FINANCIAL IMPACTS

Show Us the Money…

WHERE DOES THE PROMISED MONEY GO? – AND WHAT’S BEING SPENT TO SUPPORT THE GAS INDUSTRY?

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HOW THE TAXPAYER PAYS

Costs to taxpayers are many and varied, direct and indirect:

    • There’s the cost to the U.S. taxpayer for all the subsidies given the currently most powerful industry on earth.
    • There’s the ongoing cost to the State of administering the Oil & Gas Commission program, which may not pay its way.
    • There’s the cost to state, county, and city in wear and tear on roads and other infrastructure from heavy seismic and gas trucks and employee rigs.  From an overview article:  “The truck traffic needed to deliver water to a single fracking well causes as much damage to local roads as nearly 3.5 million car trips.  The state of Texas has approved $40 million in funding for road repairs in the Barnett Shale region, while Pennsylvania estimated in 2010 that $265 million would be needed to repair damaged roads in the Marcellus Shale region.”
    • There are the costs to communities of the social detriments that usually accompany gas & oil development:  need for expanded emergency responders and hospitals, also policing, jails, and court time due to drugs/theft/prostitution and related social ills.
    • And there are costs to jurisdictions as well as individuals whenever there is an industry-related calamity.
    • There are also unmentioned costs to landowners whose property loses value due to industrial activity nearby.
    • There may be costs to individuals and the State in legal proceedings if leasing leads to mortgage foreclosure for unsuspecting leasers or split estate owners – especially when the State has neglected to regulate or even register misleading lease-gathering ‘landmen’.
    • And if you do sign a lease and get royalties? – your county will likely tax you extra on all the monies you receive from the gas developer (even if the value of your home wanes).
    • You will also pay federal and state taxes on any leasing bonus payments and on any royalty checks you receive.

    HELPFUL LINKS

    HIDDEN COSTS/LIABILITIES TO COVER

    County, city, and community costs:  Aside from the many externalized costs that industry is able to impose upon the State, community jurisdictions, and the people who lease to or invest with them, there are other hidden costs.  Local governing jurisdictions end up footing the bill not just for road damages (which can be extensive) but also for greater needs for community policing/jails, possibly for hospital services, and for regulating the industry and cleaning up after its negative impacts.  (Many negative impacts, unfortunately, can’t be surmounted with money.  Communities are changed; environments are changed; and there’s no going back.)

    Clean-up can be a problem:  Those who sign leases take on the risk that a development company that goes bankrupt will leave them to clean up any mess or impairment not covered by minimal bonding requirements.  In many areas where bankruptcies have caused companies to pull out, equipment has been left to rust and wells have been left uncapped.  The lease signer will also likely ‘inherit’ the responsibility for any harms caused by the defaulting drilling company.

    Financial and other risks:  Leasers also accept the risk of dealing with primary companies (the developers of the gas or oil field) or their inheritors (when those initial companies go bankrupt or sell directly to another company), as well as with whatever subcontractors are hired by these.  Some smaller developers are on shaky financial ground.  (The State of Idaho, for instance, is forcing citizens to deal with a Texas company, Alta Mesa, that has been downgraded seriously by Moody’s 3 times in one year.)  Subcontractors often hire workers who aren’t as professional as is claimed (and some hire the darned unsavory).

    Community-wide social problems:  Developing O&G fields invariably lead to heightened sociological problems, which must be paid for financially as well as socially by the local jurisdictions.  This is from Pennsylvania:  “‘More and more, it seems the police reports coming out of the northern tier include arrests because of drug use and trafficking, fights involving rig workers, DUIs, and weapons being brought into the state and not registered properly…  We’ve even encountered situations where drilling company employees who have been convicted of a sexual assault in another state come here to work and do not register…'”  Some workers aren’t above theft from sitting-duck landowners or harmful skullduggery on the job such as this:  A “farmer reported that 140 of his cows were exposed to hydrofracking fluid when wastewater impoundment was allegedly slit, and the fluid drained into a pasture and a pond.  ‘These farmers saw workers slitting the liner to decrease the amount of liquid in the impoundment in order to refill it…  We have heard it now on several occasions.'”

