TO DRILL OR NOT TO DRILL - THAT IS THE QUESTION
With the introduction of Marcellus Shale drilling, a landowner is presented with a dilemma - should I wait for another day or sign the lease. Unfortunately, no one can predict the future and the decision falls upon the landowner to consider all the issues.
The landowner and the oil and gas producer become, in a sense, a partnership. The relationship is defined within the lease agreement (and so are the landowner's rights, responsibilities, and risks). The decisions made require a thorough understanding of the implications of the oil and gas drilling.
Besides the lease terms, the landowner must also examine tax and estate planning considerations: ordinary income and capital gains, depreciation and depletion, and federal estate and Pennsylvania inheritance taxes. Taxes will affect the landowner's rate of return.
So let's consider some of the questions, issues, and concerns:
•· Well sites (distance from existing buildings), pipeline placement (laying technique and depth), and roads (location and damages to farmland, crops, and improvements) should be addressed within the lease.
•· Effect on the valuation of the real property.
•· Duration of the lease - delay rental payments, dry hole provisions, secondary term (whether drilling occurs on your property or a drilling unit), option to extend the lease.
•· Damages to crops, farmland, timber, and improvements - valuation of the crop damage (number of years), surface implications (maintenance of roads before and after drilling), depth of the pipelines that affect farming operations, fences and gates around drilling equipment or roads.
•· Liability insurance to protect you on your property and any drilling unit of which you are a part.
•· Access to books and records of the drilling company to determine the sales and the calculation of your royalty payments.
•· Water contamination - considerations for both you and your neighbors.
•· Indemnification - whether the gas company will indemnify you against lawsuits entered by your neighbors or the government.
•· Rights to free gas and water that the gas company might use in its operations.
•· Rights to free gas to the landowner - now and other units that may be constructed in subsequent years.
•· Amount of royalties - for example, the percentage rate may differ from neighbor to neighbor, and the number of acres the landowner has within the drilling unit.
•· Duties on the part of the gas company to fulfill the obligations under the lease - including value to pay royalties, shut-in provisions, and lawsuits.
•· Roads - payment for the road (now, and in subsequent years), location, joint use of the roads, maintenance of the roads.
•· Ponds - holding ponds located on landowners property whether it affects the landowner or the drilling unit.
•· Assignment of a lease - the right to consent to the change of drilling companies.
Remember, a lease represents a legal agreement that is enforceable. Careful review and understanding of the lease provisions is a necessity before execution.
If you would like more information about Pennsylvania Elder Law, Business Law or Tax Law, please contact an experienced Pennsylvania Attorney is who is also a Certified Public Accountant (CPA) via email or phone us at (724) 832.7171 at our Greensburg, Pennsylvania office.
The Iezzi Law Office serves clients in southwestern Pennsylvania, including Greensburg, Pittsburgh, Delmont, Monroeville, Latrobe, Irwin, Uniontown, Connellsville, Indiana, Somerset, including Westmoreland County, Allegheny County, Fayette County, Indiana County, and Somerset County.
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IRS CIRCULAR 230 DISCLOSURE:
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
