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Friday, December 2, 2011

A Layman's Guide to Oil and Gas Leases

Learning Too Late of the Perils in Gas Well Leases

After Scott Ely and his father talked with salesmen from an energy company about signing the lease allowing gas drilling on their land in northeastern Pennsylvania, he said he felt certain it required the company to leave the property as good as new.

So Mr. Ely said he was surprised several years later when the drilling company, Cabot Oil and Gas, informed them that rather than draining and hauling away the toxic drilling sludge stored in large waste ponds on the property, it would leave the waste, cover it with dirt and seed the area with grass. He knew that waste pond liners can leak, seeping contaminated waste.

“I guess our terms should have been clearer” about requiring the company to remove the waste pits after drilling, said Mr. Ely, of Dimock, Pa., who sued Cabot after his drinking water from a separate property was contaminated. “We learned that the hard way.”

Americans have signed millions of leases allowing companies to drill for oil and natural gas on their land in recent years. But some of these landowners — often in rural areas, and eager for quick payouts — are finding out too late what is, and what is not, in the fine print.

Energy company officials say that standard leases include language that protects landowners. But a review of more than 111,000 leases, addenda and related documents by The New York Times suggests otherwise:

¶ Fewer than half the leases require companies to compensate landowners for water contamination after drilling begins. And only about half the documents have language that lawyers suggest should be included to require payment for damages to livestock or crops.

¶ Most leases grant gas companies broad rights to decide where they can cut down trees, store chemicals, build roads and drill. Companies are also permitted to operate generators and spotlights through the night near homes during drilling.

¶ In the leases, drilling companies rarely describe to landowners the potential environmental and other risks that federal laws require them to disclose in filings to investors.

¶ Most leases are for three or five years, but at least two-thirds of those reviewed by The Times allow extensions without additional approval from landowners. If landowners have second thoughts about drilling on their land or want to negotiate for more money, they may be out of luck.

The leases — obtained through open records requests — are mostly from gas-rich areas in Texas, but also in Maryland, New York, Ohio, Pennsylvania and West Virginia.

In Pennsylvania, Colorado and West Virginia, some landowners have had to spend hundreds of dollars a month to buy bottled water or maintain large tanks, known as water buffaloes, for drinking water in their front yards. They said they learned only after the fact that the leases did not require gas companies to pay for replacement drinking water if their wells were contaminated, and despite state regulations, not all costs were covered.

Thousands of landowners in Virginia, Pennsylvania and Texas have joined class action lawsuits claiming that they were paid less than they expected because gas companies deducted costs like hauling chemicals to the well site or transporting the gas to market.

Some industry officials say the criticism of their business practices is misguided. Asked about the waste pits on Mr. Ely’s land in Pennsylvania, for example, George Stark, a Cabot spokesman, said the company’s cleanup measures met or exceeded state requirements. And the door-to-door salesmen, commonly known as landmen, who pitch the leases on behalf of the drilling companies also dismiss similar complaints from landowners, and say they do not mislead anyone.

The Sales Pitch

“There are bad leases out there, and, as with any industry, there have also been some unscrupulous opportunists,” said Mike Knapp, president of Knapp Acquisitions and Production, a company in western Pennsylvania that brokers deals between landowners and drilling companies. “But everyone I know who does this work is on the up and up, and most of the bad actors that there may have been before are no longer in business.”

He said that his company’s leases ensure that landowners will get replacement water. The company also encourages landowners to visit an existing drilling site before signing a lease to get an idea of the potential noise and truck traffic. Some of the complaints about leases, he said, are just sour grapes from landowners who are envious about the amount of money they believe their neighbors are earning in bonuses and royalties.

To be sure, many landowners have earned small fortunes from drilling leases. Last year, natural gas companies paid more than $1.6 billion in lease and bonus payments to Pennsylvania landowners, according to a report commissioned by the Marcellus Shale Coalition, an industry trade group. Chesapeake Energy, one of the largest natural gas companies, has paid more than $183.8 million in royalties in Texas this year, according to its Web site.

Much of the money has gone to residents in rural areas where jobs are scarce and farmers and ranchers have struggled to stay afloat. Mr. Ely once worked for a company owned by Cabot on drilling sites in his area, until he was fired shortly after publicly complaining about Cabot’s drilling practices.

But many landowners and lawyers say that gas companies are intentionally vague in their contracts and use high-pressure sales tactics on landowners.

