How the Leasing Process Works

Allegheny College has been approached by several natural gas leasing consultants offering their services since Allegheny’s Bousson Environmental Research Reserve is presumed to be within an area of interest to natural gas drilling companies.  Consultants profess to offer geological and market information necessary to make an intelligent and knowledgeable decision regarding leasing.  While Allegheny has made no commitment to pursue a leasing contract or work with a leasing consultant, we are learning as much as we can about the process in order to make an informed decision that serves the best interests of the college.  More information about leases can be found at http://pubs.cas.psu.edu/freepubs/pdfs/ua448.pdf.

If a landowner chooses to explore a leasing contract allowing gas production activity on their property, there are multiple steps to the process.  A landowner can choose to pursue the process independently or with the assistance of a leasing consultant.  Leasing consultants typically work with a collection of landowners and represent them in negotiations with a gas drilling company.

First, a landowner drafts a leasing contract that stipulates the terms of activity which would be accepted and prohibited on their property.  An educated, savvy  landowner would draft a detailed “sophisticated lease” addressing environmental protections, financial details, and legal protections.  The Pennsylvania Environmental Council offers a very helpful leasing guide for conservation-minded landowners at http://www.pagreenlease.org/wp-content/uploads/2011/06/PEC-Marcellus-Shale-Lease-Guide.pdf.  While Allegheny might or might not consider allowing drilling under Bousson, we’ve discussed a reluctance to allow surface activity, such as roads, drill pads, pipelines, transition stations, etc.  This is possible since we have neighbors willing to host the surface activity/drill site on their property.  However the drilling company may or may not be willing or able to produce according to the stipulations included in a contract.  A “non-drilling” stipulation would disallow a drilling pad but would allow roads, pipelines, etc.  A “non-surface” stipulation would disallow any activity or impact on the surface of the property but would allow horizontal drilling under the property from an adjacent property.

Second, the leasing contract is presented to a gas drilling company interested in establishing leases in the area.  The drilling company may choose to accept the proposed contract, request to negotiate changes to certain stipulations, or choose not to sign the contract.  If the drilling company chooses to accept the contract, the landowner must make a final decision on whether to sign the contract or not.  If the landowner and the gas drilling company settle upon a mutually acceptable leasing contract and both sign, the terms of the contract commence and the drilling company pays the landowner a signing bonus (potentially $2000-4000/acre according to the leasing consultants with which we’ve spoken).  If a landowner chose to use the services of a leasing consultant, the consultant would collect a percentage of the signing bonus.

Normally leasing contracts have a term of 5 years with a 5 year extension option.  However the term might also be set in the contract to be something different, for example 7-10 years.  If the drilling company drills within the term of the lease, the landowner is then entitled to a production royalty based on the volume and quality of the gas produced and current market values, as stipulated in the leasing contract.  If the drilling company does not drill within the term, the landowner gets to decide whether to terminate the contract (keeping the signing bonus we were paid at the beginning of the term, but with no chance of eventual production royalties) or to extend the term (with another round of signing bonuses and the potential for eventual production royalties assuming they drill).

 

Notes from meetings with leasing consultants:

10.02.12 Western Pennsylvania Gas Leasing Consultants, LLC

10.09.12 CX Energy