After half a decade into oil and gas leasing in Western Pennsylvania, many of the more desirable farming areas are now committed to a drilling unit for production and leased-up. Until recently, if a smaller parcel landowner, such as those located in towns, wanted to lease their mineral estate, they found themselves needing to piggy-back onto leases designed for a neighboring large farm. This is no longer the case as the industry has begun implementing programs aimed at leasing small towns, communities and cities. As the opportunity to profit from oil and gas expands, landowners of small parcels may now have a chance to join in those profits.
Regional and national drillers have been eyeing smaller parcels and towns in Allegheny, Butler, Greene and Washington Counties as of late and are now looking for ways to economically extract oil and gas from these areas. Previously it did not make economic sense to target these small areas simply because it would require the combination of many small parcels into a group to create a profitably sized drilling unit. Companies now have found ways around this dilemma. One recent example includes a pilot program launched between Range Resources and Claysville, a small town of Washington County located in Southwestern Pennsylvania. The program encourages small-tract owners to lease their subsurface rights as a group or community in exchange for a donation to the community. Range and Claysville then came to threshold agreement of 90% meaning once 90% of the community was under lease, Range would then provide a donation. Here 90% of community was leased and Range Resources in-turn donated a new fire truck to the community valued at $500,000.
Similar projects have been undertaken by Rice Drilling and Rex Energy. The process involves all or an agreed upon percentage of individual landowners within a community signing a group lease. However, each landowner does retain the ability to negotiate on an individual basis. In return for a group lease, the community benefits from receiving some sort of improvement project. Other the other hand, the lessor benefits by accessing untapped resources that otherwise would have been economically unattainable.
Although this new process of leasing may be more extensive and time consuming, the group community unitization process differs very little from the more common leasing of large parcels. Traditionally, the process of oil and gas drilling involves unitizing multiple parcels into a group that would allow for the capture of the oil and gas from a single location. Unitization cuts down on both subsurface and surface waste simply due to the fact a single well pad can produce from 400 – 1200 acres. Typically, units are built around one or two large farms and any adjacent tracts of land. Similarly, when unitizing a town a town or community, the drillers will first search for a large parcel on the outskirts of town to place the well pad. Once this is done, the drillers can map out the horizontal extensions of the well in order to extend them into the group leased town. ((For more information on drilling and unitization, please visit http://www.museumoftheearth.org/files/marcellus/Marcellus_issue6.pdf.))
Not only does the community benefit from group leasing but the individual leaseholders also benefit. By extending the lateral wellbores into town, those community residents that lease falls within the unit are entitled to receive a royalty payment from the gas produced. This alone allows the small parcel landowners the capability of receiving the same offers as their large farming neighbors, albeit at a lower sum due to less acreage. While the signing bonus may seem minuscule due to their small acreage, the lot owner must look at the value on a communal scale. Not only will they continually profit as the well produces, but so will their neighbors and the municipality as a whole. But not all land in small towns will be owned by residents. Typically, small municipalities and towns own their own surface and subsurface rights. One such example is in North Braddock, Pennsylvania, where the borough is considering leasing 300 blighted and vacant properties. As you can see, group community leasing benefits both communities and landowners alike.
Like any new energy project, however, group and community leasing does come with criticism. Unlike exploration in rural areas, this type of leasing places drilling much closer to towns. With their close proximity to town, the drilling pads are not necessarily “out-of-sight, out-of-mind.” Although residents of towns may not have an unconventional drill in their personal backyard, it will surely be in their communal backyards. In addition, those residents living near the drilling pads will face additional pollution and distraction. For instance, trucks traveling to and from the drill site emit both emissions and noise pollution. Furthermore, the drills themselves operate in a manner that is similar to a small factory and the risk of spills and leaks are always a present danger if not monitored correctly. Range Resources was recently fined by the state of Pennsylvania for leaks stemming from fracking wastewater ponds in Washington County. Additional fears span from water contamination to fatal well fires.
Even if residents stand behind and encourage the community lease concept, there is not always a guarantee it can be effectuated. Any desire to drill in a small town can always be preempted by the municipality. The recent Pennsylvania Supreme Court landmark decision of Robinson Township v. Commonwealth invalidated statewide land-use regulation of oil and gas operations as found in legislative Act 13 of 2012.((Robinson Township, et al. v. Commonwealth et al., Case No. 284 M.D. 2012.)) The opinion stated that the General Assembly “has no authority to remove a political subdivision’s implicitly necessary authority to carry into effect its constitutional duties.”((Id. at 162.)) The court additionally found that governmental action, such as land-use regulations, are “a quintessential local issue that must be tailored to local conditions” and “cannot reasonably be assessed on the basis of a statewide average.”((Id.)) A full copy of the opinion can be found here. Therefore, even if residents agree to a community or group lease, the municipality still retains the power to block the drilling.
The concept of leasing small communities, boroughs and towns as a group is an interesting concept and shows the willingness of the oil and gas industry to experiment with new programs in an attempt to reach all attainable resources. However, as these programs develop in the future, they most likely will face criticism. If the programs are implemented properly and risk is minimized, the concept of group/community leasing could potentially offer great benefits for small towns in need of improvements and also individual landowners that previously believed would never benefit from oil and gas exploration. It will be interesting to see if these programs remain “ideas” or if they will become common and develop with the industry.