Fuel Fix ? Some signed low-rent drilling leases

A crew works on a drilling rig at a well site for shale based natural gas in Zelienople, Pa. (AP Photo/Keith Srakocic)

OAKLAND, Md. ? The land men came one evening in 2006, offering property owners modest riches for a simple act: leasing their land rights to the natural gas industry?s middlemen.

Carl W. Lohr, a farmer in Friendsville, didn?t sign that night. But when the land men from the Lexington, Ky.-based Keeton Group LLC came knocking at his door weeks later, he leased his 156 acres to the company for five years, at $5 per acre, in return for allowing gas wells to be drilled using a controversial practice called hydraulic fracturing, or fracking.

At $5 an acre, Lohr is cut a check every year for less than $800. He?s happy with that amount, which he said is enough to cover real estate taxes in Garrett County. But other land owners, as close at hand as Pennsylvania, have signed leases for up to $6,000 per acre. And natural gas industry members and experts say it?s fairly common for some land men to sign property owners to a lowball lease and then resell the rights to energy companies for a big profit.

A commission formed by Gov. Martin O?Malley in 2011 to study fracking practices and safety agreed this week to recommend that legislation be introduced in the General Assembly to force land men to register with the state. This year?s session begins Wednesday.

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The Pennsylvania experience

Jon Laughner, an extension educator with Pennsylvania State University?s College of Agricultural Sciences, said Maryland?s experience isn?t unique. He has tried to educate Pennsylvania residents about how some land men do business for years.

?Their goal is to accumulate a lot of land leases in an area and then flip them, sell them to the energy companies,? said Laughner, who has studied hundreds of leases in Pennsylvania, where there are far more natural gas deposits than in Maryland.

A man who answered the phone at The Keeton Group?s office declined to answer questions about the company?s leasing practices. Keeton persuaded hundreds of Garrett County residents to sign land leases starting in 2006, but the company is not alone in the complicated world of energy company land leases.

Land men ? sometimes brokers, sometimes contractors and sometimes direct employees of gas companies ? first descended in 2006 on Western Maryland, where the Marcellus Shale rock formation runs a mile below the surface. At that point, residents in Garrett and Allegany counties didn?t know what they had beneath them.

The Marcellus Shale formation is a rock-encased deposit of natural gas that can be extracted through a complicated process that involves drilling a mile deep and blasting a water and chemical mixture into the rock, fracturing it and releasing gas.

Companies that employ land men generally don?t have the wherewithal to actually extract the gas. They make their money by finalizing real estate deals, then selling groups of leases to natural gas exploration and production companies at a profit.

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?Good and valuable consideration?

Laughner said energy companies and land men keep the details of their transactions secret, treating them as proprietary information. The sale of land leases can be tracked from company to company, but the purchase amount is usually described in court documents only as ?good and valuable consideration.?

Such is the case with Lohr?s lease, which from 2006 to 2010 changed hands from Keeton, to Unconventionals I LLC, to Chief Exploration & Development LLC and Radler 2000 Limited Partnership and finally to Chevron U.S.A. Inc., which bought the leasing rights to Lohr?s 156 acres and dozens of other lease agreements in July 2010.

Delmer R. Yoder, a 76-year-old farmer in Accident, said he didn?t sign with the land men when they came to Garrett County in 2006. Instead, he did some research.

What he found was that land owners in areas of the country that were already leasing property to gas companies were making far more money than the land men were offering Maryland residents. According to several people familiar with land leasing, the lease amount has been up to $6,000 per acre in Pennsylvania, West Virginia and elsewhere, with royalties on extracted natural gas reaching up to 18 percent.

?I started looking into this thing and calling different places around,? Yoder said. ?Come to find out that we could do better.?

Yoder started a group that quickly swelled to more than 200 county residents who wanted to lease their land. Yoder hired a consultant and negotiated a fee of $1,150 per acre.

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Prices may vary

Lohr, who was among the first Western Marylanders to sign with the land men, said most of his neighbors followed suit. Some made out a little better than he did, garnering up to $15 an acre, but he said he was shocked to hear that the land he leased may be worth so much more.

At the price Yoder?s group had negotiated, Lohr?s payment of $780 per year would have swelled to $179,400.

?I had already signed up before he really created that group,? Lohr said.

But he was also grateful for the money he got. The recession and an executive order signed by O?Malley imposing a moratorium on fracking until 2014 have virtually halted all leasing activity, temporarily derailing the agreement reached by Yoder?s group.

