In this week’s episode of All Things Marcellus, Attorney Doug Clark explains how low natural gas prices and a lack of active drilling rigs may present gas leasing and other opportunities for Pennsylvania royalty owners can.


Doug initially explains how negotiated pipeline right-of-way option agreements may present future opportunities or property owners in times of low gas prices. For example, Doug explains that negotiated pipeline option agreements should reduce the time period for the company to exercise the option and construct the pipeline.  If natural gas prices fall and drilling does not occur as planned, pipeline companies may seek to extend the pipeline option period.  This scenario puts the landowner in an excellent leverage position to re-negotiate compensation and even address the underlying terms of the option agreement.


Doug reminds listeners how he recently discussed the need to negotiate pipeline option agreements for the shortest option term. If all surrounding landowners have a five-year option term, and you have negotiated a two-year option term, you may be able to take advantage of a down market to negotiate much higher consideration in exchange for extending your shorter two-year option period to coincide with your neighbors’ five-year option terms.  When gas markets decline sharply pipeline companies will not install pipelines as quickly anticipated when the pipeline agreement was signed.  This means that pipeline companies must extend option agreements or be forced to negotiate new pipeline agreement that have expired due to a lack of pipeline installation activity. This is just one example of how low natural gas prices may present opportunities for property owners relative to pipeline option agreements.


Tioga County and Vertical Wells “Holding” Leases by “Production”

Attorney Clark also talks extensively about Tioga County royalty owners who are being “held by production” by annual shut-in royalty payments made in lieu of receiving gas production royalties. When horizontal drilling stops and rigs are laid down, gas companies are pressed to extend the oil and gas leases in any way possible or negotiate a new lease to develop the property. Doug believes that when natural gas prices dive and drilling and production are cut, gas companies become “creative” in interpreting the lease’s development requirements.  When multi-millions of dollars are at stake, gas companies understandably may be desperate to avoid re-leasing property with new per-acre bonus payments and higher royalty rates.


There are many leases in Tioga County that were signed between the years 2000 and 2007 that are allegedly “held by production” solely by virtue of a vertical Marcellus Shale Well that is not producing gas and is not connected to a pipeline.  This is unacceptable.  These vertical Marcellus Shale wells are not generating royalty payments but purport to hold otherwise expired leases.  Instead of gas production royalties, royalty owners receive yearly shut-in checks as companies’ attempt to maintain the lease.  Doug believes that many Tioga County leases can no longer be held by SWEPI, LP, Tilden, Rockdale and other companies solely by shut-in checks.  However, when royalty owners’ cash shut-in checks, they may be ratifying their gas lease and extending an otherwise terminated lease.


Attorney Clark recommends that any royalty owner who is receiving annual shut-in checks for several years from SWEPI, LP or others to contact The Clark Law Firm for a review and consultation regarding the status of their gas lease.  The Clark Law Firm has secured the release of several Tioga County Oil and Gas Leases and is working diligently to have expired leases terminated and the gas rights returned to the property for future leasing opportunities.


Doug reminds landowners that older leases were typically signed at the Pennsylvania guaranteed minimum royalty rate of 12.5%.  Typically, today’s leasing market involves 15% royalty or higher.  However, when royalty owners cash the yearly shut-in checks, companies will argue the royalty owner is consenting that they have a valid lease, or they are ratifying the company’s position that the lease is valid when they cash the shut-in check.  Attorney Clark recommends that any Tioga County royalty owner who is receiving annual shut-in checks for several years from SWEPI, LP contact the Clark law Firm immediately for a review and consultation regarding the status and validity of their gas lease.  Doug’s goal is for all terminated Tioga County oil and gas leases to be released and surrendered at the courthouse.


Royalty owners should take action to terminate their old lease and have the lease surrendered.  Royalty owners can simultaneously attempt to negotiate a new lease or simply fight to have their existing lease surrendered and look to negotiate a new lease when the market improves.   Even if a new lease is not available at the present time or the leasing market is poor, it is better to terminate your old lease so that you were able to immediately negotiate when the leasing market improves.  Attorney Clark believes companies pray on people’s complacency and we must take action to have Tioga County terminated lease is released and surrendered.


Doug explains how this shut-in royalty payment “scheme” is used extensively in Tioga County to hold leases that may have expired. Attorney Clark’s practices oil and gas law across Pennsylvania, and he has not seen this shut-in payment “scheme” anywhere else in the state.  Tioga County royalty owners must fight to invalidate expired leases and not continue to simply accept shut-in payments.  Call Doug Clark today to learn about his review and consultation services on this issue.


Buying and Selling Oil and Gas Rights in Low Gas Price Markets

Attorney Clark also explains how low natural gas prices, lack of drilling and low gas production may create opportunities for investors who seek to permanently purchase oil and gas rights. There have been many landowners who were promised huge royalty proceeds by the landman only to find out decades later that they have received no production royalty payments whatsoever. When they landowner is under lease for 10 or 20 years and has yet to receive a royalty check, they understandably become very frustrated.  This frustration creates an ideal opportunity for investors to seek to permanently buy that royalty owners oil and gas rights. Buy forever!  The investor, or their landman agent, may make arguments to the royalty owner that the gas prices are so low and the future is so uncertain that the royalty owners should sell their oil and gas rights now and get what money they can before the market gets worse.


The investor seeking to buy your oil and gas rights will argue that they are doing you a huge favor by taking on an enormous risk when the gas prices are so low, and companies are not drilling new horizontal wells. The investor will then argue that because of this great risk they are taking, they are only able to offer a small amount of per-acre money to permanently buy your oil and gas rights. Because the royalty owner is frustrated that they have never received production royalties despite landman promises years before, they elect to sell their oil and gas rights at far below their actual value. This is an example were low natural gas prices and a lack of drilling creates an opportunity for investors, not royalty owners.  Royalty owners must recognize this situation and not allow frustration to push them into a bad agreement to permanently sell their oil and gas rights.


The final segment of All Things Marcellus addresses Tioga County royalty owners directly. Doug recommends that royalty owners receiving shut-in checks in the year 2020 call The Clark Law Firm for a review and consultation to determine whether they have a case to terminate their oil and gas lease.  These gas lease reviews with an in-person or telephone consultation usually takes 1-2 hours.  Doug believes many SWEPI, LP leases have terminated and can no longer be held by vertical wells that do not produce gas and are not even connected to a pipeline. Attorney Clark has already had several Tioga County leases released and surrendered and wants to identify every Tioga County lease possible for termination and surrender. Tioga County royalty owners must act and not blindly cash shut-in checks and hope for a better future.


Also, royalty owners are now receiving scary letters threatening to have uncashed shut-in checks proceeds surrendered to the state.  Doug again recommends that any landowners receiving these notice letters should contact his office to determine the best course of action.  Tioga County must not simply accept low gas prices as a basis for shut-in checks and no royalties.  Instead, they must see low natural gas prices, no drilling and no gas production as a potential opportunity to have their oil and gas lease surrendered so that they may enter a more favorable lease in the future.