Home / Shale News / Marcellus Shale News / Owners of gas rights gain leverage through groups
Getty Images via NewsCred
Getty Images via NewsCred

Owners of gas rights gain leverage through groups

When friends Ethan Ward and Kathleen Wright Croft successfully negotiated a group gas-drilling lease with fellow property owners in Washington County, they heard one question from neighbors: “How can I start a group?”

“Large groups have a lot of power,” said Ward, a Donegal farmer and district judge who helped negotiate seven leases between land groups and gas companies ranging from 2,000 acres to 50,000 acres.

“The one thing that we found, if you stay together and have patience, and negotiate as a group, the lease terms will become more favorable,” he said.

Such deals between companies and land groups of dozens or hundreds of people holding rights to the gas beneath their land have become less common in Pennsylvania. The push to lease big chunks of land slowed as acreage in key spots became less available and low gas prices reduced competition among producers.

“The leverage that landowners have has been greatly diminished,” said Craig Sweger, another Donegal farmer in Washington County who helped neighbors negotiate lease deals.

The energy companies are doing more business with one another, or focusing on soon-to-expire leases.

“I see more transaction between companies, where one company has an acreage position and they’ll assign that position to another,” said Dwight Howes, a partner at Pittsburgh law firm Reed Smith with energy clients. Recent examples include Chesapeake Energy’s sale of wells and lease rights beneath 400,000 acres to Southwestern Energy Co. for $5.4 billion.

Big deals still can happen, though, especially in so-called wet gas areas — where wells produce valuable liquids such as ethane and propane — and unleased sections of the Utica shale, said Charles Z. Keslar, a longtime landman from Donegal in Westmoreland County.”That’s a hotbed of activity still,” he said about the westernmost parts of Greene, Washington and Beaver counties and the northern panhandle of West Virginia.

That’s where Moundsville, W.Va.-based law firm Gold, Khourey & Turak recently said it struck a $100 million deal between a land group of hundreds of families and Tug Hill Operating, a private Fort Worth exploration company. The land is in Marhsall and Ohio counties in West Virginia and in Greene County, where the firm continues to seek members to join the group.

Related: Penn. and W. Va. landowners settle on group lease agreement.

Attorney Jonathan Turak, who helped negotiate the deal, declined to say how many people signed the deal, how many acres it involves or what percentage of royalties clients will get from producing wells on top of the combined $100 million signing bonus.

Tug Hill officials did not return calls for comment.

Turak said several companies competed for the deal.

“Companies are more inclined and willing to deal with a land group in a situation like that, when there’s competition,” said Keslar, who contracts with companies to represent them in dealings with royalty- or rights-owners.

A land group deal generally makes it easier for companies to scoop up contiguous acreage without having to approach and negotiate with many individuals. It can take away flexibility that companies want, though.

“Gas companies really prefer to have a specific lease on a particular property because each one is unique,” Keslar said.

The land group gives people a position to negotiate.

“The more acreage you have, the more leverage, even if it’s just three or four families,” Howes said.

“It’s not just the bonus, it’s getting good lease terms and a good royalty,” said Jackie Root, a landowner and gas deal consultant in Tioga County who is president of the Appalachian chapter of the National Association of Royalty Owners. If companies really want that big piece of land, they might forgo language in the standard lease that allows them to deduct from the royalty, she said.

Root encourages anyone approached by a company or landman to talk with neighbors and lawyers. Those discussions are how many land groups form.

“Too many people focus totally on the money and less on the terms, which I believe are far more important,” Sweger said about lease language that covers buildings and facilities on the land. “The terms are going to be there for your grandchildren to deal with.”

In most of the Marcellus, landmen are no longer cold-knocking on doors, though. Keslar, Howes and Root said leasing overall has slowed.

“I’m speaking with people whose leases are about to expire mostly,” Keslar said. Companies generally have five years to drill a producing well on a property to hold a lease.

Land groups could be effective in dealing with companies looking to build pipelines to connect the wells, Croft said.

“You can work on it as a community and get things done,” she said.

They most likely would become popular again if economics improve, or particular shale plays attract a lot of interest.

“The key is the price of gas and return on investment, which could be impacted by a severance tax,” Howes said, referring to Gov.-elect Tom Wolf’s promise to raise taxes on gas wells.