Property and Leasing

Private Property

Property Law and Lease Regulation

In the state of Pennsylvania, property is divided into two distinct entities: mineral and surface. Owning the surface or real estate does not necessarily mean that one also owns the subsurface or mineral resources that may lie below that property. Often real estate owners may be unaware of whether or not they own the mineral rights under their land. It may be necessary to trace the property deeds as far back as the 1860s to check if surface and mineral estates were split. Phrases in the deed such as "fee simple" indicate that you own mineral as well as surface property. In cases where the two, mineral rights and surface, rights are owned by separate parties, both are legally entitled to access their property. The owner of mineral rights is entitled to extract those minerals, even if this involves altering, or temporarily occupying parts of the real estate. Mineral rights also can be leased by their owners to a producer. These leases usually set an annual rental rate per acre and a royalty on production. Often independent companies acquire mineral rights leases from private holders and then sell them as packages to well operating corporations.

There are no regulations at the federal level that mitigate property rights issues. The state DEP does regulate certain technicalities of how a mineral rights owner can access his or her property. These regulations are outlined predominantly in the Oil and Gas Conservation Law and the Oil and Gas Act. The DEP, however, is not involved in regulating property or lease disputes, aside from making sure that minimum royalties (set at 1/8th the value of oil or gas produced (58 P.S. § 33 and § 34)) as prescribed by oil and gas laws are enforced.

Right of Capture

It is possible for mineral property to be extracted by a well operating on a neighboring tract of land. A well operator can legally capture gas even if it does not underlie the tract of land from which he or she is drilling. Unless it is a "conservation well" (see Oil and Gas Conservation Law) the operator cannot be forced by law to pay royalties. Instead, the operator ejoys a right of capture, meaning he or she owns whatever resource is extracted, even if it lay beneath neighboring property. Voluntary pooling agreements should be sought for operations that are near tract boundaries to prevent this property loss.

Important Regulations

Any well operation applying for a permit must notify surface rights owners, and water source owners or parties with coal interests located within 1000 feet of the prospective well (58 P.S. § 601.201(b)).

The surface rights owner may object to a well being drilled within 200 feet of any existing buildings--this is the minimum distance required by law. The department, however, has the right to overrule this objection if it would disable the mineral rights owners from accessing their property, and if the well operator agrees to additional measures outlined by the DEP. (58 P.S. § 601.205(a))

Well operators must restore the surface tracts affected by well operation, once they have terminated their use. They within nine months of closing the well, must remove all equipment from the site, and remove or fill in all pits used for the operation. (58 P.S. § 601.206(a,b)).

Leasing Public (State Forest) Land

Pennsylvania's public natural resources are the common property of all the people, including generations yet to come. As trustee of these resources, the Commonwealth shall conserve and maintain them for the benefit of all the people.
— Pennsylvania State Constitution, Article I, section 27

There are 2.1 million acres of state forest land in Pennsylvania. 1.5 million of those acres, or 71 percent, are within the Marcellus Shale formation. This land is managed by the Bureau of Forestry within the Pennsylvania Department of Conservation and Natural Resources (DCNR). In managing this large public resource, DCNR must balance its value as wildlife habitat, recreation space, and a source of income for the state from tourism, logging and natural gas extraction. DCNR has been leasing state forest land to private companies for the purpose of natural gas drilling since 1947. Of the 1.5 million acres of state forest land with access to the Marcellus, nearly half has been leased for natural gas drilling. Although leasing and drilling activity has fluctuated over the years, an unprecedented period of drilling on public lands has begun. This increasing activity has become an important source of revenue for the state.

Terms of the Lease

Leases of state forest land are sold at auction by the DCNR, with proceeds entering the Oil and Gas Lease Fund. The DCNR sends out notificaitons of the auction to potential buyers several months in advance, and bids are announced in a public event. In the past few years, auctions have brought in significantly higher returns than expected. In 2008, the sale of drilling rights to 74,000 acres brought in $160 million. In January 2010, the sale of 32,000 acres in North Central Pennsylvania generated $128.4 million, more than double the projected $60 million. The winning bids for the six tracts sold in 2010 are here:

Timeframe

According to DCNR, "operators generally have obligations to initiate oil or gas well drilling or storage activities within certain timeframes and the leases usually continue as long as the wells are producing certain quantities or storage activities continue...In general, if an operator fails to proceed with oil and gas development consisten with the terms of the lease, the operator would relinquish all or a portion of the leased acreage and DCNR would have the ability to lease the acreage to a new operator."

