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Marcellus Shale Drilling Frederick M. Nice, Esq. © 2010
Marcellus Shale Drilling
Frederick M. Nice, Esq.
© 2010
Before You Sign A Gas Lease
Negotiate Addendum
• Language less than clear• Language in favor of gas
company• An addendum is expected
if you ask• Negotiate a higher bonus
payment• Negotiate a higher royalty• Negotiate better lease
terms
© 2010
1. Conflict2. Royalty3. Shut-in Royalty4. Indemnify and Hold Harmless5. Pipeline Clause6. No Gas Storage7. No Drilling within 500 feet8. Timber Clause9. Clean Up Premises10. Clean and Green Clause11. No Option to Extend
44 Typical Addendum Provisions
© 2010
12. Pugh Clause13. Surface Damage14. Payment in Lieu15. Location Approval16. Use of Ponds17. Plow Depth18. Road Width19. Commencement of Operations20. Crop Damage21. Water Quality22. Fresh Water Damage
44 Typical Addendum Provisions
© 2010
23. Minimize Soil Erosion24. Fence Producing Well25. Fences and Gates26. Well Sitting Fee27. No Other Minerals28. Three Year Shut-in Limit29. Double Ditch Method30. Market Enhancement31. Prudent Operator32. Access to Information33. Disposal Wells
© 2010
44 Typical Addendum Provisions
34. Compliance35. Fair Market Value Royalty36. Notice of Assignment37. No Facilities38. Audit39. Ad Valorem Taxes40. Special Warranty Title41. Release of Lease42. Force Majeure43. Arbitration Clause44. Lease Ratified
© 2010
44 Typical Addendum Provisions
• Notice to landowner
• Required by permit
• To all surface owners or water supplies within 1000 feet of proposed well location
• Review the well location plat plan– Well location and number
– Angle and direction of drilling
Before Drilling
© 2010
• Take pre-drill water samples
• If pollution or diminution of water supply within 6 months of drilling
– Presumption well operator responsible
– Few defenses
– Restore or replace
Before Drilling
© 2010
• Interests or estates can be dealt with separately
• Surface – raw land, recreation, hunting, home site, cabin
• Subsurface – mineral rights, monetary value
Two Separate Estates in
Land Can Be Created
© 2010
• Sold with the land
• Retained by the seller
• Sold separately
• Lease assignment
• Mineral deed
If Selling Land, Subsurface
Rights (Estates) Can Be:
© 2010
• Estates can be owned separately• Surface by Mom & Dad• Subsurface by LLC of Mom & Dad
– LLC: Limited Liability Company
• LLC becomes General Partner of Limited Partnership (LP) which includes children– Provides governance and control in parents– Orderly and easy shift of equity to next
generation– Cash flow during lifetime
Lifetime and
Multigenerational Planning
© 2010
• Limited Partnership– No PA Capital Stock/Franchise Tax
• Family Limited Partnership
• Revocable Trust or Irrevocable Trust– Own subsurface rights
– Mineral deed
– No real estate transfer tax
• Corporation– C Corp or S Corp
© 2010
Lifetime and
Multigenerational Planning
• Fair market value
• Appraisal techniques– Cost
– Income approach
– Comparables
• Surface rights
• Subsurface rights
© 2010
Valuation of Interests
• Pre-production value– Very speculative– May be no additional value
• During production value– Still very speculative– No history in Marcellus of well
production decline rate or production life expectancy
• Discount rates apply
© 2010
Valuation of Interests
• Subsurface rights increase property value if together
– Preserve right to minerals
– Preserve stream of income
– Greater value on resale
© 2010
Valuation of Interests
• Subsurface rights decrease property value if separate– Right of ingress, egress,
regress– Build roads, drilling
pad, pipelines– Limitation on use and
enjoyment– Lower fair market
value
Valuation of Interests
© 2010
• Will
• Revocable trust
• Irrevocable trust
• Mineral deed
• Life estate deed
Estate Planning: How to Pass Subsurface Rights to Next
Generation
• Limited LiabilityCompany
• Family Limited Partnership
• Corporation – gift of stock duringlifetime and at death
© 2010
