Think Before You Lease
UNEXPECTED RAMIFICATIONS OF GAS & OIL LEASING…
Jump to these sections below:
Do you have property rights?
Lease snags and negotiation
On public lands as well
What about alternatives?
Mortgage effects: This is the walloping big surprise withheld and even denied by gas industry representatives: Your signature on a gas & oil lease leaves you open to your mortgage holder calling in your loan, because allowing industrial activity that endangers the environment puts your mortgage in technical default. Don’t believe it? – call your lender and find out. (Your lender may or may not offer you a ‘second-best’ option of purchasing a new mortgage at a higher rate and a much higher up-front down payment and points charge… to offset the greater risks you’ve subjected your property to.)
Ability to sell if affected as well: If you don’t have a mortgage, you might want to call some mortgage lenders and ask them whether someone who wished to buy your property could get a mortgage on it. (Even if the bank would lend on such property, the petroleum company won’t want to give the bank a subordination agreement, which ensures first lien rights if the property goes into foreclosure – and the bank, logically, won’t want to lend on the property without that.)
Problems with refinancing/farm loans: You will also have trouble getting a mortgage refinanced, or getting a farm loan, when the lender discovers what the new ‘cloud’ on your title – that lease – consists of.
Insurance policy impacts: Your insurance company will no doubt be very loath to pay on a claim for any sort of disaster that may arise due to industrial activity not expressly covered in your policy. …And is, in fact, within their rigths to cancel your policy when discovering the new nature of your property holding. (You may – or may not – in that case be offered a much more expensive policy that covers an industrial scenario.) If you are skeptical of this, call your insurance agent to see what they say.
Earthquake insurance may be required: Another consideration for you as regards insurance may be whether, with drilling activity in your area, you might need seismic insurance that would cover damage to your dwelling or water source from possibly induced earthquakes. While induced earth tremors are minor with pre-drilling exploratory seismic testing, damaging quakes are common in areas where injection wells for drilling/fracking wastewater are in use (on the way in Idaho). This insurance tends to be quite expensive, and some insurance companies don’t provide the coverage at all in some earthquake-prone areas.
Lack of coverage affects mortgages too: Without insurance coverage, a person – you or someone you’d like to sell to – can’t get a mortgage on your property.
All of these difficulties will pass to your heirs, of course, if they inherit your property.
DO YOU HAVE PROPERTY RIGHTS??
‘Split estates’ and ‘forced pooling’ mean impairment of expected property rights: What if your property is a ‘split estate’, where you don’t actually own the minerals(/gas) under your land? – you can’t keep the mineral rights owner from developing the gas beneath you. What if you are ‘forced-pooled’? – how much say do you have in what happens to your property?; what legal recourse might you have if your mortgage is called in? You may have assumed that the State would at least protect you from drilling right next to your home or well… but your state, like Idaho, will likely have ‘occupied the field’ (of gas and oil development) and so prevented local ordinances from protecting you except by requiring more than a minimal setback distance.
MORE INFO ON SPLIT ESTATES/FORCED-POOLING HERE
LEASE SNAGS AND NEGOTIATION
Others are affected as well: Your own decisions may dramatically affect your neighbors’ welfare. Your leasing may adversely affect your and your neighbors’ property values, mortgages, and insurance and subject your neighbors to industrial activity and risks they would never countenance. And your signing may tip the scales so that your neighbors are force-pooled (‘integrated’) – forced to lease – without their consent. …Not to mention that your allowing gas/oil development on your land could lead to air, water, soil pollution and health dangers for you and all the people around you (for which you could potentially be sued by your neighbors). Not only might this result in damage to neighborhood relations, individuals’ decisions on whether or not to lease can affect a whole community for decades to come.
‘Landman’ lease brokers: The ‘landmen’ who go door to door asking people to sign seismic testing permits and mineral rights leases are not regulated in some states (e.g., Idaho) and do not fully disclose the nature of gas & oil leasing. They have tended to use many, sometimes unethical, forms of persuasion to get people to sign the boiler-plate documents they present people with. They try to get any homeowner to sign, even when property is owned jointly. They often tell people that all their neighbors have signed (when that isn’t true) and that they’ll be forced to sign anyway (they could be force-pooled – especially if their neighbors do sign – but they can’t be forced to accept the liabilities of signing).