“If you’ve never seen a good lease, or any lease, how are you supposed to know what terms to try to get in yours?” said Ron Stamets, a drilling proponent and a Web site developer in Lakewood, Pa., who started a consumer protection Web site,, in 2008 so that he could swap advice with his neighbors as he prepared to sign a gas lease. Others have also taken steps to better inform landowners about the details in leases. In the past several years, the attorneys general in New York, Ohio and Pennsylvania have published advisories about the pitfalls of leasing land for drilling.

State regulations also provide protections to landowners above and beyond what is in their leases.

At least eight states specifically require companies to compensate landowners for damage to their properties or to negotiate with them about where wells will be drilled, even if the lease does not provide those protections.

Asked about the leases, officials from Exxon Mobil, the largest natural gas producer in the United States, declined to comment.

Protecting Landowners

Jim Gipson, a spokesman for Chesapeake Energy, said any claims of damage can be investigated by the state and federal authorities and, he added, noise or other disturbances that may come with drilling tend to be brief.

“The most frequently asked question we receive from our mineral owners is, ‘When are you going to drill my well?’ ” he said.

Mr. Gipson said that most leased properties do not end up having a well placed on them, so those leases do not need added protections. But some consumer advocates and lawyers say that protections are needed for all leased properties, even those without wells, because drilling may occur underneath them. These advocates also say that landowners’ eagerness to start earning royalties has made them vulnerable to deceptive tactics by landmen.

“We’re in town until tomorrow,” the landmen typically say, according to interviews with more than two dozen landowners in Ohio, Texas and Pennsylvania. “We have already signed up all your neighbors.”

The landmen then claim that if you do not sign right away you will miss out on easy income because other drillers will simply pull the gas from under your property using a well nearby.

Some landmen show up in poorer areas shortly before the holidays, offering cash on the spot for signing a lease. They might offer thousands of dollars per acre as a bonus to be paid shortly after the lease is signed. Royalties, which usually run between 12.5 percent and 20 percent of what the companies make for selling the gas, can mean tens of thousands of dollars per year for landowners.

Jack Richards, president of the American Association of Professional Landmen, said his members follow a strict code of ethics. His organization also encourages landowners to ask questions before they sign leases, he said.

“We promote open and honest communication between the landman and landowner before signing the lease,” he said, adding that the standard lease forms are written with some protections for landowners.

Some leases, however, also include language that comes back to haunt landowners.

“I thought I knew what the sentence meant,” said Dave Beinlich, describing a section that said that “preparation” to drill was enough to allow Chief Oil and Gas to extend the duration of his lease.

In 2005, Mr. Beinlich and his wife, Karen, signed a lease for $2 an acre per year for five years on 117 acres in Sullivan County in north-central Pennsylvania. They soon realized they had gotten far less money than their neighbors, so they planned on negotiating a new lease when theirs expired in 2010.

A day before their lease term ended, no well had been drilled on their land, but the gas company parked a bulldozer nearby and started to survey an access road. A company official informed them that by moving equipment to the site, Chief Oil and Gas was preparing to drill and was therefore allowed to extend the lease indefinitely.

The Beinlichs have sued. Kristi Gittins, a vice president at Chief Oil and Gas, says that the company does not comment on pending litigation, but that its goal is to produce gas and it makes an honest attempt to develop the land it leases.

“Lease contracts work both ways,” she added. “Chief honors the terms of its lease contracts, and we expect the landowners who have signed the lease contract to honor the terms of the contract as well.”

But lawyers say that drilling leases are not like other contracts.

“You’re not buying a refrigerator or signing a car note,” said David McMahon, a lease lawyer in Charleston, W.Va., and co-founder of the West Virginia Surface Owners’ Rights Organization, adding that once a well is drilled, it can produce gas for decades, locking landowners into the lease terms.

“With a gas lease, you’re permitting industrial activity in your backyard, and you’re starting a relationship that will affect the quality of living for you and your grandchildren for decades,” he said.

Mr. McMahon and other lease lawyers say that unlike many contracts, oil and gas leases are covered by few consumer protection laws, in part because drilling has been most common in states with less regulation.

Clauses With Consequences

“When it comes to negotiation skills and understanding of lease terms, there is a gaping inequality between the average landman and the average citizen sitting across the table,” said Chris Csikszentmihalyi, a researcher at the Massachusetts Institute of Technology who created a Web site last year called the Landman Report Card that allows landowners to review landmen’s professionalism and tactics.

Some lawyers also say that there are major differences between what drilling companies tell landowners and what they must disclose to investors.

