Before You Sign That Oil or Gas Well Contract in Gates Mills

things you might like to know...

Do the Following to Protect Yourself and Your Property!

Although residents have diverse opinions about drilling in urban neighborhoods, there are some important considerations for any property owner to review before signing a contract with an energy company.  The following checklist is offered for your consideration and protection.  It is a sample of the important issues to be discussed with a prospective driller.

According to a September 2011 Economic Impact Study by Kleinhenz & Associates, over the next five years, oil and gas producers are projected to spend over $34 billion in exploration, development, midstream, and royalty and lease payments in Ohio.  Landowners need to investigate the effect oil and gas drilling might have on their property and environment.  They also need to be aware of the complex tax rules that apply to selling or leasing oil and gas interests.  So before entering into an agreement to sell or lease your property, careful tax planning is needed to insure the most beneficial tax treatment.  Consultation with a lawyer versed in all aspects of gas well leasing is essential. 

Remember that a driller needs 20 acres of compact and contiguous property to drill a shallow well of which approximately 10% can be mandatorily pooled, or 40 acres for a deep well of which 35% can be mandatorily pooled.  Horizontal legs from the deep well extend great distances from the well pad meaning the well may involve up to 640 acres.  Generally, wells may not be located closer than 150 feet to an occupied dwelling. 

Signing a contract with a driller means giving away some of your property rights to that energy company.  Do so with extreme caution.  The impact of the contract is upon the life of the property, owned now by you and others in the future, and may also effect your neighbors.  Government regulations will not adequately protect your interests. 

Finally, negotiate royalties carefully.  12.5% was the traditional percentage for royalties paid to lessors.  The new norm is closer to 15% and royalty payments of up to 20% are not uncommon. 

Here are the steps to follow:

•Select an environmental attorney to represent you in the contracting process, and contact the Northeast Ohio Gas Accountability Project (NEOGAP) website NEOGAP to obtain protective lease language for your property.  If inexperienced in oil and gas well drilling, the property owner needs help to secure the best terms in order to limit his/her exposure to ongoing liability for the drilling, well operation, and capping of the well.

Ask the following questions.  How long will I be bound by this lease?  Are there any restrictions on where the energy company can drill or how many shafts they can drill on my property?  Can they drill right under my house?  Do I have any say on how much drilling they do (directional drilling, fracing, for example)?

•Conduct a title search with the Cuyahoga County Recorder’s Office, to determine whether there are any historic deed restrictions that prohibit drilling on any of the properties to be pooled for the 20 acres needed to drill a well.  Cuyahoga County Recorder

•Consult with your home insurance carrier to confirm that insurance will be available for your well and confirm whether there is any additional cost.

•Check with neighbors and other customers of the drillers who are proposing to drill on your property.  The Village Fire Department has a list of all wells, owners, and drillers in Gates Mills.  Also, review the MIT database of citizen reports on drillers in the NEOGAP website. 

•Hire an engineer to give advice on maximizing safety regarding the quality of equipment and techniques used in the drilling process.

Ask whether there will be ‘frac’ drilling?  If so, watch this homeowner set the water coming out of her kitchen sink tap on fire.  Go online and use this link:  Tap fire

Test your well water for contaminants before signing a gas well drilling contract to have a baseline of the quality of your water before drilling begins.

•Develop a request for proposal (RFP) for your project, and select several drillers to bid.  Contact the Ohio Department of Natural Resources (ODNR) for a list of drillers and their backgrounds.  Kim Dobbins (614) 265-6373, Kim Dobbins maintains the record of violations against all drillers.

•Ask yourself the following questions regarding the revenue to be derived from the well.  How much money will I really get from this lease?  How competitive is this royalty?  Do other companies offer more?  Who does the accounting?  How often will I be paid?  What are my rights if I don’t think I am being paid the right amount?  What charges can the drilling company deduct to reduce the amount of royalties owed me?  What taxes will I owe?  

Access the NEOGAP website for income estimates based on the current trend in market pricing for gas.

•Does the company have the right to sell, transfer, or assign your lease to someone else?  Ask whether you can choose with whom to do business.

•Consider what additional legal obligations you are assuming by signing a lease with a driller. 

Here are some questions to ask.  Must you pay the cost to defend the title to your property?  Will the driller pay your taxes?  What does the lease require you to do?  How much does it cost?  What legal rights am I giving to the energy company when I sign?  What is my obligation if there is an environmental leak on my property?  Who is responsible for the clean up?  What if there is an explosion?  Can I be held legally liable?  What if a sink hole develops or the foundation of my house cracks?  Who is responsible for paying for the repair?  Will my homeowners’ insurance cover me?

•Consider how you can withdraw from a signed contract.

Ask the following questions.  If I change my mind, can I end the lease?  What rights can I enforce in court?  How can I withdraw from the contract?

•Include the recently amended Section 1513.03 of the Village Fire Prevention Code in your contract to further ensure your safety, that of your neighbors, and the community safety forces.  See the NEOGAP website for information about gas well safety, and the report of safety incidents submitted by the Fire Chief.

•Secure a copy of the completed permit application before your driller submits it to the ODNR.  Then immediately thereafter, obtain a copy of the permit granted to the driller by ODNR.  Insure that the specifications are the same.

•As a courtesy, advise immediate neighbors and the Village Fire Department of the plan and timeline for installing your gas/oil well.

•Did you know that there is only 1 ODNR inspector for all of Cuyahoga County, which has over 3,000 active gas wells?  At a recent meeting with city officials, ODNR admitted that it spends most of its time issuing new drilling permits, and doesn’t have time to do even annual safety inspections of existing wells. Ohio Department of Natural Resources

Ask how your driller will ensure safety in light of the lack of oversight by the ODNR?

For more detailed information and guidance, contact a member of the Village Gas Well Safety Committee, a member of the Gates Mills Land Conservancy, or the Village Fire Chief or read the book Oil and Gas at Your Door? Earth Works

January 2013