By Jamison Cocklin
When Joyce and Kenneth Thomas were first approached by BP last July to sign an oil and gas lease on their 4 acres off Warren-Sharon road, they thought little of it.
But as negotiations proceeded with the oil and gas giant, it turned out the company was willing to send a small windfall in their direction, a signing bonus of $16,926 for 4.34 acres.
Five acres is usually required to drill and maintain a Utica well. But as drilling technologies have improved, operators are going deeper, requiring in some instances 40-acre tracts of land to lay down a well pad.
BP approached a neighbor of the Thomases, obtained an additional acre to make five, and everything was going smoothly.
“I thought, ‘They’re not going to put a rig on my property — I’m just a 4-acre peon,’” said Joyce, as she sat with her husband around the couple’s dining- room table.
In December, the neighbor received his bonus payment of about $13,000 — the Thomases are still waiting.
The problem is not BP; it’s the couple’s lender. Chase Bank refuses to amend the terms of their refinancing agreement to allow the lease to go forward, barring any future operations, even though BP has no specific plans for the property.
Now, Joyce, an office worker, and Kenneth, a steel worker, are unlikely to receive a dime from BP.
The rush of leasing activity and drilling operations across the Utica Shale play in Ohio has left many of the state’s residents wide-eyed, ready to jump on leasing opportunities at a moment’s notice, without realizing the complexity of such a long-term agreement.
Increasingly, a growing number of banks are reluctant to finance properties where oil and gas leases exist, nor will they consider issuing second mortgages on similar land. In some instances, lenders have even grown wary of financing a neighbor’s property, free and clear of any oil and gas operations, for fear of a decline in property value if a drilling site is nearby.
“It’s becoming wide-spread across the industry. Servicers and lenders are becoming more unwilling to approve a loan on these properties,” said Amy Bonitatibus, vice president of communications for JPMorgan Chase. “At the end of the day, we may not even own the loan.”
Bonitatibus could not discuss the Thomases’ case specifically, but she confirmed that in most cases Chase Bank does not approve or allow oil and gas leases, mainly because of “the potential impact to the value of a property.”
For the Thomases, this likely means BP will give up on their lease, said Harrington, Hoppe and Mitchell attorney Tom Carey, who represents the couple.
“It’s a very rigid policy, and [Chase] does not make any exceptions; there should be exceptions, but the bank is choosing not to understand how all this drilling works,” Carey said. “It is more likely that the bank will get paid if the lease bonus goes through, but then again, to argue for the bank they then have to rely on the Thomases to send some of that money in their direction.”
Carey added that nearly all his legal options have been exhausted. He made a written appeal to Michael Samuels, of Chase Land Services, arguing that the drilling BP has planned in Northeast Ohio involves deep wells, which require more than 5 acres to maintain, making drilling operations nearly inconceivable.
Samuels, who wanted BP to amend its lease and exclude surface rights, the crux of nearly all leases that allows operators access to the property, wrote in an email to Carey that the bank does grant home-equity credit secured by collateral where surface oil and gas operations exist.
He added, however, that it does not do so after the fact in a situation such as the Thomases’ who were requesting approval for the lease after they received a home-equity line of credit from the bank in 2007.
Carey said he’s seeing more issues between lenders and borrowers. In some instances, banks simply sign subordination agreements that allow leases to go forward; in other cases, he said, the banks will not budge.
“We’re a drop in the bucket,” Kenneth said. “I don’t know if there will ever be a civil suit or something, but there has to be hundreds of people out there in the same situation we are.”
Curtis Thomas, BP’s director of government and public affairs in Ohio, said the Thomases’ problem is not isolated, and BP continues to try to resolve such situations on a case-by-case basis.
BP was unwilling to change its lease agreement, according to the Thomases, telling them that if it makes an exception for one landowner, it would have to do so for others too.
“I saw this happen in Pennsylvania on property that was encumbered by oil and gas leases; we saw lenders asking prospective purchasers to indemnify the bank for any damages to the property,” said Steven Franckhauser, director of energy at Hill, Barth and King, an accounting firm in Boardman.
“The reality is, the lease is a very important document, it stands to reason that the surface value is likely going to suffer if it’s subject to an oil and gas lease.”
Carey noted that larger national banks have been more reluctant to approve oil and gas leases, whereas smaller community banks are less concerned, having taken more time to understand the issues involved.
But James Thurston, spokesman for the Ohio Bankers League, disagreed, saying smaller banks are just as likely to protect their assets, because, he added, “at the end of the day, it’s the bank holding the paper.”
William Eiler, spokesman for Huntington National Bank, Youngstown’s largest bank by deposits, couldn’t share much insight on how the institution deals with oil and gas leases, saying only that each case is reviewed independently.
But Joe Gerzina, chief lending officer at Farmers National Bank in Canfield, said the bank has had no choice but to learn more about oil and gas leases and how they affect its assets.
Farmers, he said, has been very specific with operators, requiring them to outline what exactly will be done with the property.
Also problematic for the bank, Gerzina said, is the fact that it sells nearly 80 percent of its mortgages in the secondary market for better interest rates, where investors might be reluctant to make a purchase if the property is encumbered by a lease or drilling operations.
Often, if Farmers believes the lease will affect adversely a property’s value, the borrower may be asked to dedicate part of their lease bonus or royalties to the principal balance of any existing loan, especially for commercial borrowers, he said.
“It really comes down to this: We’re willing to take a look at the bigger picture. We’ve spent some time on this locally and we’ve been busy putting together unique agreements,” Gerzina said.
“Northeast Ohio is one of the most drilled-upon places in the country; there’s a lot of existing leases out there. In some respects, this is a new problem, but in others, it’s been out there forever.”