    Quality of life issues:  While developers take on the risk of expending investors’ cash on seismic testing and then on drilling wells that might not produce as projected, the real liabilities are borne by those living in the developed areas.  The greatest risks are taken (or handed to) those closest to wellbores and other water/air-contaminating facilities.  Entire communities, though, must deal with handling fallout from development on infrastructural, environmental, and societal levels as well as adjust to escalation of nuisances such as noise and traffic – and, perhaps, waning of the area’s customary attractions to property buyers and visitors.
    HELPFUL LINKS/EXPLANATORY HANDOUT


    ‘FORCED POOLING’ AND YOU

    What is ‘forced pooling’?:  The industry and many State oil & gas commissions sanitize the more accurate term ‘forced leasing’, using such terms as ‘forced [or compulsory] pooling’, ‘unitization’, and ‘integration’ to denote its actions to force some unwilling mineral rights owners to ‘allow’ gas development on their land. …Or on the surface land of those who are ‘split estate’ surface-only owners (see below).   A developer can request that a unit – ostensibly a 640-acre section for gas (40-acre for oil) – be ‘integrated’ when a minimum % of acres are leased to them.  The minimum varies widely from state to state (currently in Idaho, it is 55%); and the size of the section may be reduced considerably upon request.  When Integration is sanctioned, all other mineral rights owners within the section will be forced to accept development of their mineral rights when and how the gas developer chooses (and in some states, this may include trespass and development on the surface of the land as well).

    The rationale and the reality:  Gas, in particular, is held in pockets or aquifer-like reservoirs that can’t be drained only to a property line.  Therefore, all those who are force-pooled will share in the royalties for that unit.  Some states, such as Pennsylvania, do not authorize forced leasing, as it is a taking of private property rights.  But developers love it because it allows them to pick and choose amongst properties for most convenient routes and sites for their activities and equipment.  They also love it because the company that achieves Integration is allowed to be the only company that develops leases within that section – so lack of competition is assured.

    Your choices in Idaho:  If you, as a mineral rights owner in Idaho, are force-pooled, you have 5 options:  1 – Cough up the big bucks up front to become a Working Interest Owner, and share in “royalties plus” (including part of mere leasers’ royalties), and in costs and liabilities, and accept the mortgage and insurance disadvantages.  2 – Sign up as a Non-Working Interest Owner, and pay a huge penalty while being financed so as to eventually become a Working Interest Owner, sharing in costs and liabilities, and accepting the mortgage and insurance disadvantages.  3 – Sign a lease, get a 1/8 royalty, possibly share in costs and liabilities, and accept the mortgage and insurance disadvantages.  4 – Refuse to sign a lease and be Deemed Leased, still get a 1/8 royalty, pay no share of costs and liabilities, and have some legal recourse to fight against your mortgage or insurance being taken away… because it’s the State that is forcing you to lease against your will.

    Many people who have the options explained to them say, “So why would anyone lease?”
    WHAT IF YOU ARE FACING FORCED POOLING?
    HELPFUL LINKS/EXPLANATORY HANDOUT


    WHAT ARE ‘SPLIT ESTATES’?

    Do you own your mineral rights?:  A ‘split estate’ is property that has had the below-ground mineral rights severed from the ‘surface rights’, the top few inches of land and everything built thereon.  Many people are not even aware that they do not own the mineral rights for their property.  In Idaho, for example, there is no requirement for real estate sellers to disclose this – and often the seller doesn’t know… and it can be a very laborious process to even find out, as many ‘mineral estates’ were split, or severed, decades ago.  (See link below for our handout on how to research this.)

    Mineral rights trump surface rights:  A split estate surface owner has no legal means of preventing the mineral estate owner from authorizing gas development under or on their land, other than minimum setbacks from their homes and water wells to gas wellpads and perhaps pipelines.  This means that drilling, tanks, roads, pipelines, related processing plants, etc. may otherwise be impinged on the surface of their land if the developer so chooses and the mineral owner has allowed… and the surface owner will get no recompense for that disruption, beyond a minimal bond to cover a calamity should it occur.

