a

group lease.

 The lease is long term, multi-generations.

 Anything/everything is negotiable.

 If given an opportunity, and within reason, make adjustments to fit the farm.

Leases – Basic Implied Covenants

 Reasonable Prudent Operator: The company will act in good faith, competently and with due regard to the landowner’s interests in developing a project.

• Good Faith: Act to advance the mutual goals of this business relationship.

• Difficult to prove, but courts know it when they see it.

Leases – Basic Implied Covenants

 Reasonable Prudent Operator: The company will act in good faith, competently and with due regard to the landowner’s interests in developing a project.

• Competence: Reasonably prudent manner applying technology and operating practices recognized by the industry.

• Use of best management practices.

Leases – Basic Implied Covenants

 Reasonable Development: An economically motivated, prudent operator is obligated to fully develop resources with a reasonable (or set) amount of time. • Economically Viable: Geologically sound, technology is available, financial analysis shows probability of success.

• Management strategy in place shows efforts today increase profit potential tomorrow.

Oil and Gas – Regulation & Authority

Know Workings of ODNR – Oil and Gas…

 Responsibilities include inspection and enforcement (ORC 1509.02): • Oil and gas drilling operations.

• Oil and gas production operations.

• Brine disposal operations.

• Underground injection operations.

Oil and Gas – Regulation & Authority

Know Workings of ODNR – Oil and Gas…

.

 The division’s responsibilities include regulation, inspection and rule enforcement: • Staff inspects the drilling, restoration, and plugging of all oil and gas wells in the state.

• They issue permits for all oil and gas, injection and solution mining wells.

Oil and Gas – Regulation & Authority

Know Workings of ODNR – Oil and Gas…

 The division’s responsibilities include regulation, inspection and rule enforcement: • • Through the Oil and Gas Well Search Program, track information on oil and gas well permitting, project completion, and production reports.

Know local staff and inspectors.

Oil and Gas – Regulation & Authority

 State law requires reclamation within nine months, weather permitting, after the well is started only to the extent to prevent erosion or pollution.  A desire to improve on state regulations for restoration must be in the lease.

 Caveat Vendor – Well decommissioning responsibilities…

Oil or Gas Lease - References

Know the Developer…

 Ask for five references from the company of landowners where they have operating wells. Call the references and ask: • • • Is the developer easy to talk to and does he/she respond to problems promptly?

Are delay rentals or royalties paid regularly and on time?

Was restoration done properly?

Oil or Gas Lease - References

Know the Developer…

 Ask for five references from the company of landowners where they have operating wells. Call the references and ask: • Were you consulted on access road, well site, compressor station and all facility locations?

• Are you having any problems now with the producer?

Oil or Gas Lease - References

Know Your Legal Counsel…

 Ask legal counsel the following: • Years of experience working with complex leasing/contracts used in energy and utility related issues.

• • Familiarity with different types of energy technology being used today.

Experience negotiating individual and group agreements.

Oil or Gas Lease - References

Know Your Legal Counsel…

 Ask legal counsel the following: • Access to financial planning resources for the farm (business functions, taxes, etc.) and family, (estate planning, gifts, trusts, multi-generation benefits, taxes, etc.).

• • Access to family counseling services.

Access to philanthropy; working with local foundations.

Oil or Gas Lease - References

Know the Lease Buyout Specialist…

 Ask representatives the following: • Mineral Rights Ownership – Terms, time periods, control of development, percentages and provisions for return? • • • Impacts – Tax, land value, mortgage implications, estate planning?

Liability and cash return? Company references?

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Take Steps to Clear Your Record - Use Ohio’s Statutory Forfeiture Process (ORC 5301.332) • 45 – 90 Day Process • Search to identify current lease holder; use margin entries on lease in at County Recorder’s Office; often handwritten.

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Take Steps to Clear Your Record - Use Ohio’s Statutory Forfeiture Process (ORC 5301.332) • Send notice via certified mail – Letter should include company name, land description, reason for forfeiture, and attached copy/reference to lease.

• Similar notice in county seat newspapers.

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Take Steps to Clear Your Record - Use Ohio’s Statutory Forfeiture Process (ORC 5301.332) • No Response – Record an Affidavit of Forfeiture at County Recorder’s Office after 90 days. • Response – Notification to landowner by company; details reasons why lease remains in force and effect.

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Take Steps to Clear Your Record - Ohio Dormant Minerals Act (ORC 5301.56)  Be aware - Acceptance and cashing of lease fee any time after the original term can automatically renew a lease.

 Additional lease remedies and actions could include…

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Delay Rental Payment Provisions – Failure to pay obligations long term could cause lease to be automatically forfeit.

 Proper Notarization – Must be in person and in presence of legal notary. This claim is null and void if owner accepted payments over the years.

Provisions a Landowner Should Consider in Old Lease – Clear Title

 Lessee Assignment Without Consent: • If the lease says that assignment is “not unreasonably held,” the landowner must site specific details for his reason to contest the issue. • No language equals no reason necessary – Claim is null/void if payment has been previously accepted.

Provisions a Landowner Should Consider in Old Lease - Revisions

 Landowners with old leases could be contacted to sign “additional paperwork.”  Be aware – In some cases landowners are asked to approve reopening and changing key provisions of the old lease.

 Recognize this as an opportunity to reopen and fully renegotiate the old lease.

Provisions a Landowner Should Consider in Old Lease - Revisions

 Strike automatic renewal clauses.

 Respect all Implied Covenants.

 Certified, properly witnessed, notarized and filed copy at the County Recorder’s Office is the only enforceable copy of record.

 Negotiate provisions within reason; points to consider…

Provisions a Landowner Should Consider in a Lease - Pooling

 Pooling Provision Unit Clause - Identifies larger tracts of land that are pooled to form a defined area (unit) on which a well is drilled.  Holds the land in the unit for as long as the well produces.  Royalties based on number of acres each owner has in the pool.

Provisions a Landowner Should Consider in a Lease – Payments

 Lease Rentals - Fees vary throughout Ohio. A landowner should negotiate for a reasonable annual lease rate.

 Negotiate a bonus to cover: • Legal Fees – Negotiation/Litigation • • Testing – Creating Baselines Financial Planning  Shut-in Royalty – Minimum royalty payment in times of force majeure or low market prices.

Provisions a Landowner Should Consider in a Lease – Payments

Free Gas Provisions…  1000 Cubic Feet of Natural Gas • • • • • 6.86 Gallons of Fuel Oil 10.76 Gallons of LPG 119 Pounds of Wood 79 Pounds of Coal 300.91 kWh of Electricity  Negotiate for 300,000 cubic feet/year, even if you don’t use it…

Provisions a Landowner Should Consider in a Lease - Infrastructure

 Infrastructure - Landowner approval in writing of well, tank, access road, compressor station, all underground infrastructure and support sites.

 A map attached to the lease may be desirable where special land features should be protected.

Provisions a Landowner Should Consider in a Lease – Land Impact

 Payment of damages - This provision should include wording that makes the company liable for damage to: • Water quality/quantity • Crops, Trees, • Fences, Buildings, • Tile Lines, Ditches • All Infrastructure…

OFBF Self-Help Energy Programs

Dale Arnold, Director, Energy Services Ohio Farm Bureau Federation 280 North High Street Columbus, OH 43218 Phone: 614.246.8294

E-Mail: [email protected]