The Butler decision answers the question whether natural gas trapped within an unconventional shale formation in Pennsylvania belongs to the owner of the oil and gas estate or the owner of the mineral estate. Pennsylvania Courts have long held that gas is not a mineral; a reservation of “minerals” in a deed is not a reservation of “gas.” This is known in Pennsylvania as the “Dunham Rule” from the case Dunham v. Kirkpatrick, 101 Pa. 36 (1882).

An exception to the Dunham rule was created for coal-bed methane in the Pennsylvania Supreme Court’s decision in United States Steel Corporation v. Hoge, 468 A. 2d 1380 (1983)(“Hoge II“). There the coal owner (U.S. Steel) objected to the hyrdo-fracking of its coal seams by the owner of the gas estate to produce coal-bed methane; i.e. methane trapped within the coal seam. The Hoge II Court concluded that coal-bed methane belonged to the owner of the coal.

In Butler the owner of the mineral estate asserted ownership to natural gas trapped in the Marcellus shale, relying on Hoge II and arguing that the Marcellus shale is itself a mineral such that gas trapped within the shale belonged to the owner of the mineral estate. The Butler Court distinguished and discredited Hoge II and reaffirmed Dunham and its progeny, concluding that gas is (still) not a mineral in Pennsylvania.

The Butler decision should provide the shale gas industry with the predictability and certainty it craves, and hopefully will end any chilling effect that the litigation has had to date on continued or increased leasing activity within the Commonwealth.

The only way to properly answer this question is to obtain a title opinion from a qualified attorney with oil and gas experience. The attorney will obtain a full abstract of the oil and gas chain back to at least August 1859 (the date of Drake’s well and the date of the earliest severances of the oil and gas estates from the surface estate). The downside to this approach is the potential significant cost and delay associated with it. Oil and gas title searches are longer and more complex than regular surface title searches. Qualified oil and gas abstractors are in short supply and high demand. Full oil and gas title searches and title opinions from a qualified oil and gas attorney can take months to obtain and can cost thousands of dollars.

Moreover, this approach is somewhat duplicative. After leasing but before drilling, the oil and gas company will perform a full oil and gas title search (again, back to at least August 1859). Some companies will do some title work before offering a lease, but increasingly they wait until after a lease is signed before undertaking title examination; they often will offer a lease conditioned upon them obtaining an oil and gas title opinion showing clear title vested in the landowner.

Most landowners choose not to incur the significant expense (and delay) of duplicating the oil and gas company’s title work. Oil and gas companies generally do not rely on title work performed by on or behalf of the landowner and will perform their own title work, regardless of the results of any abstract, title search or opinion rendered on behalf of the landowner.

Things you should know:
1) Realize that deed language is not always determinative. Just because your deed doesn’t say anything about the oil and gas rights to your property, that doesn’t mean that you own your oil and gas rights. Title issues may exist from years ago which are not apparent on the face of your deed.

2) Be aware that, just because you had the “title” searched when you bought your property, in fact no one likely ever expressed an opinion regarding title to the oil and gas rights to your land. Standard title insurance policies and attorneys’ title certificates do NOT cover matters concerning oil and gas rights.

3) Realize that oil and gas rights could have been severed from the surface rights by conveyance (deed out) OR by reservation in the chain of title; prior severances may have occurred decades in the past, way outside of standard residential and commercial real estate abstract search periods.
Things you can do:
1) Engage the services of a qualified attorney to answer their oil and gas related legal questions. There simply is no substitute for the opinion of a qualified professional in this regard.

2) Before signing a lease, review with your attorney the effect of the warranty provisions of the lease on title issues and defects. Consult with your attorney regarding the relative benefit to you, the landowner, of providing a special (as opposed to general) warranty of title in the lease, and the need to address these issues concerning title defects and curative work.

3) Look at your deed. Does it have language indicating that oil and gas rights have been excepted or reserved from the conveyance? If so it is a red flag suggesting you may not own your oil and gas rights – consult your attorney.

Some landowners who have reason to suspect that they may not own the oil and gas rights to their property hire an attorney to order an oil and gas title abstract and render an opinion. If you don’t, other interested parties (for example, the oil and gas company, your neighbors, or other speculators) may identify the prior severance and seek to acquire the rights out from under you.

You may be approached by a company asking to do seismic testing on your land. Should you allow it? (Of course, as a landowner you should NEVER sign any legal document affecting your property without first having it review by your attorney! )

The answer to this question often depends on where you are in the lease process. If you have already signed an oil and gas lease, you have likely already given permission to the lessee to conduct this activity on your property. The gas company may notify you of the pending activity, but likely will not ask you to sign a separate agreement. HOWEVER – some independent testing companies hired by the gas company will pay a nominal sum to landowners in return for the landowner executing the testing company’s permission form. This provides the testing company with some assurance that they will have access to the property and will be able to complete their work without interruption by or interference from the landowner.