    Forced pooling impinges on many surface-only owners:  Force-pooling of mineral owners (see above) does affect split estate owners, in that those who do own the mineral rights under their properties (if this is not the State), who haven’t yet leased, will be forced to choose a response… and to accept development of their rights.  In a very real sense, both of you would be force-pooled. …But only the mineral rights owner is spoken of, since that is the legal entity Integration is directed toward; and only the mineral rights owner has any say in the matter.

    In Idaho, surface owners’ rights are minimal:  Some states give concessions to surface-only owners (and the deemed leased) to compensate them for having no choices or remedies come Integration.  Idaho legislators, however, did not see fit to make any such provisions for those citizens losing property rights in this way. …Though there is hope that the State agent who may head a hearing on the matter of Integration may restrict the oil & gas company’s surface access on properties that are Deemed Leased (one of the benefits that has come out of CAIA’s legal pursuits).
    HELPFUL LINKS/EXPLANATORY HANDOUT


    LOSS OF HOMES/VALUES

    Devaluation of property values:  Contrary to what may seem like a benefit – the prospect of maybe having a lucrative ‘gusher’ on one’s land – the reality of gas development is that it depresses property values in almost all locales.  Realtors may be the first people in a new gas development area to discover, even before drilling, that properties are harder to sell when prospective buyers find out there is a gas & oil lease on a parcel; or a seismic lease; or even that there is a lease nearby.

    There are also various kinds of development related to the petroleum industry that don’t involve drilling…

    Frac sand mining/use:  Specialized frac sand mines, in certain parts of the country, level hill after hill and then use precious local water to wash the sand that’s blasted away 24/7.  It’s hauled in giant trucks that quickly damage roads (much of the leavings being hauled back, even heavier because wet, to be stockpiled as waste).  Special silica sand is used as a ‘proppant’ to keep fracked cracks open.  A myriad of sand mines are in a region, creating huge problems with traffic, noise, air pollution (blowing silica sand is a terrible lung irritant), and water issues (the sandy hills naturally filter water as it enters the aquifer).  See Frac Sand Land: Incredible Story of Vanishing Hills in Wisconsin (where property values for homes and farms on country roads were quickly slashed in half).  And when the frac sand is employed at a drill site, the same traffic, noise, and air pollution problems are attendant on the hydraulic fracturing process.

    Influences of considerable supporting infrastructure:  Other infrastructure for drilling/fracking itself includes waste ponds, holding tanks, compressor stations, access roads, and gathering pipelines as well as the major carrier pipelines – any of which will obviously greatly affect property values.

    Word gets around…:  While many states (Idaho among them) don’t require disclosure, people who have been chagrined to find that they are ‘split estate’ owners (see above) – not owning their mineral rights (which are commonly held by the State, BLM, or subdivision developers), and having absolutely no say in what happens on their land – spread the word about this detriment.

    • Knowledge about forced pooling laws alarm buyers justifiably (also see above).
    • Many people seeking property turn away altogether from an area under development, and buyers still interested will likely have difficulty getting a mortgage on a leased property – perhaps even on property nearby.
    • And of course, any harm that comes to the property’s water, air, soil, and peaceful or beautiful aspect will significantly decrease its market value further…  Unless, perhaps, you are one of the few major landholders to benefit by leasing hundreds or thousands of acres on which will be drilled many wells.  It’s unlikely that these people would be personally affected by their homes being devalued – they will almost certainly be able to keep development away from their homes.

    Mortgage difficulties affect property values:  Over 90% of mortgages are sold on to other banks as investments.  Even if one can get/keep a mortgage with a mineral rights lease on the property, secondary mortgage market purchasers look askance at properties with such liens on them. …Which means that buyers who would like to live on such property (or could be cozened into purchasing such property unawares) won’t be able to get regular low-interest loans on the properties in question – and will be apt to move on to less problematic properties.  And a property that can’t sell loses value (to everyone but the county Assessor, perhaps).
    HELPFUL LINKS/HANDOUT

    IF YOU NEED HELP NOW WITH ANY OF THESE ISSUES NOT EXPLAINED IN THE RESOURCES GIVEN, YOU MAY FIND ANSWERS ELSEWHERE ONLINE…  BUT IF NOT, WE INVITE YOU TO CONTACT US