Prior to 2008, Ohio landowners often would negotiate their own oil and gas leases. With relatively modest amounts at stake, these transactions were fairly simple, standardized, and streamlined. Since that time, oil and gas leases and sales now frequently involve millions of dollars in potential royalties and bonuses. Companies pack their leases with sophisticated clauses and jargon that determine your vulnerability to dishonest and misleading business practices. A few lines of innocent sounding language can eliminate 50% or even 100% of your royalty check from unwanted deductions.
The absence of landowner friendly clauses also allows the driller to utilize the surface of your property in unwanted ways. This includes road access, storage facilities, and storing or transporting hazardous materials and toxic wastewater on your property. Other clauses could help you secure major advantages. These advantages include multiple additional signing bonuses, protecting timber and water rights, earning tens of thousands in extra fees for the use of the surface of your land, and many other major potential advantages. The quality of your legal representation (or lack thereof) causes enormous differences in both financial results and risk elimination.
Price Per Acre
Price per acre and royalties are a critical piece of the puzzle. However, many individuals mistake these considerations as the only terms that require any serious attention. It is also an area where landowners are chronically exploited.
In 2024, some local drillers reported that the average amount they pay landowners per acre is in the $500/acre range. This is because landmen (the agents who negotiate leases) usually offer significantly less per acre if they suspect you lack knowledge of the market. Without knowledge of fair market value, an increase of two thousand dollars per acre might seem advantageous. In reality, the starting offer was simply egregiously low. By contrast, a starting offer conveyed to an attorney might be $2500-$3000 per acre, 20% royalty, with the possibility of increasing that offer by an additional $1500-$4000 acre, depending on the current global price of oil and gas, the location of the tract, and nearby production data.
An experienced practitioner should be monitoring and analyzing these factors in order to accurately gauge the value of your parcel. Over time, these amounts will fluctuate drastically in tandem with the price of crude oil and natural gas. In a down market, a $3000/acre price might have been fair during certain time periods. But within only a few days or weeks, sudden price spikes might double or triple the market rate. Accurate, up-to-date market knowledge is essential to avoid leaving money on the table.
Mineral Sales / Royalty Sales
Alternately, you can receive an even higher price per acre in the event of a mineral sale. However, this option is not ideal for every client. Mineral sales offer a guaranteed return, a higher amount up-front, and a quick, guaranteed a payment. Certain clients who value a quick receipt of funds and a minimization of risk may find these advantages attractive.
However, a well-negotiated lease will usually generate significantly more funds over time via production royalties than a mineral sale. Another disadvantage is that a mineral sale provides less control over the surface of your land. Be certain that a mineral sale is in your best interests.
Preventing Driller Misconduct
Initially, do not permit a landman to pressure you into a lease by hurrying you or citing artificial deadlines. Landmen frequently threaten landowners with force pooling. This is a procedure where the state of Ohio forces you into a lease. In reality, these companies work hard to avoid force pooling. Informed landowners can cause significant problems for companies in a force pooling situation. Because of these problems, an active force pooling order often does not prevent entering into a lease.
Also be on guard for misleading or unsupported statements. Some examples might be assurances about when a drilling unit will go forward, or how much you might be able to expect in production royalties. Landmen frequently have little or no accurate information about these matters. Nevertheless, they may intentionally mislead you in order to encourage a quick and careless signing. Arm yourself with knowledge, take your time, and understand every aspect of the transaction before signing a lease.
Gross vs. Net Royalty
Second, there are a variety of questionable practices that drillers themselves sometimes engage in that your lease should protect against. Many drillers will seek permission to deduct monies from your royalty checks. The lease language typically describes these as costs for gathering, compression, dehydration, processing, marketing, treating, handling, and transportation. Never authorize these costs, as they can consume a massive percentage of your royalty.
At times, the lease will also include an addendum provision that claims to provide a “gross royalty”. At times these provisions are purposely defective, and still allow them to take out deductions. Your attorney must carefully craft the language of these provisions to prevent any possibility of illicit deductions.
Shell Companies
A second category of driller misconduct your lease should protect against is transactions with subsidiaries, or shell companies. This is another method that drillers have used to avoid making full royalty payments to landowners. In this scenario, the driller creates a shell company to purchase the oil and gas at an artificially low price. The landowner receives their royalty at this artificially low price, to decrease the amount of their royalty check. Finally, the shell company sells the oil and gas for what it is actually worth down the line. Then, they pocket the difference in price.
Fraud
A third example of driller misconduct your lease should protect against is fraud. It is extremely rare for oil and gas companies to offer you an audit clause. Audit clauses provide the ability to double-check their production records against their financial and other records. Ohio landowners have repeatedly sued oil and gas companies for systemically paying fraudulently reduced royalties. Without the ability to audit these records, landowners are in the position of taking on faith that they are being paid appropriately. With millions of dollars hanging in the balance, this represents a completely unacceptable risk.
Landowner Protection Clauses
Landowners can override the terms of the base lease and insert landowner-friendly terms by using an addendum to the lease. Customized lease provisions may include dozens of protective provisions, some fairly obscure and arcane. Included in this article are a brief description of some of these clauses, and a few sample clauses, below.
NOTICE: These materials are provided for general information only. They do not establish an attorney client-client relationship. You should not necessarily rely on any cookie-cutter provision found online that may not be the best fit for your situation. They may also become outdated due to changes in the law or in the oil and gas industry. For example, one evolving area of oil and gas practice at present is the development of new technology for the extraction of lithium from wastewater. This may substantially change the wording in many different oil and gas lease clauses.