The Daily Record reported in September that some gas companies were letting five-year leases expire having never drilled even a foot into the ground.

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?Cattle sale?

Lohr said he?s not upset with the land men who signed him up for $5 an acre. There was no arm twisting, he said, and he was happy for the extra money.

?It?s like a cattle sale,? Lohr said. ?Sometimes you?d get top dollar, and sometimes you didn?t. But I wish they would drill.?

Delvin E. Mast, a dairy farmer in Grantsville, was less forgiving. He said he signed with Samson Resources Co. for a relatively robust $25 an acre in 2007, but was disappointed when he learned the real value of his land. Mast said his lease has expired, which is fine by him ? he?s joining Yoder?s group, he said, and putting his 500 acres on the auction block.

?I?m not really disappointed that the lease is terminating,? Mast told The Daily Record in September. ?But I do wish Maryland would get their act together.?

Laughner, who said early leases signed in Western Pennsylvania in 2005 and 2006 were usually for $5 to $10 an acre, said the college?s extension office was trying to make sure land owners didn?t make up their minds without knowing what was involved.

?When somebody showed up in 2005 or 2006 and said, ?We?d like to lease the land for $5 an acre,? it didn?t seem unusual. People have been doing it for decades,? Laughner said. ?They (thought they) knew there wasn?t any gas there, so take the $5 an acre and run.

?I suspect there was a little bit of knowledge (on the industry?s side) that there was a potential for these leases to be a lot more valuable than $5 an acre. But it was not apparent to the general public.?

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?Nice pocketful of change?

That?s what Yoder said drove hundreds of land owners to sign for far less money than they should have.

?I?m sure they made a nice pocketful of change,? Yoder said of the land men who brokered many of the early deals. ?But I?m not blaming the people that signed in for $5 an acre. They didn?t know no better.?

Once people did know better, elected officials in Western Maryland started to search for ways to protect land owners.

It was Sen. George C. Edwards and Del. Wendell R. Beitzel, Republicans who exclusively represent the portion of the state that includes Marcellus Shale deposits, who introduced legislation last year that would have forced land men to pay a $100 fee and register with the state Department of Labor, Licensing and Regulation.

The bill would have provided a modicum of accountability, Edwards said ? an argument that has belatedly been recognized by the Marcellus Shale Safe Drilling Initiative Advisory Commission.

The Senate version of the 2012 bill, heard in the Education, Health and Environmental Affairs Committee on March 6, was relegated to a drawer by Sen. Joan Carter Conway, a Baltimore Democrat who chairs the committee and has not had her panel vote on several fracking-related bills in the last two legislative sessions.

Beitzel?s version of the bill was bounced from the House of Delegates? Environmental Matters Committee into the Economic Matters Committee, where it ultimately received an unfavorable report in late March, preventing it from being considered by the full chamber.

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Making it legit

Edwards, who wants fracking to happen in Western Maryland ? he sees economic benefits to it ? said the land men ought to be held accountable.

?We want to make sure they?re legitimate ? legitimate with the state, so people dealing with them know that,? Edwards said in a recent interview.

He noted there is a national group, the American Association of Professional Landmen, but pointed out that isn?t a regulatory body, just an organization whose members are held to a code of ethics. Section 1 of that code says land men should strive to treat land owners fairly. A call to the association was not returned.

Edwards said legislation also should consider including lease requirements, to ensure land owners are getting appropriate payments for allowing companies to drill. The commission has thus far balked at making such a recommendation.

?Should there be a minimum royalty and maybe the per-acre lease (should have a minimum)?? Edwards said, ticking off various lease components that ought to be discussed. ?Should there be other certain things in the lease??

Yoder said his group just wanted a fair deal. He?s frustrated that the state?s regulatory framework for fracking hasn?t been determined and that O?Malley?s moratorium has delayed his group?s ability to sign with a natural gas company.

?Right now, we?re just waiting to see what?s going to happen,? Yoder said. ?Right now, we can?t do anything. Once the gas companies can get leases and start drilling, I think I think we can probably regroup and go from there.?

But only if gas companies and their land men offer fair value for what lies beneath the surface of Western Maryland.

?It?s got to be a two-way street,? Yoder said. ?We got to make money, and so do the gas companies.?

Source: http://fuelfix.com/blog/2013/01/21/some-signed-low-rent-drilling-leases/

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