Geologists have long known that certain deep shale formations contain natural gas. Developments in drilling technologies have enabled gas companies to extract the gas economically. The rush to extract gas from shale has created a boom economy in areas that have not seen large-scale gas development.
The new technologies combine horizontal drilling with hydraulic fracturing to extract gas. In horizontal drilling, a vertical bore is drilled to reach the shale layer, and then the drill is turned sideways to follow the shale formation. Several horizontal bores may emanate from a single surface drilling pad in a radial pattern. In hydraulic fracturing (known as "fracking"), a fluid containing chemicals, sand and water is pumped into the horizontal bore under high pressure. The pressure and chemicals open long fractures or cracks in the shale. The sand (or other propping agent) enters the cracks and holds them open when the fluid is withdrawn. Gas flows from the shale into the cracks, follows the cracks to the well bore, and follows the well bore to the surface.
The first well-known shale gas boom started in the Barnett Shale Formation in the Fort Worth basin of Texas around 10 years ago. Gas booms in the Marcellus Shale Formation in Pennsylvania, New York and West Virginia, and in the Antrim Shale Formation in Michigan are in full swing, and a new gas boom in the Utica Shale Formation in Michigan is just starting. A gas boom begins when agents for gas companies, known as "landmen," approach the owners of gas-containing shale deposits (typically the surface owners where there has been no severance of oil and gas rights) with proposals to lease the oil and gas rights on their property. Some landmen have been known to combine the prospect of large signing bonus payments with threats that gas will be extracted by wells near the property without payment, to pressure landowners to sign a lease quickly. Under common industry lease forms, the company typically is given five years to drill a well after the lease is signed. If a well produces gas anywhere on the property, the lease typically continues until the gas is exhausted (even if exhausting the gas requires the drilling of multiple wells over time). Exhaustion of gas from a single well may take decades.
Gas leases may look like immutable forms, but many of the provisions of gas leases are negotiable. In fact, gas companies will compromise many of the more far-reaching provisions of their lease forms if the landowner’s lawyer simply knows what or how to ask. Landowners who sign quickly without negotiation often miss opportunities to improve the economics of the deal, or to protect themselves from potential negative effects of gas exploration and production on their properties. These concerns fall into two categories: interference with other uses of land and environmental impacts. Landowners can protect themselves from these negative effects by negotiating to limit blanket gas company rights typically included in lease forms.
Examples of rights that can interfere with other uses of land include the right to use the surface for drilling rigs, compressor stations, storage areas and fracking fluid ponds. Interference can also come from the right to construct gas or water pipelines and to inject gas produced off the property into underground rock strata for storage. These rights can last long after the gas produced on the property has been exhausted. Depending upon the size and location of the property, gas companies may be willing to forgo these rights (or pay separately for them), or will limit them to locations that minimize interference with the property owner’s other uses of the land. In some cases, the gas company may agree to waive the right to use the surface and soil of the property altogether, if gas can be drained from the property by wells located off the property.
Although gas exploration and production can cause noise and light pollution, the potential environmental problems that get most attention are surface and groundwater contamination and the leaking and spilling of fracking and drilling fluids. Fracking a single well requires millions of gallons of fracking fluid. While a vigorous debate is underway on many of these environmental issues, if the gas company does not case and cement the well properly, the pressure from fracking can cause contaminants to leak into groundwater. If the gas company stores the fracking fluid in a pond that is not properly lined, it can also contaminate groundwater. Pumping and transportation of fracking fluid can result in spills. Landowners can allocate liability for potential environmental problems contractually by negotiating effective environmental controls, remedial actions and liability protections in their leases.
Owners of oil and gas rights should welcome the financial opportunity presented from leasing gas rights on their property, but should engage knowledgeable legal counsel to protect them from the risks.
Timothy B. Anderson