Some local landowners have made hundreds of thousands or even millions of dollars leasing mineral rights to their property, but will those same people be broke in just a few years?
Any responsible lawyer or adviser who is working with someone on a mineral-rights lease should recommend their client to work with someone on investments, said Alan D. Wenger, a Youngstown attorney with Harrington, Hoppe & Mitchell LTD. This would help avoid potential problems in the future.
The majority of lease payments are for $2,500 to $5,000 per acre, said Rhonda Reda, executive director of the Ohio Oil and Gas Energy Education Program.
In Ohio, the minimum amount of property needed for a horizontal well is 640 acres, she said. This means the company has invested $1.6 million to $3.2 million to one or several landowners just to lease enough land to drill.
“It’s a huge investment without any guarantee of return,” Reda said.
At a March meeting of the Associated Landowners of the Ohio Valley in Trumbull County to discuss the recently signed deal with BP, there were business lawyers, certified public accountants and tax advisers at the session in addition to the lawyers negotiating the lease terms, Wenger said.
“We tell them to take a deep breath and at least not buy that second Cadillac,” he said.
The personality of those involved in the transaction makes Wenger less fearful that a number of those who signed lease agreements will go quickly through their money, he said. They tend to be frugal.
“Most of the people that we’ve been dealing with are older and have a conservative mind-set,” Wenger said. “A lot of them grew up or had parents who grew up during the Depression, but there may be a few that who aren’t like that.”
Harrington, Hoppe & Mitchell LTD will host a financial seminar open to landowners from the Trumbull County negotiations with BP. The company also has had a seminar in Columbiana County for landowners, Wenger said.
Anyone who signs one of these leases should put just as much time in deciding what they will do with the upfront payments they receive as they did deciding with whom they would sign a lease, said Frank Hierro, president of the Mahoning Valley Region for Huntington Bank.
Huntington spoke with the Trumbull residents who were part of the ALOV deal with BP, he said.
“We told them they shouldn’t rush out and make investment decisions, Hierro said. “We told them they should sit down with someone, take the time to get counsel, and make the right decision.”
The information on lease-payment spending is that many of the people have used it to pay off debts and purchase new farm equipment, said Linda Woggon, executive vice president for the Ohio Chamber of Commerce.
The investment BP made in Trumbull County of more than $330 million is “off the charts,” Hierro said.
For some people, that money has the potential, if handled correctly, to carry them financially for the rest of their lives and possibly for their descendants, Hierro said.
Those who are receiving lease payments or royalty checks need to determine what their goals are just like any person who has experienced a financial windfall, said Gary Jergler, a Sharon-based investment broker.
There are a lot of people receiving these payments, and some of the options being presented to them are not good, he said.
“One of my clients went to an event and they told him to buy a higher life-insurance premium so his family would get more when he died. That’s a terrible idea,” Jergler said.
The real money for wells that are successful is the royalty payments, which average 12.5 percent to 15 percent in Ohio, Reda said. The average lifespan for a horizontal well is 20 to 40 years.