Under federal law, oil and gas companies must offer investors and federal regulators detailed descriptions of the most serious environmental and other risks related to drilling. But leases typically lack any mention of such risks.

In New York, the duration of leases has been an especially contentious issue.

As leases near expiration, some gas companies try to extend them, often by invoking “force majeure,” a legal term referring to an unforeseen event that prevents the two sides from fulfilling an agreement.

In these instances, gas companies say the unforeseen event is the state’s repeated delays in releasing environmental regulations and issuing drilling permits.

Force majeure clauses appear in as many as half the roughly 3,200 New York leases reviewed by The Times.

Another important lease term is the Pugh Clause, said Lance Astrella, a lease lawyer in Denver. It is named after Lawrence Pugh, a Louisiana lawyer who started adding it to leases in 1947 to ensure that they would not be extended indefinitely without wells being drilled.

Fewer than 20 percent of the more than 100,000 Texas leasing documents reviewed by The Times include such a clause, and very few of the leases from Maryland, New York, Ohio, Pennsylvania and West Virginia include the language. While the leases collected by The Times represent a small fraction of the more than 8 million oil and gas leases in the United States, experts said they illustrated issues that landowners need to understand.

Mr. Astrella said that leases also typically lacked a clause requiring drillers to pay for a test of the property’s well water before drilling started, and landowners often do not think to do the tests themselves. If drilling leads to problems with drinking wells, landowners have few options if they want to prove that their water was fine before drilling started.

For some landowners, it can be a costly mistake.

“It’s been one expense after another since our water went bad, and the company only has to cover part of it,” said Ronald Carter, 72, of Montrose, Pa. Mr. Carter and his wife, Jean, said they signed a lease in 2006 for a one-time fee of $25 per acre on their 75 acres and annual royalty payments of 12.5 percent.

The Carters live on $3,500 a month, including the $1,500 per month they average in gas royalties. But they had to spend $7,000 to install a water purifier when their drinking supply became contaminated in 2009 after drilling near their property.

The Carters joined a lawsuit with about a dozen neighbors, including Mr. Ely, accusing Cabot Oil and Gas of contaminating their drinking water.

Mr. Stark, the Cabot spokesman, said that his company was not responsible for any water contamination in the area and that Cabot’s studies showed that the gas seepage into the drinking water was occurring naturally.

“All the testing we have been able to conduct show the water meets federal safe drinking water standards,” Mr. Stark said.

In 2009, Pennsylvania ordered Cabot to provide the affected residents with water. For the Carters, the company has paid for bottled water and for the installation of a water buffalo next to their trailer. Mr. Stark added that his company had offered to pay for treatment systems to remove gas if it leaked into their drinking water.

Mr. Carter said that even though Cabot had paid to provide him with bottled water and a water buffalo, he can barely afford his electricity bill, which doubled because he has to heat the water buffalo to make sure it does not freeze.

Those expenses may soon go up.

On Wednesday, Cabot stopped delivering water to the Carters, the Elys and others in Dimock after state regulators said the company had satisfied requirements of a settlement agreement with the state.

“It’s a little late now,” Mr. Carter said. “But there are a lot things I’d like to have done different with that lease.”

Jeremy Ashkenas and Kitty Bennett contributed research.

Lawyers and consumer advocates say that leases often contain or lack fine print that landowners should not overlook in signing leases. Here are some examples of key clauses that landowners have come to regret:

Key Clauses in Many Leases

FORCE MAJEURE Typically refers to natural disasters or other events that are beyond a company’s control and can delay drilling plans. In New York, gas companies have used it to argue that leases should be extended beyond their original terms because of the state’s moratorium on certain types of gas drilling.

ASSIGNMENT CLAUSE Allows a company to sell or transfer a lease to another company. Some landowners have complained that their leases have been sold to companies that are financially unstable or have poor environmental records.

ON-SITE STORAGE Some leases allow the energy company to use land for underground storage of gas or drilling waste, sometimes from another property.

PITS Many leases allow companies to place drilling waste into pits on the landowners’ property. Some lawyers say that leases should explicitly prohibit waste pits.

EXTENSION OF LEASE Leases are typically for three to five years, but they often include clauses that allow the drilling company to extend the leases even if landowners want to renegotiate or cancel them.

POST-PRODUCTION COSTS Some leases include language that allows the company to deduct certain costs of producing the gas before paying royalties.

Key Clauses Often Omitted

WATER TESTING CLAUSE Some lawyers say that landowners should add language requiring energy companies to pay for independent testing of the landowners’ drinking supply before they drill so that investigators can determine the origin of any contamination that might occur.