Negotiating a lease agreement: You can negotiate any element of a lease document – no one has to accept only the form handed to them. However, keep in mind that even if you negotiate points of the lease, the landmen know that getting you to sign is the only important thing (pressuring you to renegotiate to their terms later can solve that, from their point of view). They are salespeople, and their persistence is designed to make them commissions, not to help other people make good choices. You would definitely be wise not to sign anything without research and deep thought, away from the presence of the person asking something of you. (See the link below for tips on negotiating a much better lease than the landman presents you with.)
Seek advice before signing a legal document with far-reaching effects: We encourage you to speak to a non-industry lawyer and get fully educated about your options and about the full consequences of taking those offers. A gas & oil lease is a major and probably very long-term commitment. What you don’t know can hurt you.
Seismic leases: Note that seismic permits are also a form of lease. They too may affect your mortgage, the sellability of your home, and put a cloud on your property’s title. There are also chances for damage to structures, water wells, and tree roots from the seismic testing activity (via vibrating trucks or dynamite).
Other pitfalls for the unwary: Just because you lease your surface lands doesn’t mean you’re ever going to get royalties… First, the well has to be economically viable for the profits to trickle down to most mineral owners. Potential leasers are quoted a royalty rate (usually ‘1/8th’) but may not have it explained to them that developers deduct considerable amounts as expenses from royalty calculations. (If you don’t own the mineral rights under your land – ‘split estate’ – all the royalties resulting from oil or gas leases will go to whatever party does.) Second, make sure your lease doesn’t allow the gas company to compensate only your neighbors who get the well, while you get only the access roads, pipeline, wastewater pond, or tanks/processing station (and attendant property devaluation). Forced pooling (called ‘integration’ in Idaho) does prevent this scenario for those whose properties fall within the pooled ‘unit’ – but it may be possible for other property owners to find themselves outside that area but still asked to provide surface access through a lease.
Royalties going to mortgages?: Contrary to many leasers’ expectations, whatever royalties are paid out may not show up in your bank account – not if you have a mortgage. Some mortgage companies – who jointly own property with you – siphon off royalties to pay down your mortgage.
Taxes: At the backend, you will be taxed by the IRS and State for any royalty (and bonus) income you receive. You will probably also be taxed again by your county on royalties when an accounting shows the gas produced.
Leasing and selling mineral rights are very different options: Finally, beware of the difference between leasing and selling your mineral rights. Selling them outright means you would get only the agreed-upon sales payment/s, not ongoing royalties. (And you would create a different sort of lien on your property, which would affect your ability to sell/refinance it and would likely confuse your heirs.)
MORE INFO ON SPLIT ESTATES/FORCED-POOLING HERE
ON PUBLIC LANDS AS WELL
Public resources changed for private gain: The State and Federal government want to hand over your public resources so that oil and gas companies can come in and make profits. This allows government agencies to benefit financially via lease monies but may well lead to environmental degradation (and taxpayer-funded cleanup?) as well as destruction of the potential for other uses of our shared lands.
Resource risks: Leaks in oil and gas infrastructure are inevitable over time; other risks and industry practices also endanger air, water, and soil resources along with human and animal health. Industrial uses of public lands automatically reduce an area’s appeal, if not actual usability, for tourism, recreation, hunting and fishing. Some states rely heavily on these draws for boosting local economies as well as for the enjoyment of taxpaying citizens (and other visitors). Wildlife habitat and migration routes can be fragmented by fenced-off areas and heavy industrial traffic.
Management is thorny due to the nature of the industry: States like Idaho hold a large percentage of our nation’s dwindling wilderness. Careful planning for modern metals mining and lumbering operations avoids most detrimental impacts, the effects of which are naturally limited in scope. Gas and oil extraction, on the other hand, carries far-reaching risks to important resources that are not able to be well-managed (particularly water sources), no matter what precautions are taken. (And the petroleum industry is exempt from many of the regulations that govern other natural resource industries.)
