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Oil and gas mineral owners: How to pursue a better offer

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The production of natural gas from wells drilled horizontally into the Marcellus Shale in West Virginia began in December 2007 — just over five years ago.

Now, leases that were signed in the land rush that followed and have the typical five-year primary term are beginning to expire.

"Over the next two years, a great deal of these leases are going to roll off," said Morgantown lawyer Stephen K. Shuman, who includes oil and gas law in his practice at Reeder and Shuman in Morgantown.

Producer interest in maintaining leases or acquiring new leases depends on the same fundamental factor as all things real estate: location, location, location.

"Everybody's chasing wet gas in Ohio, Marshall, Wetzel, Doddridge, maybe Tyler," Shuman said, referring to the counties in which significant amounts of valuable natural gas liquids come up from the Marcellus Shale with the methane.

In counties where the gas is drier, he said, producers that signed leases during the land grab are not looking to renew.

But in those wet-gas counties, gas tracts that aren't held under lease by production are going to be attractive.

"Held by production" can be obvious.

"If they've drilled a well, then it moves the lease into the secondary term and it's valid as long as they're producing oil or gas," said Robert Hart, president of the West Virginia chapter of the National Association of Royalty Owners.

It can also be invisible.

"These days, leases also can include (as activity that holds the lease) things like geological studies or mapping — things that wouldn't give any physical appearance that they've done anything at all," Hart said. "And the activity doesn't have to be on your property. If the lease terms provide for them to pool or unitize it with other lands and they declare you in the pool or include even one acre of your, say, 100 acres in the pool, they've got a valid lease on your land."

What should a mineral owner do who holds a valuable lease that is soon to expire, apparently without activity — who, maybe, has gotten a better offer?

Before doing anything else, read the lease, Shuman said.

"A lot of this stuff was so sloppy when the land rush was on — sometimes they got it right, sometimes they didn't," he said.

Some leases allow the lessee to renew beyond the primary term without production by making a specified payment, Shuman said. "Cutting the check and sending it out is the same as exercising the option."

The mineral owner who signed such a lease cannot prevent renewal. "The courts have said that that's enforceable" — even if there's a much, much better offer, said P. Nathan Bowles, who practices oil and gas and other areas of law out of Bowles Rice's Charleston office.

Some leases, importantly, have provisions prohibiting "top leasing," or signing a second lease that would take effect on expiration of the first.

But ultimately, a lessor who believes the lessee hasn't done what it takes to hold or renew a lease beyond the primary term can write a letter requesting that the lease be voided, Hart said.

"More often than not there's language saying the company has 60 days after they get the letter to remedy the situation," he said.

An inquiring producer who makes a better offer is probably going to want to see documentation showing that the first lease is terminated, said William J. Leon, who represents mineral owners in his law practice in Morgantown.

And where the lease allows activities like mapping to stand for production, Leon said, that can be difficult.

"I've got a case right now where the primary term was up in March and we got in touch with the current holder of the lease and said, ‘We think this is terminated.' They said, ‘No, we think we're producing,'" he said. "We have to file suit."

It all serves as hindsight for those signing leases in the future. When Leon negotiates leases for mineral owners, he said he includes an objectively verifiable milepost. "You have to at least have acquired a permit or actually have begun to move dirt and stake out a wellpad — something you can't quibble about."

Most of the re-leasing activity in the coming several years will apply to those who signed modern "paid-up" leases during the last decade for the Marcellus Shale — leases where the lessee pays the lessor an up-front fee for the primary term and can pay again to renew.

But here's a note for those who have older "flat-rate" leases that pay "delay rentals" to maintain a lease beyond the primary term, with or without production.

Some of those auto-terminate after the primary period in the absence of production or regular, on-time payment. But some don't, Bowles said. In those cases, the process for terminating such a lease is like the one Hart described for paid-up leases: Write to the operator demanding payment and, if it's unpaid within 60 days, the lease is terminated. The rules for this termination process are contained in West Virginia code.

Shuman reiterated the importance of understanding the lease.

"If you're dealing with more than a fractional interest, get an attorney who's knowledgeable and spend an hour with him," he said. "And if there are elderly parents involved, children ought to step in and negotiate and help out."