ON THE OTHER HAND, if you are not yet leased, consider the following as you decide whether or not to sign the seismic testing agreement:

1) Landowners generally get paid little for the seismic testing companies to come on-site and do their testing.
2) Landowners do not get copies of the data.
3) The data is VERY valuable.
4) The seismic testing companies may be hired by a particular gas company OR they may do the work “on spec” and sell the data to any or all interested bidders.
5) There is significant risk to landowners who permit seismic testing activity before they are leased. If the seismic data is unfavorable, the gas company may not offer a lease. Ordinarily the gas company would have to lease, and pay a larger per-acre bonus, before they would have sufficient right to enter the property and gain access to the seismic data.

In sum: you don’t know what’s down there. They don’t either – yet. They have to pay for the right to explore. If they can get seismic data for a few dollars an acre, they may save thousands of dollars per acre that they may have otherwise paid for the right to explore your property set forth in a lease.

Also, many landowners would not be happy to see the helicopters, trucks and ATV’s show up on their property during certain times of the year (e.g. on the first day of deer season). Be sure to talk to your lawyer about including any special protections or provisions you may require.

For a good video of the process, click here:

http://vimeo.com/8423174

Grass Roots Groups. Some landowner groups are grass-roots efforts by local landowners who join together to promote education and the sharing of information in advance of low-ball leasing efforts of landmen and other industry representatives. Typically these groups charge only a nominal fee, if any, to join (often a few dollars per acre). Landowners are not asked to sign any documents which would be placed of record or which would otherwise encumber or burden their property. The group may engage in lease negotiations with interested producers for the best economic deal which is embodied in a form group lease. However, each member of this type of group is free to:

1) accept the offered lease “as-is”;
2) negotiate a different lease with the same producer (these separate negotiations are often not focused on the economic terms of the lease but rather on issues specific to the landowner or his property); or
3) negotiate a different lease with a different producer.

These groups serve the landowners’ best interests – primarily the gathering and sharing of information upon which deliberate and informed decisions are made – without any of the detriments of the other forms of groups. We support and work with these types of landowner groups throughout our footprint.

Marketing Groups. Other landowner groups are formed by a brokerage or marketing company as a way to attract customers. These groups charge for their services, typically on a percentage basis (we regularly see marketers charging from 4% to 10% or more). Most charge just on the bonus amount, but many charge on the future royalty stream as well. This often amounts to tens of thousands of dollars in cost to the medium to large parcel landowner. We do not recommend that our customers engage the services of anyone – professional or otherwise – who charges on a percentage basis for the negotiation of an oil and gas lease.

Special care must be exercised when the brokerage or marketing company appears to be owned by or affiliated with a lawyer or a law firm. These attorneys are often principal owners of or otherwise affiliated with the brokerage or marketing companies. These attorneys have made a conscious choice to NOT represent individual landowners as their legal counsel. There are many potential reasons for this; however, some attorneys have formed brokerage or marketing companies as a means to charge a higher fee as consultants than they would lawfully and ethically be permitted to charge as attorneys. Although some ethics commentators have recently suggested that Pennsylvania’s Rules of Professional Conduct may permit an attorney to take an ownership interest in a portion of the client’s property (e.g. a percentage interest in a landowner’s royalties), those commentators also agree that the percentage interests being charged by brokerage and marketing companies are excessive and unreasonable under the circumstances. Regardless, landowners MUST understand that lawyers who form or are affiliated with marketing companies do NOT represent them. Much confusion in this regard will almost certainly lead to litigation. In fact, this threat of litigation and the attendant efforts by the Plaintiff’s bar to invalidate the underlying leases have caused many major producers to become increasingly reluctant to negotiate with large groups, particularly those involving brokerage or marketing companies.

To be fair: the leases negotiated by these marketing companies are, on average, better than the leases which landowners typically wind up with when they try to negotiate their deals on their own. However, these leases may not always be the best leases for a particular landowner’s unique, individual situation. They are typically no better than the average, independent, attorney negotiated deal in a given area. Worse, working with non-professionals provides no security or sense of assurance which the landowner would otherwise realize from professional licensure, regulation, or malpractice insurance. We therefore encourage all our customers to seek the advice of a qualified, experienced oil and gas attorney before signing any document – be it an oil and gas lease, marketing agreement, or any other legal instrument.

