Editor’s note: This is the third of a four-part series about the economic factors of hydraulic fracturing.
Many Athens County landowners are ready to reap the financial rewards from lease agreements that allow “fracking” on their land, but one local attorney is finding that, beneath the surface, these agreements could be more toxic than they appear.
In recent months, attorney Don Wirtshafter, who specializes in oil and gas leases, has been working with a couple dozen landowners to break their hydraulic fracturing leases — to no avail.
Cunningham Energy, a West Virginia-based oil and gas company, has been negotiating leases in the county since October, acquiring more than 100,000 acres of land.
But Wirtshafter believes the fine print of these leases trips up landowners eager to profit from resources deep below their land.
“Owners need to be cautious and need to understand all the implications that come with signing leases,” Wirtshafter said.
When local attorney John Lavelle decided to lease his 80-acre Waterloo Township farm to Cunningham, he had similar qualms with the agreement.
“I wanted a lease friendly to the landowner,” Lavelle said.
After holding a meeting at his farm with neighbors interested in leasing their land, Lavelle decided to draft his own lease that would address their concerns.
Lavelle presented his version of the lease to Cunningham Energy and, after several rounds of negotiations, they came to an agreement and approved his lease for use by other landowners.
Lavelle’s lease made significant changes to the original Cunningham lease, including raising royalties to 16 percent and adding an upfront bonus payment of $2,500 per acre that must be paid by March 15, 2012.
An addendum attached to Lavelle’s contract outlines the implications that leasing land for fracking could entail.
Lavelle and Associates will receive $50 per acre from each lease, which is only 2 percent of the bonus payment.
Around Thanksgiving, Lavelle started distributing his leases throughout Athens County. Lavelle’s version of the lease has been used to sign 35,000 acres over to Cunningham Energy.
“No one knows the land better than its steward and it is their decision,” Lavelle said.
But Lavelle’s lease overlooks some components that have Wirtshafter concerned.
Lavelle’s leases retain a clause from Cunningham’s lease that allows the company to remain on the leaser’s land longer than allotted if ample resources still exist.
The clause reads: “The lease shall remain in force for a term of (blank) years from and after the effective date, and as long thereafter as any leased minerals are produced in commercial quantities from the premises.”
Each lease also contains a term that would allow the company to use neighboring property to help extract resources, even if that property owner did not sign a lease.
Another problem can plague landowners in the leasing process — the minerals beneath their property’s soil may already be leased. Old oil and gas leases can still be in effect and are almost completely binding, which Wirtshafter has dealt with in previous cases.
“Someone in the 1950s could still have the (property’s mineral) rights and those rights are nearly impossible to break,” he said.
This could be problematic because only the initial agreement is valid.
Wirtshafter said the company trying to acquire the leasing rights could offer property owners a way to nullify previous agreements, but then substantially lowers its offer for the mineral rights.
There is no record of this occurring in Athens County for Cunningham Energy, but Wirtshafter is concerned that it could happen soon if people are unaware of this condition.
These leases also could create complications with previously signed contracts on the property, especially mortgage contracts.
Typically, a mortgage is superior to all future contracts regarding that land and the lender must approve any additional contracts, said retired title-insurance examiner Kathi Scali.
But in June 2010, Gov. John Kasich approved a clause in Ohio’s Revised Code giving mineral rights dominance over property rights.
If a landowner decides to go forward with such an agreement, they could potentially lessen the value of their property and that of their neighbors.
It could also hinder the landowner from acquiring loans or negotiating with their lender, she said.
“If you don’t think about the big picture if you are thinking of signing one of these leases, you are becoming a huge risk for everyone,” Scali said.
kg287609@ohiou.edu
