CCE Natural Gas Leasing

Natural gas exploration poses opportunities for rural economic development in New York and can provide a cleaner burning fossil fuel to meet future energy demands. However, gas development can create challenges for the relationship between private landowners and gas exploration companies. The most common first point of contact is during the gas leasing process. Landowners who understand the gas exploration and leasing process will make better decisions for their land and families. Assistance from public and private natural resource and legal professionals can prevent complex legal circumstances and unwanted impacts to natural resources.

Although natural gas has been extracted from underground sources in New York since the early 1800’s, new technology is making gas extraction from deep reserves more economically feasible. It is becoming more evident that the increasing demand for cleaner domestic energy will bring about continuing exploration. The gas industry is seeking points of access to potentially high volume reservoirs of natural gas (called “plays”) located far below the hills and valleys of the Finger Lakes, Central New York, and the Southern Tier.

Although natural gas has been extracted from underground sources in New York since the early 1800’s, new technology is making gas extraction from deep reserves more economically feasible. It is becoming more evident that the increasing demand for cleaner domestic energy will bring about continuing exploration. The gas industry is seeking points of access to potentially high volume reservoirs of natural gas (called “plays”) located far below the hills and valleys of the Finger Lakes, Central New York, and the Southern Tier.

Natural gas exploration and extraction is a potentially valuable economic stimulus for rural communities in New York. As landowners are compensated for the use of the resource and as the gas industry develops the regional drilling infrastructure, the economic benefits can be significant. However, unwary private landowners can find themselves in a difficult legal situation or frustrated by gas development activity that seems erratic. Information about gas deposits and leasing is usually carefully guarded to prevent competing businesses from interfering with each other’s gas development plans. Clear answers about gas exploration and leasing concerns have not been widely available. Additionally, the abrupt interest and pace of drilling have led to uncertainty and suspicion about the gas exploration process.

Property owners should understand the following key points about natural gas leasing:

1) Gas exploration and drilling are based on the realities of geology and speculation by gas industry professionals. There are many gasbearing formations throughout New York at various depths. The gas -bearing rock in the deeper Trenton-Black River formations follow detectable features from 3,500 to more than 10,000 feet underground. These features result in surface wells that usually follow discernable patterns across the Southern Tier, tracking the long and narrow depressions of ancient faults (called “graben trends”). Gas pockets in fractures or “joints” in Marcellus Shale are of
interest for newer drilling technologies.

2) Property owners generally have the right to explore and develop minerals under their property unless this right has been leased, sold, or otherwise transferred to another party. Property owners may lease the right to explore for gas to a company that has the equipment and expertise to recover or receive the gas for a period of time. Some leases pertain only to certain layers of rock or specific hydrocarbon compounds. The property owner may accept payment for the lease and royalties for the
value of the gas. Public records, deeds, and real estate titles will indicate whether such rights have been leased, sold, or otherwise transferred.

3) Gas leases are legal and binding contracts. They represent an official written agreement between two parties - usually between the gas company and the landowner. Because the leases are binding contracts, it is strongly recommend that the landowner have the proposed lease reviewed by a lawyer before signing.

4) Gas leases are partly negotiable. To reduce the time and effort of gas leasing with many landowners, gas companies and their representatives may offer a pre-printed gas lease document. There are no standard leases, since each lease represents a unique agreement. The pre-printed version usually provided by gas company representatives can be fully accepted or rejected by the landowner, or serve as a starting point for a two-way negotiation. Changes can often be made by including an addendum approved by both parties. It may be helpful to retain the ability to negotiate new terms when the primary term of the lease expires, so make sure you know the date it will expire.

5) New York’s Environmental Conservation Law gives all property owners the opportunity to recover or receive the gas beneath their property. To protect these “correlative rights,” the Department of Environmental Conservation may establish spacing units whenever necessary. Compulsory integration is required when any owner in a spacing unit does not voluntarily integrate their interests with those of the unit operator. Compensation to the compulsory integrated interests will be established by a DEC Commissioner’s Order after a public hearing