Understanding Your Leverage and Rights in Pipeline Right‐of‐Way, Water Impoundment Pond, and Compressor Station Agreement Negotiations
I have negotiated hundreds of Pipeline Right‐of‐Way Agreements with approximately 50 different companies across Pennsylvania. I have also negotiated Water Impoundment Pond and Compressor Station Agreements on behalf of Landowner clients in the Marcellus Shale regions of Pennsylvania. There are many issues and concerns that a Landowner must consider when considering a Pipeline Right‐of‐Way Agreement or a Surface Use Agreement permitting a Water Impoundment Pond or Compressor Station on their property.
Location and Compensation First
With the exception of Oil and Gas Lease negotiations, I often talk to clients about first establishing location and compensation in determining how seriously to consider an offer by a gas company, pipeline company, or other Marcellus Shale entity. If the Landowner is unhappy with the location of the pipeline easement or other proposed facility that they have the ability to refuse, the Landowner should simply reject the offer unless the location of the activity can be moved to an acceptable area. Similarly, if the offered compensation is not acceptable, the Landowner and their attorney should first attempt to reach an agreement on the compensation for the project. If an agreement on location and compensation cannot be reached, the Landowner should reject the offer and avoid wasting time and incurring expenses.
An acceptable location for a proposed Pipeline Easement, Water Impoundment Pond or Compressor Station is easily reviewed by the Landowner to determine whether the proposed location is acceptable. Prior to seriously considering any offer, the Landowner should obtain a map depicting the proposed location of the activity or easement. If the location is agreeable, the Landowner may desire to proceed to address financial compensation and then enter into further detailed negotiations addressing the language of the proposed agreement.
With regard to compensation, the Landowner must understand their leverage and the market price of Pipeline Easements, Water Impoundment Ponds, Compressor Stations or other similar facilities in their region. Evaluating leverage is a difficult process in most cases and Landowners should seek experienced legal counsel to assist them in this extremely important part of the negotiation process. Most Landowners I speak with have either overvalued or undervalued their leverage. A mistake in evaluating leverage can cost Landowners thousands or even hundreds of thousands of dollars. There is truly an art to evaluating Landowner leverage and it is very difficult to evaluate leverage without a wealth of experience from prior negotiations. Do not go through this leverage evaluation process on your own.
Understanding Your Gas Lease and Leverage in Pipeline Negotiations
My first step in representing Landowners in Pipeline Right‐of‐Way Agreement negotiations is always to determine what natural gas pipelines, above ground facilities, or other activity is permitted under the terms of their Oil and Gas Lease. Understanding what is permitted under your existing gas lease is absolutely critical. Remember, Landowners cannot rely on the gas or pipeline company Landman to advise them what is permitted or not permitted under their Oil and Gas Lease. I routinely encounter cases where Landowners wrongly believe a certain activity is permitted under the terms of their Oil and Gas Lease. This incorrect understanding leads to unwanted pipeline easements and pipelines installed at significantly lower compensation rates than available. Do not make this mistake.
Pipeline Right‐of‐Way Leverage Example
The following is an excellent example of misinterpreting an Oil and Gas Lease relative to pipeline installation rights:
In many gas leases pipelines are permitted as long as those pipelines carry oil and gas from a production unit which includes the Landowner’s property, but the gas lease precludes third‐party or foreign gas from being transported through the pipeline. Thus
when the Landman advises the Landowner that their Oil and Gas Lease permits gas or water pipelines, this is true, but in a very limited fashion. It is absolutely vital that the Landowner understand exactly what is authorized under the terms of their gas lease and not rely on the interpretation provided by a Landman working for the company. The information provided by the Landman may be selectively correct and mislead the Landowner into believing they have no leverage to either say “No” to the offer or negotiate higher compensation and better terms. Landowners must have their own independent evaluation performed by a knowledgeable and experienced attorney to fully understand their rights. A mistake in this area may be very costly.
Understanding Water Impoundment Pond and Compressor Station Leverage
Landowners have similar but additional considerations when considering an offer for a Water Impoundment Pond or Compressor Station. One fundamental difference is that typically the gas or pipeline company has absolutely no right to install a Water Impoundment Pond or Compressor Station under the terms of an existing gas lease. Accordingly, the Landowner can simply say “no” or quickly turn their attention to the compensation offered to determine whether an agreement can be reached.
When considering these agreements, a Landowner will typically have a specific compensation figure that they will approve in order to enter into a Water Impoundment Pond or Compressor Station Agreement. Compensation for Water Impoundment Ponds or Compressor Stations must be substantial as they will have long term serious consequences for your property. Landowners should not set their compensation sites too low when considering these offers.
However, should the gas company have several alternative sites within close proximity of the Landowner’s property, the gas company will look to other Landowners in the region to determine who will accept the lowest possible compensation package. The Landman will work regional Landowners against each other to obtain the best possible agreement for the company. It is very important in these cases that the Landowner understand the regional compensation market for Water Impoundment Pond and
Compressor Station Agreements. In other words, the Landowner must attempt to determine what financial offers the company has previously made to other Landowners and what compensation have Landowners in their region accepted in the past.
If a Landowner’s financial demand is well in excess of the market price paid in their region, the company will most likely aggressively seek alternative sites that they may obtain for a cheaper cost. Of course, if all Landowners in the region were to say “No” to the standard compensation offered, the gas company would have no alternative but to increase their compensation offer.
The more alternative sites that the gas company may have for a proposed Water Impoundment Pond, Compressor Station or Pipeline Easement, the more options they will have with respect to Landowners who may be agreeable to lower compensation. It is the law of supply and demand. Alterative locations for facilities are crucial for the company to obtain the cheapest agreements. However, when alternatives are limited, or do not exist, the Landowner stands in a great position to negotiate high compensation and a strong agreement.
Experienced Attorney Highly Recommended
This statement may sound self‐serving, but it is true. It is very important that Landowners have a knowable and experienced oil and gas attorney to assist them when considering Pipeline Right‐of‐Way, Water Impoundment Ponds, Compressor Stations, Roadway Agreements and all other oil and gas contract offers. Experienced and knowledgeable counsel will provide the Landowner credible and reliable information and will maximize the negotiation process for the Landowner to obtain the best possible agreement.
Douglas A. Clark, Esq. ‐ Protecting Pennsylvania Landowners