Two days ago MDN brought you news about a new bill in the Pennsylvania House of Representatives, HB 247, which would allow fully leased parcels that are part of one drilling “unit” to be combined with parcels in a different unit (see PA Floats Bill to Allow Shale Drilling to Span Multiple Units). “Cross-unit drilling,” if you will. We connected a few dots and made some observations that maybe were not quite on the mark. This post presents “the other side” of the HB 247 issue.
Currently, if a driller wants to drill across units, the driller must get a release or amendment signed by all of the landowners/mineral rights owners involved. HB 247 would eliminate that step, provided the driller already has all surrounding properties under lease.
In our previous post we made the observation HB 247 would remove barriers for drillers, remove an existing speed bump whereby drillers must get sign-off from the landowner to “pool” their land in a new unit. We said that a lease review (i.e. speed bump) can, in some cases, provide the landowner with the opportunity to review their original lease and perhaps win a few more concessions from the driller. We’re not talking about new money as in a signing bonus, or a change in the royalty rate–that’s not going to happen. But changes like the location of well pads and pipelines on the landowner’s property.
A couple of things happened in short order after publishing our post on HB 247. First, we heard from a landowner who is currently, right now, pooled in a cross-unit. The landowner has been drilled under as part of the new cross-unit, and is happy with the result (so far). We also heard from both the Marcellus Shale Coalition and from MDN friend George Stark at Cabot Oil & Gas. Cabot and the MSC are strongly in favor of 247 and want to make their case for why it should be supported. This post is an attempt to accurately reflect their arguments and thinking.
In our conversation with George, he pointed out (as we previously did) that many of the Marcellus leases in existence were signed when it was inconceivable that a lateral would exceed 5,000 feet, or one mile. Units for shale drilling were designed to be roughly 640 acres, or one square mile. The language, the actual term used in the lease, states “640” acres. If that specific “640” term was not in the original lease, this all would be a non-issue!
From George’s perspective:
* HB 247 does NOT in any way alter existing leases between drillers and landowners. The terms are the terms. They are a settled contract and will remain the same whether a driller creates a new cross-unit or not. The landowner will get X% in royalties, period, as they have been. There is no new signing bonus because there is no new lease. Landowners will make more money, potentially, because another well gets drilled under their property. And when the gas begins to flow, so too will new royalties from that well.
* In some cases where a new well pad is constructed, new pipelines run, new roads constructed or widened, etc.–landowners can and will get more money. But that’s not a change to the original lease–that’s an addendum, something extra over and above the original lease. The lease terms remain the same (X% in royalties).
* There is no forced pooling, period. What HB 247 does is allow a driller who already owns the leases for all of the landowners contemplated in a cross-unit situation to drill across what is an artificial boundary line put there “arbitrarily” by the original contract. For simplicity sake, Landowner A owns half of Unit 1 and Landowner B owns the other half. Landowner C owns all of Unit 2, which sits next to Unit 1. Both units are leased by the same driller, and now the driller wants to drill a new well that uses part of Unit 2 (Landowner C) and part of Unit 1 (Landowner A)–combining two pieces into a new “virtual” unit. Landowners A & C still get all of their royalties from the original wells on their properties, but now get extra/new royalties from a new well they both belong to, a well that could not have been drilled unless they signed-off or unless HB 247 makes it possible. Landowner B keeps getting royalties from the original Unit 1 but does not participate in the new virtual unit.
* The drilling that will be done often combines “leftover” or stranded pieces of property that could not be previously drilled, due to where they were located. With new, longer laterals, those stranded bits of property can now be accessed. Drilling is optimized.
* HB 247 will lead to a reduced impact on the environment–fewer well pads with longer laterals. Less well pads means less truck trips, less earth disturbance, better for the environment.
* Other states like Texas and Oklahoma and Louisiana already have a provision like HB 247 that allows drillers to combined adjacent/currently leased property. Without 247, drillers are forced to go landowner by landowner and get permission, which takes a long time. Landowners move, title to property changes, people die and rights get transferred via probate court (probate takes a looooong time). Activist judges get involved and slow everything down. In the end, nobody wins. This bill fixes all that.
* With HB 247, George says everybody wins. The landowners are already leased, the legislation merely removes an artificial barrier.
The PA House Environmental Resources and Energy Committee is meeting today to discuss 247. In advance of that discussion, the Marcellus Shale Coalition issued the following message to encourage support:
The Marcellus Shale Coalition urges support for HB 247, which benefits landowners and operators alike. To address some misinformation about the bill, please consider the following:
- Operators currently have the ability to drill on separate leased units. Nothing changes in that respect.
- This bill simply allows operators to drill those separate leased units from one well pad, as opposed to building a separate well pad for each unit.
- This bill only allows drilling where it is authorized by existing leases. It does NOT allow forced pooling, which is a concept that involves the production of certain non-leased acreage.
- Because this bill deals with acreage that is currently under lease, operators receive no additional authority other than to cross existing unit boundaries. Nothing is being “taken” from mineral owners.
- Despite suggestions otherwise, operators who have a leased unit with an active well pad already have the ability to go onto the existing well pad to drill more acreage within that unit.
- This bill would provide more mineral owners with royalties while limiting surface disturbance for landowners.
So what about MDN’s earlier concerns–that the speed bump of forcing drillers to sign off instead of getting carte blanche authority to combine units–can potentially benefit landowners if they use it as an opportunity to review and strengthen their leases? According to George, leases are a done deal and don’t/won’t get revised. In essence, the only winners in a protracted back and forth to review the lease are the lawyers, that no new advantage can be gained for the landowner. That view does not square with the information we received about a case where we believe the original lease *was* amended. However, we take George at his word–he’s always been 100% honest with us. Perhaps the info we previously received (or our understanding of it) is in error.
If indeed there’s nothing new to be gained by forcing a review of existing leases, we would be in support of HB 247. More drilling for more landowners, grabbing what had been landlocked and partial pieces of property, is good for everyone. It’s good for the landowners, it’s good for the driller, and it’s good for PA (jobs, impact tax revenue, etc.).
UPDATE: After we had written the post above, but before we published it, we received word that the hearing on HB 247 is over and that the bill was reported out of committee by a vote of 15-10. All 15 Republicans supported the bill, all 10 Democrats opposed. Either it goes on to another committee, or possibly out for a full floor vote–not sure which comes next.
This post appeared first on Marcellus Drilling News.