Gas Leasing Comments
Division of Mineral Resources staff receive hundreds of phone calls each year from landowners who have been approached to lease their oil and gas rights. While we cannot review leases or advise landowners on this important decision, we present below our responses to some of the comments we frequently hear. Responses regarding well spacing and compulsory integration pertain to gas wells permitted in New York after August 2, 2005, in areas that are not exempt from the spacing law (Title 5 of Article 23 of the ECL). Statistics related to compulsory integration are derived from the records of 91 hearings held from May 2006 through April 2008.
In addition to reviewing the information presented below, please access the Important Links on the right-hand side of this page to learn more about well spacing, compulsory integration, and how the environment is protected during well drilling and operations.
Comment: I've heard that royalties of up to 25% have been paid under natural gas leases in New York.
Response: The Division of Mineral Resources does not track royalty rates in private leases. Staff have been told that some companies who have participated in wells in New York have offered royalties as high as 25%, and in May 2008 newspapers started reporting on leases in some areas that provide a 15% royalty. However, the market in any area controls the royalty rate. Integration hearing records show that all 13 companies which have drilled wells subject to integration in New York continue to lease for a 1/8 (12.5%) royalty.
Comment: I've been told that I will only receive a royalty from commencement of production if I lease to the well operator who drills the well. If I don't lease, or lease to someone else, my royalty will be delayed.
Response: If your acreage is in the spacing unit and you don't lease, then your rights will be addressed by the compulsory integration process. If gas is sold from the well in the unit and you elect to be integrated as an "Integrated Royalty Owner," then you will receive a royalty for production. (See the Guide to Compulsory Integration Options under "Important Links" to the right for a full description of all the choices available under the compulsory integration process). The well operator must pay Integrated Royalty Owners promptly and no less frequently than it pays its lessors. Assuming the integration order is issued prior to first product sales, royalties will be paid upon commencement of production. If you lease to another company (other than the operator) who participates in the well, then you would be paid by your lessee from the commencement of production if that is what your lease requires.
Comment: The fine print in standard, pre-printed forms cannot be changed.
Response: Like any contract, a lease is negotiable.
Comment: A standard oil and gas lease will allow the operator to store gas in tanks on my property.
Response: While oil or water may be stored in tanks at well sites, natural gas is not. Producing gas wells are connected to underground gathering systems which convey the gas to a sales meter and then to an end-user or major gas transmission line. If the well is on-line, gas flows through the gathering system. If the well is shut-in, gas remains in the wellbore and in the underground rock formation where it was found. Some proposed leases include terms that provide the lessee with storage rights to store gas underground. Like other lease terms, this is negotiable.
Comment: If I sign a lease I might be transferring possession of my property, and the gas company could tear down my house to drill a well.
Response: If you are certain that you are discussing an oil and gas lease and not a purchase agreement or mineral deed, then no property transfer should be involved. An oil and gas lease does place obligations on both the grantor and the grantee, and you should make sure you understand them all before you sign. Unless the lease includes specific prohibitions against surface entry, then the lessee does have an implied easement to use the surface of the land as may be reasonably necessary to obtain production. If you are concerned about specific surface disturbances you may seek to negotiate appropriate protective measures into your lease. For example, negotiated express provisions could address location of access roads, proximity of pipelines or wells to structures on the property, and the lessee's responsibility for surface damages. A non-surface entry lease may be feasible, but keep in mind that if ALL leases prohibited surface entry then there would be nowhere to drill.
Comment: If I do not lease to the well operator, I will not receive any compensation because my acreage will be excluded from the unit.
Response: The Environmental Conservation Law establishes criteria for spacing unit sizes and how close the well can be to the unit boundaries. If a proposed unit conforms to these criteria and the applicant controls 60% of the acreage, the Department must issue a permit. The Department will not issue permits for wells with proposed spacing units that create stranded acreage that cannot be developed. Well operators have an obligation to their lessors to develop their acreage. Because of this obligation and the 60% requirement, well operators are likely - within geologic constraints - to choose drilling locations which optimally develop their leased acreage. However, if your acreage is outside a unit and a successful well has been drilled nearby, it is possible that the same operator or a different one may decide to include your acreage in a future unit.
Comment: I was told that the State/DEC forced the well operator to revise a Spacing Unit.
Response: The Department may only modify a unit previously established by a permit or a spacing order after all affected parties have had an opportunity to comment. Such Department-initiated modifications are very rare. The rumor that the Department changed a spacing unit most often arises when an operator forms a voluntary unit, in accordance with the pooling clause in its leases, that is different from the spacing unit established under the Environmental Conservation Law when the Department issues a well permit. Operators are not required to inform the Department of voluntary units, and the Department does not track them. However, only the spacing units established by Department permits and orders are recognized for the purposes of compulsory integration and future well permitting in a given area.
Comment: I thought that if I leased, all of my acreage would be in the spacing unit and production would be allocated to all of my acreage.
Response: Until the Department issues a well permit, there is no certainty about where a well will be drilled or what the spacing unit will look like. If the well permit has been issued or an application for one has been received, then the spacing unit map is available for review by contacting the appropriate Division of Mineral Resources regional minerals manager for oil and gas.
Comment: It is better to seek compensation through the compulsory integration or forced pooling process than by an oil and gas lease.
Response: There is no compulsory integration process unless the Department issues a permit to drill and the land is included in a spacing unit. Historically, only 10-15% of the acreage leased by oil and gas companies is ever included in spacing units, and the Department cannot issue a permit to drill unless the applicant controls 60% of the acreage in a spacing unit. If everyone in a prospective area waits for compulsory integration, it will never happen because no well will be drilled. Only you can determine for yourself, with appropriate legal advice, how the compensation offered for a lease on your acreage stacks up against any perceived disadvantages.
Comment: All of my obligations as an Integrated Participating Owner or Integrated Non-Participating Owner will be fulfilled at the integration hearing, before the integration order is issued.
Response: Integrated Participating Owners are responsible for their share of costs for the life of the well. There may be time periods where costs exceed production so that money will be due to the well operator. Drilling problems may increase costs above the original estimate, or inflation may cause plugging costs to increase above original estimates. After recovery of the risk-penalty, Integrated Non-Participating Owners are treated the same way and have the same obligations as Integrated Participating Owners. Both types of owners may bear liability for third-party claims.
Comment: The only way I can participate in a well as a working interest is through the compulsory integration process.
Response: Joint Operating Agreements are common in the oil and gas industry, and - although we cannot require them - the Department strongly encourages these agreements between the well operator and other potential working interests within the spacing unit. The advantage of these agreements is that business interactions among the working interests - such as data sharing, payment schedules and audits - are controlled by contract instead of by state government.