Increase in Real Property Taxes and Agricultural Programs
Many landowners who use their property for agricultural purposes receive important benefits from both Ohio and Federal programs. These tax benefits can be quite significant depending upon the size of the parcel at issue. Three of the most well-known programs are the Current Agricultural Use Value program through Ohio, the Conservation Reserve Program, and the Conservation Reserve Enhancement Program administered by the USDA. If you lose access to these programs due to drilling, the driller can agree to compensate you for the loss.
Sample clause:
INCREASE IN REAL PROPERTY TAXES AND AGRICULTURAL PROGRAMS. Lessee agrees to reimburse the Lessor for any penalty, charge, withdrawal, reimbursement, rollback, recoupment, or recapture of tax abatements, or any other increase in real property taxes attributable to Lessee’s oil and gas related operations upon the Leased Premises. Such reimbursements shall include abatements created or impose under any governmental or agricultural assistance program or legislation such, but not limited to CAUV, CREP, or CRP that is levied on Lessor solely as a result of Lessee’s operations on the Lease premises. Lessee will reimburse Lessor for the portion of such costs as are attributable to the number of acres disturbed by such operations, upon written request with documentation provided, within thirty (30) days after Lessor’s delivery of a copy of the penalty notice and proof of payment thereof by Lessor.
Timber
By law, drillers possess many rights under oil and gas leases that never appear in the text of the lease itself. These “hidden” rights can include putting in access roads, storage facilities and other infrastructure, and removing minerals and timber from the property. If a driller happens to remove timber “incidentally” to the lease, they will frequently sell that timber and keep the proceeds of that sale for themselves, unless you restrict their ability to do so. Depending on the amount of marketable timber on the property, this clause could also be extremely important to make sure the benefits of that timber flows to the landowner, instead.
Sample Clause:
Water Protection
One of the most concerning areas for the long-term protection of land value, is water rights. The hydraulic fracturing process carries known risks of contaminating water supplies. Fracking involves highly toxic substances, heavy metals, known carcinogens, and sometimes radioactive elements. It can also lead to the intrusion of flammable gas into water lines, and other significant health hazards.
However, proving that a driller is responsible for causing this damage to your property is extremely difficult. This frequently requires advance testing and/or the use of scientific experts. Permanent damage or contamination to water sources can be devastating to your real estate values. Your land may become extremely difficult to market or sell at a suitable price, as few buyers care to purchase land without a safe water supply.
Consider a series of water clauses to mitigate these risks. Include critical details such as the proper testing to be conducted before a well is put into place, when water sources can be utilized, damages for restoration, and clauses to prevent wastewater runoff onto the surface.
Surface Damage and Location Approval
Courts assume that with every oil and gas lease, the right to install necessary infrastructure is an implied term, unless your attorney explicitly restricts it. Landowners can approach this in a variety of ways, ranging from requiring reimbursement, forbidding surface operations of any kind, or requiring approval of where infrastructure is to be located, in order to maintain an appropriate distance from residences or other sensitive areas.
Sample:
SURFACE DAMAGE PAYMENT. Provided that Lessor is the then current surface owner of the Leased Premises at the time of Lessee’s surface operations, Lessee agrees to pay Lessor, as surface damages, a one-time payment of Thirty Thousand and 00/100 Dollars ($30,000.00) for the first six (6) acres of surface disturbance upon the surface of the Leased Premises, as well as One Thousand and 00/100 Dollars ($1,000.00) per acre for each additional surface acre disturbed by Lessee’s surface operations, except that to the extent that if only a portion of the surface operations are located upon the surface of the herein described Leased Premises, the payments described herein shall be proportionately reduced to reflect the percent of the surface operations that is located upon the Leased Premises.
Clean Up and Restoration
The last step in an oil and gas lease is the final restoration process. The costs to safely close up a well, remove equipment and infrastructure, and to restore the surface of the land are substantial. Key terms should include:
- A precise description of what condition the land should be restored to.
- What items of equipment or infrastructure must be removed or will remain in place.
- The time frame in which this restoration should be accomplished.
Conclusion
In Ohio, oil and gas law rose to prominence in the wake of the first Utica and Marcellus shale boom from 2008-2015. As an extremely specialized area of practice that has only relatively recently become commercially relevant to Ohio, there is a limited supply of knowledgeable, competent practitioners available. Simultaneously, the financial impact of an oil and gas lease or mineral sale can be truly life-changing, and requires great care and attention to detail. Landowners should select an attorney who has dedicated significant time to focusing upon this area of practice, is fully up to date on pricing trends in both the global and the local (county) market, and is well-versed in maximizing both legal protection and competitive pricing in negotiations.
In addition, you may also want to connect with an accountant who is familiar with tax strategies related to oil and gas. As mineral sales and leases can result in significant implications for capital gains taxation, or significantly increase your income tax burden through royalty payments, it may be important to devise a strategy to appropriately control your tax exposure. You should also make a provision for your oil and gas rights in your estate plan, as one of the primary ways that these assets are lost is a lack of awareness of these rights and how to protect them from abandonment.
If you have any questions or concerns regarding oil and gas issues, we offer both phone and in-person consultations on oil and gas matters.
Greg
Greg is the founder of McCleery Law Firm, and opened his own practice several months after passing the bar. His primary areas of practice are oil and gas and family law. In the early phases of the Utica and Marcellus shale, Greg assisted both both major industry players and local landowners with title research, leasing negotiations, sales of minerals and royalties, and curative title work, and acted as the title supervisor for an oil and gas brokerage firm, overseeing all title operations and leading a team of experienced abstractors. Next, Greg focused on expanding the firm and adding new areas of practice, with an emphasis on family issues.