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Oil and Gas Leases: Issues and Considerations

Leases do not include the same information that companies give to their shareholders. Landowners are not told the actual risks associated with hydraulic fracturing.  There are ways to challenge a lease if a company was not honest about the risks associated with the processes involved in fracking.

The following document regarding gas leasing practices provides important insight into issues to be considered regarding leasing and what is often omitted in leasing offers. The entire content of “Drilling Doublespeak” can be obtained for download at the following link: http://static.ewg.org/pdf/Drilling_Doublespeak.pdf

SAFE has been examining leases, and is working toward building this page as one that will help you assess your own lease for language that protects you (issues such as burden of proof , compensation for damages). Please check back on this page as we update this information.

Contact Our Legal Committee

L. Cook legal@dontfractureillinois.net

SAFE has seen a lease that explained the lessee’s rights as follows:

“with the exclusive right for the purpose of exploring *** and operating for and producing *** and the exclusive right *** to inject water, brine and other fluids into the subsurface strata, as well as any industry enhanced recovery methods.”

Note the use of the relatively innocuous sounding term “other fluids” after “water” and “brine” and also note the use of the term “industry enhanced recovery methods”.  The lessor explained to us that they were not told that horizontal high-volume, high-pressure hydraulic fracturing could be used on his property.

If this language was intended to encompass horizontal fracking, it is far from a model of clarity and is misleading.

Royalties

Other lease specify royalties that are calculated “at the wellhead.”  This means that no matter what is stated anywhere else in the lease, “at the wellhead” means the company is entitled to take all costs (i.e., any cost it can think of) out of its profits before it calculates any royalties.

Pipelines

Leases typically have paragraphs that sound like care is taken regarding pipelines, e.g., that pipelines will be buried below the plow line in crop fields. Yet those leases do not say that pipelines must be buried in a location that is not a crop field. This means they reserve the right to run a pipe line through your yard if they want to.

Damage Clauses

The “famous” liquified damages clause limits any damages payable to you (for any damages, of any kind, ever) to $5,000. We have even seen damage limits as low as $3,000.

Hold Harmless and Indemnify

Perhaps worse, the “hold harmless and indemnify” clause says no matter what happens, you, the landowner, is liable: for injury, damage to the land, to property or anything else. We have a signed copy of one of those leases. The Johnson County clerk’s office has many, many of these leases filed.

FAQ

Will Not Signing a Lease Prevent Drilling?

Q.  I am an owner of an oil/gas lease with Next Energy, LLC.  They have sent us a form that requests to change the original lease to allow horizontal drilling.  With everything I have read, I have not signed it as yet.  Will my not signing (my brother and sister haven’t either) prevent anything?


A. First, we need to know how the mineral rights are owned, before we can answer the question about you and your brother/sister not signing the lease. If they own any of the rights, and none of you have signed the lease, then yes, that can make a difference. The issue is a little complex, but basically it is this: In contract law, an issue has to be “within the contemplation of the parties” when they sign a contract for there to have been a “meeting of the minds.” If there has not been a meeting of the minds, there is a very good argument that a contract is invalid.

I am assuming that the contract that was originally signed was before horizontal fracking became an issue? If that is the case, then the parties had no way of knowing that the oil and gas company could potentially use fracking on their property, and therefore did not sign a lease with any intention of allowing horizontal fracking to take place. Therefore, there was no meeting of the minds, and if the oil and gas company does not get an amendment signed, and goes ahead with fracking anyway, they run the risk of being taken to court for an injunction forcing them to stop operations after they have already committed serious time and money and materials to the project.

So, NextEnergy is covering their bases and trying to get the amendment signed. Now, I must warn you they may try to bully you into it, by threatening you and saying they have the right to do it anyway, so you might as well sign. DO NOT fall for it. This is a standard tactic. They may also say you might as well sign, because they can drill on your neighbor and steal your gas, so you might as well sign. NOT TRUE. There IS something called forced pooling in Illinois, but if by some chance they get any gas or oil from under you, they have to pay you for it, no matter where they drill. And right now IDNR is not allowing forced pooling anyway, and has not even issued one permit for forced pooling in all this time. I talked to IDNR about this myself. So do not fall for that one either.

Threatened to Sign A Lease

Q.  My husband’s family has been presented with leases for their surprise inheritance of indivually-small shares in mineral rights under some property in southern Illinois. Ugh! I’m a member of a grassroots fractivist group in Colorado and am appalled. I thought it was a load of frack-fluid when the landman told my husband that if he didn’t sign the lease, my husband would become like a part owner of the drilling company and would incur expenses of drilling before receiving any royalties.

This sounds crazy, but it’s what the landman told us; he even sent us a copy of a letter to someone owning property in Louisiana (not Illinois) to present the idea. Also, I’ve heard from an attorney in Colorado that it is possible, but he’s not familiar with Illinois laws.

Can you help me with this? Have you heard this before? I haven’t had any luck in looking at the Illinois oil & gas regs.

A Chicago (where I grew up) attorney offered to check into it for $300-$400/hour; I’d have to sell my house to afford that. We’re contemplating the HORRIBLE idea of signing the lease and donating any royalties (expected to be very, very minimal – but even if they were huge) to fractivist organizations, including SAFE. Another HORRIBLE idea is to sell our house and try to hide the money if there’s any profit, rent an apartment, declare bankruptcy, and then sign the lease.

By the way, we’re so impressed with the SAFE newsletter, actions, number of volunteers, etc. Kudos! We wish you the very best – a statewide ban – of course!

A. This is the most ridiculous thing I’ve heard yet. No, you do not become part owner of the drilling company just because you do not sign a lease, and it is legally impossible to “draft” someone into becoming part of any company; no, you do not incur expenses of drilling before receiving any royalties just because you do not sign the lease. Yes, it is a load of frack fluid.

The only grain of truth in it is, if you DO sign a lease expecting to receive royalties, and the lease says your royalty is computed at the well head, they get to deduct all kinds of expenses before computing the royalties.

I would doubt anything the landmen say; I would doubly doubt any copies of letters they say they sent, as this is easily faked; and I would especially doubt anything they say they sent to Louisiana, as Louisiana is under Neopolitan law, unlike the rest of the US, and their laws do not apply to us.

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