Landowners lose cash, rights in some drilling deals

By Karl Henkel

khenkel@vindy.com

COLUMBIANA

Gas and oil drilling is a quickly growing industry, but Mahoning Valley landowners looking to capitalize should proceed with caution, according to a local lawyer and a nonprofit oil and gas leasing organization.

Many oil businesses, including Oklahoma City-based Chesapeake Energy Corp., one of the largest oil companies in the U.S., are using a newer tactic which, while perfectly legal, potentially could cost landowners thousands of dollars.

The most popular oil or gas drilling agreements — the kind signed with Columbiana County residents — are giving way to a new strategy: mineral-rights purchases.

Instead of lease agreements, which could net landowners thousands of dollars a month plus royalties, a mineral-rights purchase would forfeit land rights and any royalties, said Alan D. Wenger, an attorney for the Youngstown law firm of Harrington, Hoppe & Mitchell.

Wenger helped draft an April contract between Chesapeake and the Associated Landowners of the Ohio Valley, a nonprofit organization that seeks to educate and protect landowner rights.

Potential royalties are as high as 15 percent to 20 percent in the Mahoning Valley.

Wenger said the difference between signing leases, which under Chesapeake are often five-year deals with a potential three-year extension, and a mineral-rights purchase amounts to thousands of dollars per acre, per month.

The mineral-rights purchases are generally one-time payments of $2,500 an acre.

“Deciding how to benefit from potential mineral development is a personal decision,” said Scott Rotruck, vice president of corporate development for Chesapeake. “Some risk-tolerant mineral owners prefer to lease their minerals, potentially receiving a bonus payment and then royalty payments over time, while others who are more risk-averse prefer to sell their mineral rights outright and receive their compensation up front.”

Wenger said oftentimes it won’t be a large oil company that tries to purchase mineral rights; a smaller company such as Oklahoma City-based MC Mineral Co. LLC, which is actually a subsidiary of Chesapeake, would be the purchaser.

By acquiring mineral rights, the oil company becomes the beneficiary of any royalties negotiated under a previously-signed lease, which equates to about 12.5 percent.

“Given the shale developments of the last year around here, the companies that are actively exploring for shale development or speculating and trying to get rights are trying to take advantage of existing leases,” Wenger said.

MC Mineral, in a letter to a Mahoning County resident that was acquired by The Vindicator, clearly states it “is interested in purchasing, not leasing” oil and gas minerals.

One problem though, said Bob Rea, president of ALOV, is that landowners will lose control of their property.

“They can put a drill wherever they want and they have no recourse,” Rea said. “If you sell mineral rights, they have full access to your property.”

And selling mineral rights potentially could decrease land and property value.

Patti Mika, Real Living real-estate agent, says it may be too early to tell the true impact on values. Mika said she recently sold about 50 acres to owners who think the land will eventually net a large reward, but that normally homeowners aren’t interested in owning mineral rights.

“People that want that house, it’s an extra bonus if they have the mineral rights because they get a royalty,” she said.

Landowners who know they have current leases with other oil companies have a couple of options.

They can try to get a dormant lease legally terminated. It’s not easy and the process can vary depending on the terms of the lease. Some agreements state that if an oil well becomes dry, the lease terminates, but others state that as long as oil companies continue to pay the amount outlined in the agreement, the contract remains valid. A lease can even continue beyond its current term. It’s called “held by production,” Wenger said.

In the case of mineral-rights ownership, if it’s been more than 20 years and a landowner gives a 30-day public notice, an affidavit can be filed to take back mineral rights. If the gas or oil company responds within 30 days, the next step is likely a lawsuit.

In either scenario, Wenger said most landowners don’t understand the differences between leasing and selling, the latter of which is significantly more beneficial to the gas or oil company.

“They’re really kind of playing into the greed or the need for cash,” Wenger said. “Or they’re trying to get the folks that have acreage around here to sell it for what looks like a nice piece of cash.”