Leasing headed over the top

MOUNDSVILLE – Mineral rights owners, take note: if you leased your gas and oil rights a few years ago and drilling hasn’t taken place, then it is possible for you to cash in a second time on your holdings, as many of the Marcellus Shale leases signed throughout northern West Virginia a few years back soon will expire without drilling taking place.

This process is called a “top lease,” and it allows companies to speculate that your original drilling lease will expire before a pooled drilling unit is formed and tapped. If a top lease is agreed to and the original lease expires, then the top lease would take effect.

Every Marcellus or Utica shale lease agreement may have its own unique provisions, including automatic renewals at specific intervals. However, many of those signed in 2009 were set to expire after five years if drilling did not commence within that time frame.

According to Tim Carr, the Marshall Miller Professor of Energy at West Virginia University, local lawyer Jonathan Turak and the Baker Botts international law firm, a top lease is basically a second agreement that a mineral owner signs for land that he or she already has leased. If the initial lease expires, the top lease would take effect.

“A company usually signs a top lease if they believe someone is not going to drill, but believe the area has a lot of potential,” Carr said. “I bet this is because some of these leases are expiring.”

Residents in the local area, particularly Wetzel County, have reported being contacted by companies seeking to offer top leases.

Baker Botts states that “speculators, often landmen,” are those most likely to be soliciting top leases.

“The top leases offered by some operators are very unfair because they aren’t true top leases,” Turak said. “They only promise to pay in the event the underlying lease expires. In that way, the mineral owner is locked in at a certain price without the operator paying any consideration for the commitment.”

Local lease contracts signed since 2009 include provisions for lease payments ranging from $5 per acre to $8,000 per acre, with production royalties ranging from 12.5 percent to 20 percent. Energy giants such as Chesapeake Energy, Chevron, Rice Energy, Gulfport Energy, Antero Resources, XTO Energy and others currently are active in the local play.

Turak said if the company that signed the initial lease begins using the acreage for drilling, the subsequent top lease is rendered worthless.

“The mineral owner believes his current lease will not expire, and sees the top lease as a way to earn some additional income. The operator taking the top lease bets the lease will expire and his top lease will kick in,” Turak said.

As some companies are now signing mineral owners to top leases, others continue searching for new shale opportunities. Tim Greene, owner of Land and Mineral Management of Appalachia, said other items mineral owners need to consider when signing a lease include:

– requiring the company to pay for extracting ethane, propane, butane, pentanes and other NGL, as some companies will consider these “byproducts” that the landowner has agreed to discard;

– limiting the extension of the lease;

– limiting the gas company’s ability to install storage facilities, disposal or injection wells for hydraulic fracturing waste, pipelines and compressor stations;

– including surface damage protections to ensure the least amount of property damage.