PUGH CLAUSE Protects landowners from gas companies indefinitely holding rights to an entire parcel, even if only a small part of it is being used for gas drilling.

INDEMNIFICATION CLAUSE Lawyers recommend that leases contain language exempting the landowner from all forms of liabilities stemming from the company’s activities.

FACILITIES CLAUSE Often establishes the “setbacks,” or the distances that are required between drilling activity and houses, roads, wells or other structures on the property. Without them, the lease may violate mortgage rules that dictate how certain properties can be used.

Saturday, May 8, 2010

New U.S. Push to Regulate Internet Access


WASHINGTON—In a move that will stoke a battle over the future of the Internet, the federal government plans to propose regulating broadband lines under decades-old rules designed for traditional phone networks.

The decision, by Federal Communications Commission Chairman Julius Genachowski, is likely to trigger a vigorous lobbying battle, arraying big phone and cable companies and their allies on Capitol Hill against Silicon Valley giants and consumer advocates.

Breaking a deadlock within his agency, Mr. Genachowski is expected Thursday to outline his plan for regulating broadband lines. He wants to adopt "net neutrality" rules that require Internet providers like Comcast Corp. and AT&T Inc. to treat all traffic equally, and not to slow or block access to websites.

Amy Schatz and Spencer Ante discuss the federal government's plan to propose regulating broadband lines under decades-old rules designed for traditional phone networks. Plus, a live report from the Web 2.0 event and Yahoo's new ad blitz.
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* Digits: Appeals Court Deals Blow to Net Neutrality (04/06/10)

The decision has been eagerly awaited since a federal appeals court ruling last month cast doubt on the FCC's authority over broadband lines, throwing into question Mr. Genachowski's proposal to set new rules for how Internet traffic is managed. The court ruled the FCC had overstepped when it cited Comcast in 2008 for slowing some customers' Internet traffic.

In a nod to such concerns, the FCC said in a statement that Mr. Genachowski wouldn't apply the full brunt of existing phone regulations to Internet lines and that he would set "meaningful boundaries to guard against regulatory overreach."

Some senior Democratic lawmakers provided Mr. Genachowski with political cover for his decision Wednesday, suggesting they wouldn't be opposed to the FCC taking the re-regulation route towards net neutrality protections.

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FCC Chairman Julius Genachowski, whose authority over broadband lines has been questioned by a federal court, plans to use regulation on traditional phone networks to establish rules for Internet providers.

"The Commission should consider all viable options," wrote Sen. Jay Rockefeller (D, W.V.), chairman of the Senate Commerce Committee, and Rep. Henry Waxman (D, Calif.), chairman of the House Energy and Commerce Committee, in a letter.

At stake is how far the FCC can go to dictate the way Internet providers manage traffic on their multibillion-dollar networks. For the past decade or so, the FCC has maintained a mostly hands-off approach to Internet regulation.

Internet giants like Google Inc., Inc. and eBay Inc., which want to offer more Web video and other high-bandwidth services, have called for stronger action by the FCC to assure free access to websites.

Cable and telecommunications executives have warned that using land-line phone rules to govern their management of Internet traffic would lead them to cut billions of capital expenditure for their networks, slash jobs and go to court to fight the rules.

Consumer groups hailed the decision Wednesday, an abrupt change from recent days, when they'd bombarded the FCC chairman with emails and phone calls imploring him to fight phone and cable companies lobbyists.

"On the surface it looks like a win for Internet companies," said Rebecca Arbogast, an analyst with Stifel Nicolaus. "A lot will depend on the details of how this gets implemented."

Mr. Genachowski's proposal will have to go through a modified inquiry and rule-making process that will likely take months of public comment. But Ms. Arbogast said the rule is likely to be passed since it has the support of the two other Democratic commissioners.

President Barack Obama vowed during his campaign to support regulation to promote so-called net neutrality, and received significant campaign contributions from Silicon Valley. Mr. Genachowski, a Harvard Law School buddy of the president, proposed new net neutrality rules as his first major action as FCC chairman.

Telecom executives say privately that limits on their ability to change pricing would make it harder to convince shareholders that the returns from spending billions of dollars on improving a network are worth the cost.

Carriers fear further regulation could handcuff their ability to cope with the growing demand put on their networks by the explosion in Internet and wireless data traffic. In particular, they worry that the FCC will require them to share their networks with rivals at government-regulated rates.