NOTE: Attorneys, accountants, bankers and even some landmen working for the oil and gas companies have professional associations with prescribed rules of ethics governing their members’ behavior. Marketers and other such consultants do not.

Landowners should beware of the following “characters”:

1.) The name dropper. “Do you know John Smith? Well, he joined our group…”
“John Smith” is usually one of the larger landowners in the community. John may or may not have joined a particular group; however, proponents of some landowner groups use a name dropping approach to attract members. Oftentimes John Smith has not joined the group (but maybe attended a meeting) and is surprised to hear his name mentioned. Work with professionals who abide by rules of professional conduct designed to respect and protect your privacy.
2.) The naysayer. “That grass roots landowner group, they’re about to fail…”
Typically this is from a marketing company complaining about a pre-existing grass roots landowner’s group in the area. A marketing company can only get paid if it can attract members. People who join grass roots organizations typically do not sign with marketing companies. If it sounds like “sour grapes” it probably is.
3.) The insider. “We know people in high places. We’ll get you a better deal.”
The reality is that the geology under your land dictates whether, when and on what terms you will get an oil and gas lease. It doesn’t matter who you know. Also, the old rule of real estate still applies: location, location, location. If your property is located near a major interstate gas transmission line, you are going to attract more attention sooner than the owner of a property located a hundred miles away from the pipeline.
4.) The retailer. “ Join with us and you’ll have more bargaining power as part of our group – the more acres the better the bargaining power.”
There is some truth to this one – there is some strength to be found in numbers. However, what the marketers don’t tell you is that not everyone is likely to get a lease even if there is an interested producer. Often, only some of the members of the marketing group wind up with leases. The other members of the group are left out in the cold. There is no “Three Musketeers” clause in these agreement (all for one and one for all…). Your neighbor may get a lease and you may not.
5.) The depriver. “Our landowner group was formed by an attorney who represents you – you don’t need to hire a lawyer, you can use ours.”
Beware anyone who tries to deprive you of the reasonable opportunity to consult with professional advisors of your own choosing. Attorneys who own or are affiliated with marketing companies do NOT represent you. You need professional, independent and objective representation of your own.
6.) The double dipper. “We work for you.”
The double dipper may be working for someone else as well. Most marketing agreements specify a payment arrangement whereby the marketer receives a percentage of the bonus and/or the royalty from the landowner’s share. HOWEVER, unlike attorneys and other professionals, marketers are under no prohibition or restriction from receiving compensation from the gas company as well. So, in addition to the money that you are paying him, the double dipper may also be getting paid on a per acre or percentage basis by the gas company, too.
7.) The bundler. “We have everything you need here.”
This is a variant of the depriver. Experience has shown that landowners need independent, objective professional assistance with their legal needs (lease negotiation, estate planning), accounting needs (tax planning and preparation) and financial needs (banking and financial and investment management). As these professional services are lumped together and cross-sold, they become less and less independent and objective.
8.) The paid celebrity endorser. “I was the first to sign on with them in this area, let me tell you why you should sign up with them:”
This individual is often a landowner and may take some or all of the other forms above when pushing the services of the marketing company. The motivation for the “hard sell” approach utilized by the paid celebrity endorser may not be readily apparent to the average landowner. At first, the paid celebrity endorser just seems to be an average landowner with some special information about the marketing company. However, the marketing company may in fact be paying a significant “finder’s fee” to the paid celebrity endorser if you sign up with them.
9.) The slacker. “We work hard for you.”
The sad truth is that many marketing agreements are structured so as to be recorded in the county in which the property is located. That way, the gas company representatives who would have contacted you, the landowner, contact the marketer instead. Little if any actual effort may be expended by the marketer who then “brings you “ a deal. Worse, many marketing agreements require payment to the marketer if the landowner signs a deal with any producer “to which the marketer has directed marketing efforts.” Affixing a 45 cent stamp on a letter and sending it to each of the major producers in a shale gas play practically ensures that the marketing company will demand payment on any lease signed by the landowner, whether or not such lease was the result of any actual effort by the marketing company.
10.) The gold digger. “We charge only a small percentage, and we only get paid if you get paid.” Do the math!!! Example: a 150 acre owner who leases for $4,250/acre and who commits to pay a marketing fee of 8% would pay $51,000.00 for their lease. Most landowners would realize a significant cost savings by using a qualified, experienced oil and gas attorney to negotiate their lease instead. Attorneys often charge on an hourly basis or on a flat fee basis, some for as little as $400 per lease review. The more land that you own the higher the total fee you will be charged – these percentage arrangements typically make the most financial sense for owners of very small parcels.

