Avoiding oil, gas lease pitfalls

HILLMAN – Hillman area residents and state employees held a meeting to inform mineral rights owners about Collingwood-Utica shale, and the options they can take for leasing oil and gas drilling rights.

Michigan State University Extension farm management educator Curtis Talley Jr., and Department of Environmental Quality geologist David Lawrence spoke at the Hillman Community Center, as did Fred Miller, a former Hillman resident who has dealt with oil and gas companies before. They addressed a large crowd about drilling opportunities in Northeast Michigan and what to avoid when signing a minerals lease.

Miller has no commercial interest, and no animus toward oil and gas producers, he said. Rather, he’s aiming to educate land owners about their leasing options as interest in developing wells to tap Collingwood-Utica shales increases. He’s also hoping to drum up interest in land owner associations. These groups have more clout when dealing with oil and gas companies. Miller was involved with a similar group near Fletcher Pond. By getting everyone in a certain area involved, they were able to split legal costs and get a good deal through their leases.

Collingwood-Utica shales are typically 6,000 to 10,000 feet deep in Northeast Michigan, Lawrence said. They’re found across the northern Lower Peninsula, including under Alcona, Alpena, Montmorency and Presque Isle counties. When asked for a show of hands, a dozen or so audience members indicated they’d been approached about leasing Collingwood-Utica shales under their land.

Tapping the formation requires a different drilling technique than Antrim shale, the formation tapped by most of the wells currently in Alcona, Alpena and Montmorency counties, Lawrence said. For one, Collingwood-Utica is considerably deeper than Antrim. Collingwood-Utica is typically exploited by drilling horizontally and cracking up the shale using hydraulic fracturing.

Known as fracking, this technique has been used in Michigan since 1952, Lawrence said. More than 12,000 wells in the state have been completed using the technique since then, including numerous wells in Alpena and Montmorency counties. Nearly all of them are vertically drilled wells tapping Antrim shale gases.

In response to an audience member who asked if there had been any environmental problems resulting from this, Lawrence said he was unaware of any problems in Michigan. By DEQ rules, all fracking fluids that flow back out of the well must be containerized, and can’t be stored in an open pit.

Lawrence also gave a rundown of what the DEQ’s Office of Oil, Gas and Minerals does, including drilling plan reviews, well site inspections and other tasks to ensure oil and gas drilling is being done safely.

Talley gave the second part of the presentation. He formerly had been involved in the commercial side of hydrocarbon production, and negotiated with oil and gas companies in Colorado. He and Miller urged the audience to avoid so-called standard leases. Most are written to benefit the oil and gas companies, and many aspects of a lease can be changed. Other items can be added to benefit the land owner.

Talley talked about some of the negotiating tactics used by leasing companies, and urged people to know what they want. Good leases take time, and each landowner has unique goals for their land to consider. It’s also common for people to take cash bonuses and pay little attention to what’s on the lease they signed.

“So many people do not look at their minerals as something of value,” he said. “They can be very valuable, they can be more valuable in some situations than the surface production.”

Talley recommended seeking the advice of an attorney familiar with oil and gas leases, he said. There are numerous aspects of these documents that require specialized knowledge, and the agreements can last for generations. Lessors should seek contracts containing a Pugh clause, which releases any land not receiving royalty from any unit or pool after the primary term expires. The primary term is the period during which a company must start drilling or its lease will expire, usually over one to five years.

Land owners also are able to lease specific strata, and stipulate that leases only cover hydrocarbons and not other chemicals, Talley said.

Asking for topsoil segregation can make site restoration easier, Talley said. This stipulation requires the drilling company to keep any topsoil cleared to make the drilling pad in piles nearby so it can be replaced later. Land owners also can negotiate payments for surface damage, and some have made arrangements to be paid for any timber cleared for the drilling site.

Setback requirements must be minded as well, Talley said. Leases typically have a 150-foot setback from any house for well drilling, but this is open to negotiation. He showed the audience a photograph of a drilling site crowded with semi trucks and other heavy equipment.

Some landowners can get non-development leases, where the oil or gas is drilled from another site, Talley said. He showed an image of one site where dozens of wells were drilled from a single drilling pad.

More information for landowners is available through MSUE’s website, at msue.anr.msu.edu/program/info/oil-and-gas.

Jordan Travis can be reached via email at jtravis@thealpenanews.com or by phone at 358-5688.