0 – 15 Minutes
Attorney Doug Clark discusses oil and gas lease negotiations and pipeline negotiations and why landowners must stop simply signing contracts presented by the company landman. Property owners and natural gas right owners must effectively negotiate for higher compensation and to limit the authority provided to the company under the agreement. Landowners are often signing oil and gas leases or pipeline agreements presented by the company landman without understanding their negotiation leverage. Many times property owners can negotiate for tens of thousands or hundreds of thousands of additional dollars as payment for the proposed natural gas agreement. In virtually all cases, the property owner can negotiate a pipeline right-of-way agreement to limit the authority that they are granting to the company under the document. Attorney Clark explains how negotiating a simple term such as limiting the numbers of pipelines they can be installed under the terms of a pipeline agreement can result in substantial additional compensation in the future. Property owners must negotiate money and language today so that they may set themselves up to benefit in the future. Do not be short sighted in oil and gas negotiations, but think about both the short and long term implications of the agreement. All oil and gas contracts must be negotiated to maximize today’s benefit and future opportunities. Property owners and gas right owners must look closely for opportunities and they should see offers from gas or pipeline companies as an opportunity and understand their ability to negotiate. You must have a negotiation plan from the beginning and work to obtain the best possible contract. A Clark Law Firm pipeline right-of-way agreement review and consultation is an outstanding way for all property owners to learn their rights and position themselves to make the best out of any opportunities presented by the gas or pipeline companies.
15 – 30 Minutes
Attorney Doug Clark explains the threshold terms in Pennsylvania oil and gas lease offers. Doug breaks down per acre bonus payments and what the gas right owner should be focused on when initially considering an oil and gas lease offer. The per acre bonus is always the easiest item to focus on and is typically the big ticket topic that the landman wants to discuss with the landowner. Of course, the landman will stress that substantial natural gas royalties will be paid in the future under the lease, but for now, the per acre bonus is a nice juicy carrot to place in front of the landowner. Do not limit your focus solely on the per acre bonus payment and do not overemphasize the per acre bonus. Do not repeat the mistake of others and keep your eyes open to all aspects of the gas lease offer. However, the per acre bonus payment is a major part of the oil and gas lease offer and the per acre bonus payment must be negotiated to maximize the upfront financial compensation.
The second big ticket item that the the gas right owner must look at when considering a natural gas lease is the length of the primary term of the lease. Natural gas right owners should always seek the shortest primary term in the gas lease offer. Five years is the most common primary term length for Pennsylvania and you should always seek to minimize the primary term length so that the final lease agreement does not exceed a five year primary term. Oil and gas lease offers with primary terms of ten years or more should generally be avoided. A ten year primary term is a very long time for a gas lease and rarely does it make sense for a gas rights owner to enter into a gas lease with a ten year primary term. Oil and gas rights owners and should negotiate the length of the primary term in all gas leases and fight to avoid any primary terms in excess of five years.
The final major initial item when considering a gas lease offer is the amount of royalty percentage the landowner will receive for natural gas produced under their lease. Attorney Clark explains that 12 1/2% royalty, or 1/8th royalty, is the lowest royalty percentage allowed under Pennsylvania law. Landowners must always negotiate to increase the royalty percentage in any oil and gas lease offer. All gas right owners should absolutely avoid royalties at 12 1/2% as this is the lowest royalty allowed under the Pennsylvania guaranteed minimum royalty act. Landowners must be very weary and should resist entering into 10 year leases with 12 1/2% royalty payments. Under this structured offer the gas rights owner will most likely will be locking themselves into 12 1/2% royalty for many decades and possibly for the next century. A long primary term and low royalty percent offers are a double whammy to the gas rights owner that should generally be avoided unless there are extenuating circumstances. Tioga County natural gas right owners have been offered 10 year primary term leases with 12 1/2% royalty and these offers should be rejected in most cases, but every property owner and gas rights owner should have individual legal advice from an experienced oil and gas attorney before making any decisions on whether to enter into a gas lease or any other contract with the gas or pipeline company.
30 – 45 Minutes
Attorney Doug Clark discusses natural gas royalties and how royalty payments are calculated. The starting point for royalty calculation will always be the royalty percent provided for in the oil and gas lease, but we must look deeper to determine how royalty payments will actually be calculated and whether post-production costs will be deducted from royalty payments and whether local index pricing can be substituted for the actual sale price of the gas. The gas rights owner’s focus cannot be solely on what the royalty percentage is in the gas lease, but we have to look at how royalty payments will be calculated and whether index pricing can be used and whether post production costs will be deducted from royalty payments. Unfortunately, gas companies have evolved to develop addendum terms that are very complicated as they relate to natural gas royalty payments. Companies provide addendum terms with headings that are labeled such as “royalties without deduction”; “royalties – no deductions”; and other similar misleading language.
Remember, headings in the addendum are not generally part of the contract, but you must fully read and understand the detailed language in the addendum provision. Do not focus on the addendum heading, but focus on the language below the heading. The heading that indicates that there will be no deductions taken from royalties, maybe extremely misleading and the landowner me ultimately find that post production cost deductions are taken and possibly that local index pricing is used to set the value of your natural gas. Companies will often disguise royalty deductions as “enhancements” of the value of natural gas in marketable form. Gas companies will reason that they have not taken post-production “deductions”, but they have simply not given you the benefit of “enhancing” the value of your natural gas. This is the classic example of semantics, and in this case it is used by the gas company to be detriment of the royalty owner. Doug explains how he has seen recent lease offers in Tioga County and other counties across Pennsylvania where headings in the addendum lead the landowner to believe they will not have post-production deductions taken, but these landowners will be very disappointed in the future when they start receiving royalty payments with potentially substantial deductions. We must make sure that we negotiate to try to eliminate deductions for post-production costs from royalty payments, and you must also understand that if you are signing an oil and gas lease what the royalty terms are and whether the deductions will be taken or whether the company will reduce your royalty payments by claiming that what you call deductions are actually enhancements such that you will receive lower royalties that anticipated.
45 – 60 Minutes
Attorney Doug Clark takes the opportunity in this short segment of All Things Marcellus to explain the legal services he provides and the value of contract reviews and representation by an experienced oil and gas attorney. As All Things Marcellus listeners know, the Clark Law Firm does not represent oil and gas or pipeline companies, but represents Pennsylvania property owners and gas right owners for all matters relating to Pennsylvania natural gas development. If property owners or royalty owners feel they have a claims for breach of contract or any other claim against an energy company, they should call the Clark Law Firm and learn about the review and consultation and other oil and gas representation service. Doug explains the value of honest straightforward advice and a skilled lawyer working and fighting for you. Good lawyer will identify weaknesses and strengths in any case or contract negotiation and relay this information to their client. The Clark Law Firm has helped many Pennsylvania landowners and royalty owners and you should give them a call to see if they can help you. Remember, oil and gas companies have skilled attorneys working for them, you should too.