It may be that the only way we can keep the benefits of shared public lands that we enjoy, for ourselves and future generations, is to sidestep the inherent problems of petroleum extraction on them.
WHAT ABOUT ALTERNATIVES?
Renewable technologies: Renewable energy technologies have made leaps and bounds in recent years. Solar technologies in particular are fast becoming feasible on a broader scale than most realize, and such electricity can indeed be produced, stored, and then carried long distances by energy grids such as we are used to. Each year sees huge and largely unsung strides in clean energy production techniques, and we are quickly coming to the time when clean energy will be economically competitive with dirty energy extraction. Then why don’t we do more wind/solar/etc.??
Intended delays: Comments on a news article titled “Oil Rigs Make Bad Neighbors” pinpoint the logical fallacy (but hidden truth) of pursuing gas & oil: “If the money and effort expended on wresting a rapidly declining hydrocarbon ‘resource’ at the price of horrendous pollution (denied, routinely, of course, when it is even mentioned) had been spent on renewables, instead, the results could have been huge. But fracking is also a deliberate ploy… to undermine and delay non-fossil fuel sources of energy.” Despite new technologies, oil & gas is an old, entrenched industry (for many years the most powerful on earth). Naturally, current managers always seek to prop up behemoth industries even if they are failing.
Special environmental dispensations for the petroleum industry: The dilution or setting aside of national environmental laws for this one industry alone (see Loopholes for Polluters) is symptomatic of the U.S.’s policy armor against the interests of alternative energy – no matter that this is against the interests of all the people long-term (as the resource is systematically depleted) and of a great many people who are harmed in the short-term.
Is it true that we must continue to develop for gas and oil?: We’re told by petroleum industry spokesmen, “We all use gas and oil – it’s got to come from somewhere…” The gas and oil industry has, unfortunately, made sure that we lack other ready options. What if we didn’t? All of Americans used to use wood for fuel; then the coal industry was given a boost from government subsidies. Today it’s the gas & oil industry getting the gilt-plating. What if wind, solar, hydrogen-based fuels, tidal action technologies, etc. were handed the breaks on a massive enough scale to make that industry a behemoth? – watch what happens in New York, now that fracking has been banned there… And take a gander at what the German populace and government have achieved with alternative energy sources in the past decade: “Germany has been called ‘the world’s first major renewable energy economy.” (and “almost half of renewable power capacity was citizen-owned as of 2013, and about 20 million Germans lived in so-called 100% renewable energy regions”).
The solar technology escalation: The truth is that even without governmental subsidies, solar energy technologies are slated to become – very soon – vastly more cost-effective than dirty fuels… And the insistence of governmental representatives on backing hydrocarbon industries (costly in so many ways) is a huge disservice to the people they are supposed to be serving. From the 2014 lecture of Stanford’s Tony Seba at the AltCars Conference: “Despite all the media stuff you hear about crisis in solar, it’s been growing, worldwide, by 43% per year since the year 2000. …By 2030, all the world’s energy will be solar…” – whereas “oil has gone up 35X since 1970.” Solar energy developments have already improved on the cost of petroleum (without all the subsidies) by 5355X, of natural gas (despite its recent decline) by 2275X, of nuclear by 1540X, of coal by 900X. …And, solar will continue to go down. Every time the infrastructure doubles, it goes down 22%. …Even assuming that all the other resource energy forms don’t go up – which they will – solar will have improved its cost position relative to oil by 16,000 times; relative to natural gas, by 6800 times… And the rate of growth in solar may actually accelerate.”
Those who work to uphold ‘Big Carbon’ – the gas, oil, and coal industries – are actually motivated to prevent the natural rollout of alternative energy industries and the cost savings they can (and will) mean for all citizens. Perhaps it’s time for Americans to insist on the truth, and on furtherance of renewable and far less harmful energy sourcing.
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