Landowners Stand to Lose Cash, Rights if Unprepared for Drilling Deals

The U.S. Geological Survey has made several estimates of the quantity of natural gas that lies deep below the surface in the Marcellus and Utica Shale formations.  The estimates vary, but they are all mind-boggling.  It's been said that we are sitting on an ocean of relatively clean burning fuel.  In some locations, it feels like a veritable gold rush.  However, as with all lucrative opportunities, there are unscrupulous players and caution needs to be taken.

First, here is an interesting and underappreciated fact: In all of the countries of the world, with the exception of the United States, the minerals below the ground do not belong to the surface landowner.  Rather, the oil and gas belong to the government!  Further, only a few countries is there a private, entrepreneurial, competitive exploration/drilling industry.  Notable exceptions are the United States, Britain, Canada and Australia.

In a recent essay in the respected journal Foreign Affairs, energy economist Edward Morse suggests that this private ownership model is what has allowed the United States to leap forward with innovations in discovery, drilling, and development of these resources.  In fact, we may eventually be energy independent.

But back to the issue of caution.  In both Pennsylvania and Ohio, landowners have been approached by agents seeking to organize large contiguous blocks of acreage so that the collective acreage is more attractive to a large developer/driller.  Let's call them agent/organizers, since their goal is to organize the landowners' property into a collective block.

In some instances, these people will imply that they will work on behalf of the landowners to secure the best price and royalty for the collective group.  Be careful.  There have been instances where these agent/organizers have made more up-front money than the landowners by securing fees not only from the landowners, but also from the driller/developers who, ultimately, acquire the oil and gas rights. 

Do These Agent/Organizers Owe Fiduciary Duties to the Landowner?

A fiduciary is one who you hire to act on your behalf and who the law requires to act with the utmost loyalty.  To the extent that the agent/organizer holds a license to broker or sell real estate, that license comes with many duties established by statutes, regulations and court decisions.  Generally, these can be summarized as a duty to be transparent, to keep landowners informed, to reveal and conflicts of interest, and to use their best efforts for whoever retains them.  Sounds like a fiduciary.  If the agent/organizer is a lawyer, he or she is bound by detailed rules of ethics, and would clearly appear to owe the landowner fiduciary duties. 

This all sounds good in theory, but there is a great deal of money that can be made in these transactions and unscrupulous characters can appear.  The contracts that landowners are offered can be very complex; can contain disclaimers; can limit landowner remedies or damages; and it is not always easy to determine the fair price that a landowner should be paid for oil and gas rights. 

Pending Cases

Lawsuits already have begun in both Pennsylvania and Ohio concerning the obligations of agent/organizers and the contract obligations of the developer/drillers.  Allegations of fraud have arisen and the cases are only now winding their way through the courts. 

Landowners must take steps to protect themselves.

Require full disclosure from any agent/organizer who approaches you.  Who is to pay them?  For whom do they work?  (Do not be satisfied hearing an impressive corporate name---it may be a mere shell.)  Are they representing your interests or someone else's?  How and when can you exit the relationship?  Find a lawyer who has experience in this area to review any contract you're presented.  That lawyer should be able to explain to you the details of the proposed transaction so that it is understandable and may also be able to access the resources to determine the fair value of your acreage.   

If you would like to discuss this matter with one of our attorneys, please contact our office at 814-870-7600 or complete this form on our website.