If you find yourself at risk because you have encountered any of these characters, we may be able to help. Feel free to contact us for a referral to a qualified, experienced oil and gas attorney.

Should landowners be worried about this form? ABSOLUTELY! This is a written instrument signed by the landowner. It can modify or supersede the negotiated terms of the oil and gas lease. DO NOT SIGN ANYYTHING WITHOUT HAVING YOUR ATTORNEY REVIEW IT FIRST!Do all oil and gas companies use Payment Orders with their leases? No. Many oil and gas companies do not use Payment Orders; they specify the methods and payment terms in the underlying lease. Sometimes companies which use Payment Orders say they use them to keep the price terms confidential. This is at best misleading and at worse simply false. Oil and gas companies increasingly record a Memorandum of Lease in lieu of recording the original Lease – precisely for this reason, to keep the bonus payment and royalty payment terms out of the public record. Companies which utilize a Memorandum of Lease for recording and which also utilize an Order of Payment are looking to do more than just keep the economic terms of the transaction confidential. Read these carefully!

What’s wrong with these Payment Orders? They can modify or change lease terms. Increasingly, oil and gas companies are giving themselves more and more “outs” in the Payment Orders. For example, the Payment Order may give the oil and gas Company 60, 90 and even 120 business days after the lease is signed before they must tender payment of the bonus. Many companies explain that this is for the purpose of confirming that the landowner has good title and that they are making payment to the proper party. Not all oil and gas companies operate this way; many producers with genuine interest in an area will perform title work in advance of approaching interested landowners, and will offer tender of bonus payments at lease signing.

So do Payment Orders just give the oil and gas company more time pay? No! Worse, they often give the oil and gas company the right to cancel the lease – and avoid the bonus payment obligation altogether! We regularly meet with landowners who are shocked and disappointed to learn months after signing an oil and gas lease that the Oil and Gas Company has unilaterally cancelled the lease – for no reason.

But if they don’t pay me my bonus within 60 (or 90, or 120) business days like it says in the Payment Order, my lease is automatically cancelled, right? Not necessarily! Believe it or not, many leases have been drafted in such a way to specify that failure to make payments due under the lease does not result in an automatic termination or forfeiture of the Lease. So you may be left with only a claim for money damages, while the oil and gas company has still tied your property up and made it unavailable for lease to another company with an interest and ability to pay!

So why are Payment Orders used? Although they may serve legitimate business interests of “real” oil and gas companies, we now most frequently see Payment Orders used by lease “flippers”. The use of a Payment Order helps them cash flow their obligations to the landowners – often avoiding the need for the flipping company to put any money into the deal at all. They get landowners to sign leases with extended Payment Order terms, then they flip the leases to a “real” production company. The “flipper” company then uses the production company’s money to pay the landowners. If the leases can’t be “flipped” in time, the Payment Order often has an escape clause where the company can cancel the lease without penalty.

Obviously, great care should be exercised when signing any agreement or other instrument relating to your property and your oil, gas and mineral rights. Have these reviewed by your attorney before signing. If you would like a referral to a qualified, experienced attorney serving your area please contact us today.

This isn’t the valuation method for gifts, but for an estimation of value and for estate planning it is long awaited guidance from Pa Revenue.

The week of July 9, 2012 Governor Corbett signed a bill into law that states upon death,  farmer can pass the family farm down to children free of Pa Inheritance tax. This law will help keep the family farm together and allow the next generation to continue owning the farmland without having to pay out cash or borrow to pay Pa Inheritance Tax. Again, details can be found at www.revenue.state.pa.us.  Note, however, that some family farmers should still engage in proper estate planning, particularly those with significant acreage in the various shale gas plays in Pennsylvania who may benefit from federal estate and tax planning.

There is some precedential authority for the suggested treatment of shale gas as belonging to the mineral owner: prior Pennsylvania decisions have established that coal bed methane trapped in a coal seam belongs to the coal owner and not the owner of the oil and gas. One difference between coal and shale, however, is obvious: although some small outcroppings of the Marcellus shale may have been quarried on a limited basis in the past, the Marcellus shale itself has not generally been mined or quarried for substantial economic benefit. Unlike coal, the Marcellus shale lacks intrinsic value separate and independent from the value of the methane trapped inside. This may be a key factor in the Court’s treatment of this matter.

In an apparent response to the uncertainty presented by the Butler appeal, and to ensure the right to produce gas contained within an existing unconventional shale gas formation, some gas companies have revised their lease forms to add language purporting to include “minerals” in the estate or interests subject to lease. This has resulted in significant confusion among landowners who may wish to execute an oil and gas lease but who object to the mining or removal of minerals.

Stay tuned…