Mike McCurry, former press secretary for President Bill Clinton and co-chair of the Arts + Labs Coalition, an industry group representing technology companies, telecom companies and content providers, said the FCC needs to assert some authority to back up the general net neutrality principles it outlined in 2005.

"The question is how heavy a hand will the regulatory touch be," he said. "We don't know yet, so the devil is in the details. The network operators have to be able to treat some traffic on the Internet different than other traffic—most people agree that web video is different than an email to grandma. You have to discriminate in some fashion."

UBS analyst John Hodulik said the cable companies and carriers were likely to fight this in court "for years" and could accelerate their plans to wind down investment in their broadband networks.

"You could have regulators involved in every facet of providing Internet over time. How wholesale and prices are set, how networks are interconnected and requirements that they lease out portions of their network," he said.
—Niraj Sheth, Spencer E. Ante, Sara Silver and Nat Worden contributed to this article.

Thursday, January 21, 2010

Supreme Court Strikes Down Corp.Campaign Spending Bans

Corporations have re-acquired their First Amendment rights to free speech.The Supreme Court ruled this morning that corporations may spend as freely as they like to support or oppose political candidates, and struck down a big part of the McCain-Feingold limits on business spending on federal campaigns. Amazingly the reason for the ruling had nothing to do with a campaign ad, but it was a movie critical of Hilary Clinton, that accused her of breaking campaign law.

By a 5-4 vote, the court overturned a 20-year-old ruling that said companies can be prohibited from using money from their general treasuries to produce and run their own campaign ads. The decision, which almost certainly will also allow labor unions to participate more freely in campaigns, threatens similar limits imposed by 24 states. (note the full ruling of the SCOTUS is embedded below)

It leaves in place a prohibition on direct contributions to candidates from corporations and unions, but companies are allowed to create and run their own advocacy commercials as much as they would like.

Critics of the stricter limits have argued that they amount to an unconstitutional restraint of free speech, and the court majority agreed. "The censorship we now confront is vast in its reach," Justice Anthony Kennedy said in his majority opinion, joined by his four more conservative colleagues.

Strongly disagreeing, [Liberal] Justice John Paul Stevens said in his dissent, "The court's ruling threatens to undermine the integrity of elected institutions around the nation."

Justices Ruth Bader Ginsburg, Stephen Breyer and Sonia Sotomayor joined Stevens' dissent, parts of which he read aloud in the courtroom.

This marks Justice Sotomayor's first SCOTUS case and her first attempt to legislate against the constitution from the highest court of the land.

The justices also struck down part of the landmark McCain-Feingold campaign finance bill that barred union- and corporate-paid issue ads in the closing days of election campaigns.

Advocates of strong campaign finance regulations have predicted that a court ruling against the limits would lead to a flood of corporate and union money in federal campaigns as early as this year's midterm congressional elections.

"It's the Super Bowl of bad decisions," said Common Cause president Bob Edgar, a former congressman from Pennsylvania.

The decision removes limits on independent expenditures that are not coordinated with candidates' campaigns.

The case does not affect political action committees, which mushroomed after post-Watergate laws set the first limits on contributions by individuals to candidates. Corporations, unions and others may create PACs to contribute directly to candidates, but they must be funded with voluntary contributions from employees, members and other individuals, not by corporate or union treasuries.

Chief Justice John Roberts and Justices Samuel Alito, Antonin Scalia and Clarence Thomas joined Kennedy to form the majority in the main part of the case.

Roberts, in a separate opinion, said that upholding the limits would have restrained "the vibrant public discourse that is at the foundation of our democracy."

The Point is the only people that should be limiting the freedom of speech of corporations is the shareholders who pay their bills and the customers who can take their business elsewhere.

The case began when a conservative group, Citizens United, made a 90-minute movie that was very critical of Hillary Rodham Clinton as she sought the Democratic presidential nomination. Citizens United wanted to air ads for the anti-Clinton movie and distribute it through video-on-demand services on local cable systems during the 2008 Democratic primary campaign.

But federal courts said the movie looked and sounded like a long campaign ad, and therefore should be regulated like one.

The movie was advertised on the Internet, sold on DVD and shown in a few theaters. Campaign regulations do not apply to DVDs, theaters or the Internet.

The court first heard arguments in March, then asked for another round of arguments about whether corporations and unions should be treated differently from individuals when it comes to campaign spending.

The justices convened in a special argument session in September, Sotomayor's first. The conservative justices gave every indication then that they were prepared to take the steps they did on Thursday.

The justices, with only Thomas in dissent, did uphold McCain-Feingold requirements that anyone spending money on political ads must disclose the names of contributors.