Conditions of the Lease

Once drilling rights for a parcel of state forest land have been sold, permits are granted by the Department of Environmental Protection (DEP) under it's normal permitting procedure. However, the terms of the lease include environmental requirements that DCNR claim go beyond permitting and other regulatory requirements, contractually limiting the number and location of well sites and mandating oversight by DCNR officials."Gas Leasing Policy and Process," PA DCNR. http://www.dcnr.state.pa.us/forestry/marcellus/

In 2003, DCNR proposed eliminating shallow gas development on State Forest lands, which may be more economical but requires more wells and surfance disturbance. The move drew objections from drilling interests and some state legislators. DCNR can still allow it on a case by case basis, especially when drilling deep wells reveals resources closer to the surface.

Surface vs. Subsurface Rights:

Like other property in Pennsylvania, rights to the land are divided into surface and subsurface rights.The Commonwealth owns the surface and subsurface rights ("fee simple") of 85% of state forest land. It is on this land that the state has the authority to grant drilling rights to private companies and gain revenue from the royalties. However, half of drilling in state forests occurs on the remaining 15% of land, where the state only owns the surface rights. In it's own admission, DCNR "has a much more limited ability to control surface exploration or development activity""Oil and Gas Position Statement," DCNR Bureau of Forestry, April 1, 2008. http://www.dcnr.state.pa.us/forestry/O&G/Oil_Gas_position.pdf [PDF] in these cases, and does not earn royalties from this drilling. When drilling occurs on state forest land where DCNR doesn't own the subsurface rights, the Department makes a "request" that the developers enter an agreement of environmental protection. It is unclear what the terms of such an agreement are, if it is binding, or how frequently these requests are satisfied. In any event, the much higher intensity of drilling activity on public land where the state does not own the subsurface rights would indicate that costs, controls or both are lower on these tracts.

Natural Gas Drilling and Pennsylvania State Finance:

In an era of fiscal crisis for states across the country, Natural Gas Drilling has become an important part of the Pennsylvania budget under governor Rendell. Historically, royalties earned from leasing state forest land has remained within the control of DCNR in the Oil and Gas Lease Fund, with money used for conservation and recreation programs. Beginning in 2008, growing revenue has gone to the state General fund. In the most recent $128.4 million sale in January 2010, the first $50 million remained for the DCNR's use, with the rest going to the general fund.

Proceeds from natural gas drilling play a prominent role in the Governor's proposed budget for the fiscal year beginning July 1st, 2010. The Governor has proposed an additional transfer of $180 million from the Oil and Gas Lease Fund to the State's general fund. In addition, the Governor has proposed a new "severance tax" on natural gas extraction on both public and private lands. The tax consists of 5% of the value of natural gas at the time of its extraction, plus a flat $.047 per thousand cubic feet of gas extracted. There is an exemption for wells producing less than 60 thousand cubic feet per day. The tax would generate an estimated $160.7 million, and would help to form a new "Stimulus Transition Reserve Fund," which is being introduced to help prepare the state for the phase-out of federal stimulus money.

The 2010-2011 budget also provides for 68 new positions in the Department of Environmental Protection's oil and gas program, fully funded by drilling permit fees, and 12 new positions in DCNR to handle drilling in state forest land.

The Proposed Moratorium - House Bill 2235:

In February 2010 state assemblyman Greg Vitali and thirty cosponsors introduced House Bill 2235, the State Forest Natural Gas Lease Moratorium Act. The act would put a five year ban on any new leases, and would require DCNR to issue a yearly report on the effects of current drilling on the environment and quality of life. At the end of the five years, DCNR would only return to leasing new land if it determines "in its sole discretion" that the forests can be "sustained in a balanced state" that preserves its environmental quality and "recreation, social and aesthetic values.”

Vitali introduced H.B. 2235 in response to an agreement between budget negotiators to raise another $180 million for the 2010-11 budget by leasing additional state forest land for gas drilling. According to Young Philly Politics, the Governor gained acceptance of leasing from Vitali and others in the previous year's budget by agreeing that the 2010-2011 budget would not include any more."

As of May 1, 2010, HB 2235 had cleared the Environmental Resources and Energy committee and the Appropriations Committee. The bill is likely to pass in the House, where Democrats have a small majority, but then will face more difficult passage in the Republican-controlled Senate. Republicans from the rural northern counties above the shale have been outspoken against the bill. Vitali had hoped to have the moratorium in place in time to stop the round of leasing planned for this summer, but admitted on April 22 that this was not likely.