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Landowners Cautioned on Amendments, Pipeline Deals
HOWLAND, Ohio – Landowners who recently signed leases with giant energy firms should be wary about amending their contracts at the request of these companies, warns an attorney who has helped negotiate thousands of lease agreements in the region.
"Nearly every lessor in Mahoning County and Columbiana County is receiving a request from their leasing company to amend their leases," says Alan Wenger, a partner at the law firm of Harrington, Hoppe & Mitchell. The firm hosted an informational seminar Tuesday at the Magnuson Grand Hotel, formerly the Avalon Inn, on what landowners can expect in the coming months related to their recently signed oil and gas leases. Some 300 people attended.
Wenger said that companies such as Chesapeake Energy are looking to double the unit size initially allowed in these leases to 1,280 acres from from 640. Originally, Chesapeake signed up blocks of landowners and pooled them into units of 640 acres surrounding a single drilling site. Now it wants to increase the size of those units.
Chesapeake has said its operations would be more efficient if it could control larger units instead of the smaller 640 acres, Wenger said.
But the attorney thinks there's another motive.
"I'm suspicious that the real reason, particularly Chesapeake, given its obvious financial situation, is to get the most out of these leases they signed and flip them to other companies such as BP and Consol," Wenger said. "They don't need 1,280 acres to drill a well."
Wenger said most of the drilling units to the south in Columbiana and Carroll counties are between 150 to 160 acres and don't require larger units.
He also cautioned those attending to consult an attorney before signing any amendment. "Don't sign these documents because the language they put in front of you has a lot of ringers," Wenger said.
Some language in the amendments, for example, allows further changes to the lease without consent of the landowner, Wenger noted. Other provisions he's seen could allow the terms of a neighbor's lease on land where a well is drilled to also cover the owner’s property. "That, if read literally, could completely change your lease," he said. "Don't sign these without legal counsel."
The event Tuesday was held to address issues these landowners have related to mineral rights agreements they've negotiated with the likes of BP Energy and Chesapeake Energy -- big players in an industry brand-new to many in the Mahoning Valley, Wenger said.
"There will be issues on the unitization process, the startup of operations with pads and drilling activities, title issues, and agreements they'll be asked to enter for pipelines and water supply," Wenger said.
The majority of his audience hailed from Trumbull County, where BP has leased about 85,000 acres for prospective drilling in the liquids-rich Utica shale, Wenger said. However, residents from Mahoning and Columbiana counties were also present.
Wenger said those landowners who signed with BP earlier this year should see bonus checks starting to trickle in next month. "They're starting with the smaller leases," he said, noting all of the bonus checks should be delivered by October.
Five of the firm's attorneys whose practices dwell on a specific discipline delivered presentations that touched on title research, property issues, operational questions, federal and state tax guidelines and financial planning.
For example, some landowners who have signed leases with the energy companies are likely to be approached by other companies that are contracted to construct gathering and transmission lines across their property, Wenger said.
"It's going to be vital that there be a system of pipelines to get the product to market, and that will be developed gradually as the drilling activity increases," Wenger said. "Those arrangements need to be made separately in most cases from the lease agreement. It's a very important set of separate negotiations that these folks need to anticipate."
Wenger, as the lead attorney for the Associated Landowners of the Ohio Valley, or ALOV, helped negotiate thousands of leases and inserted new language that provided more protections to landowners.
"I think we developed a strong group here," he said of his firm's oil and gas practice. "We've raised the bar on what a decent lease should look like."
Today, large energy companies are using some of that language as standard in some of their initial leases, Wenger noted.
The law firm presented short tutorials on state and federal tax law and how it treats bonus payments and royalties.
Bonuses and royalties are treated as ordinary income by the Internal Revenue Service and must be reported the year the money is received, said attorney George Millich. "Once you receive cash, it's reportable for tax purposes for that year," he said.
Among the tax strategies landowners could consider are transferring mineral interests to a trust, a limited liability company, or a family limited partnership. "One thing I will tell you,” Millich said, “is that valuation, whether it be your mineral rights or your lease, is very important prior to transferring to one of these entities."
It's also imperative that lessors consider estate taxes as part of their planning, he added.
Federal estate tax law allows up to $5.12 million be transferred upon death tax-free, and any amount above that is taxed at 35%. However, this law is scheduled to expire this year and, if so, would allow just $1 million transferable upon death and a 55% tax, he said.
"Unless there's something that's done to continue this, it's something to consider," Millich said.
Despite tax shelters and other mechanisms used to mitigate the burden, the government will always get its share, he cautioned.
"One thing we all know is that the government has a tax on just about everything you can think of."
Copyright 2012 The Business Journal, Youngstown, Ohio.