The Marcellus Shale and the Need to Change Real Estate Transaction
Documents
The West Virginia Lawyer
April-June 2010
By David McMahon
The Marcellus Shale, a rock formation under most of West Virginia, is
the source of the latest and maybe largest ever oil and gas “play” in
our state! This play exposes and magnifies a problem that has
festered for years in West Virginia for the purchasers in rural
real estate transactions. We as a profession need to make changes
to contracts, title reports and deeds to deal with the problem.
In addition, we need to advise our clients to avoid separating the
ownership of minerals from the ownership of the surface where it has
not yet occurred, or at least to do so in a way that ameliorates the
problems this separation has caused where it has already occurred in
West Virginia.
What is the problem? I hear it time and time and time
again. "I thought I was getting all the minerals when I bought
it." They did not.
In my private practice I concentrate on advising small and medium
mineral owners who are approached by a landman with a "standard" oil
and gas lease (or who have other issues regarding oil and gas
interests). My clients tell me they had a title search done at the time
of sale and that they own all of the minerals. We negotiate a
lease and an addendum, but the subsequent title search that the lessee
does brings a big surprise. Another party owns all or some of the
minerals.
I also work part-time for a public interest law firm where I advocate
for surface owners who for the most part own no mineral interests under
their land. I received a call from a man who bought a ten-acre tract in
a "development" in the Highlands. The title report carefully
disclosed a right of way for a power line across the tract. And
it mentioned that the purchaser was not getting the minerals or their
"appurtenances". A few months later an appurtenance appeared in
the form of a five-acre well site partly on his property, the nicest
part of the property, for a new well for a gas storage field being
developed under his property. The power line right of way was
carefully described, but the mineral owner/lessee's right to put a
five-acre well site and its access road on the land were only described
by the "appurtenance" language.
I get these kinds of calls all the time.
The problem for surface-only owners is that the mineral owner, unless
otherwise stated, has a right to use the surface to get out the
minerals. Language in the cases varies, but the mineral owner is
generally allowed to do what is "fairly necessary" to get the minerals
out "accommodating" or giving "due regard" to the surface owner's
use. The case law speaks of the mineral interest being “dominant”
and the surface interest “subservient”, although West Virginia's Oil
and Gas Production Compensation Act makes the interests equal if the
severance was after its enactment in 1983 (and subservience may just be
designation of the party with the burden). So by virtue of merely
owning the minerals, a mineral owner and his lessee/driller has the
right to bulldoze an access road right of way, clear or bench a well
site, use water out of streams, lay a pipeline and more, and to keep
them there for generations.
Too often the purchaser/surface owner is not aware that things of this
sort could happen, assuming the purchaser even knows he is not getting
the mineral rights. So for years surface owners have been
surprised by the things gas drillers can do to their land, and even
surprised that they did not own the minerals and were not entitled to
any royalty. And now comes the Marcellus Shale play.
The Marcellus Shale play is different from traditional gas well
drilling huge ways.
First, the royalty/financial stakes are higher. Being a shale and
not a sand formation, these wells produce much, much more gas than
traditional wells. The royalty could be $5000.00 - in the first
month.
Second, traditional wells use using a couple of tractor trailer loads
of water pumped into the formation during drilling in order to fracture
the formation and allow the gas flow to the well bore. Marcellus
Shale wells use 600,000 gallons of water and upward! Next to the
gas well, in addition to the traditional drilling "pit", the driller
builds an Olympic swimming pool-sized pond to hold the water to be
used. The picture accompanying this article is a typical vertical
Marcellus Shale well with its drilling pit and Olympic pool-sized
“frac” water pond. This well had yet another pond out of sight
that catches the frac water that flows back out of the well after the
fracture is done. This site is huge. In fact it may be
argued that the use of this much surface was not in the contemplation
of the parties at the time of the severance so that the surface owner
could stop this size site, but that case has not been brought yet.
Buying surface land without being aware a traditional well can be
drilled on you is bad enough. Imagine the situation with a
five-acre Marcellus well site! And this is only a vertical
well. Even newer technology enables drillers to drill down and
then turn horizontally 4000 feet, six wells drilled from one site,
using three times the 600,000 gallon amount of water – per well!
Thirdly, although it is more or less productive from place to place,
the Marcellus Shale is under almost all of West Virginia! It is
under counties such as Hardy, Randolph and Greenbrier counties, where
not even native West Virginia families are familiar with severed
mineral estates.
A woman who purchased a 35-acre farm in Doddridge County came to me
believing she owned the minerals. And sure, in the last paragraph
the deed language says that the conveyance is subject to reservations
of record (not described), but only after a long discussion of the
general warranty and the description of the land. And sure,
the title insurance says it excludes any and all oil and gas agreements
embracing or affecting the property, but only after the page before
says the property is in "fee simple". And sure the standard
practice is to go back only 60 years, and the title report states that
it only goes back 60 years and that oil and gas information is beyond
the scope of the examination. But nowhere does the deed point out
that there is a chance that someone else may own the minerals, or that
a driller might have a right to bulldoze an access road and a five-acre
well site on the land, and that she will get none of the royalties for
having this monstrosity on her land.
The language I see in contracts, deeds and title opinions does not let
potential buyers know what they are agreeing they are buying, not
buying, or may or may not be buying.
In real estate transactions buyers should be agreeing in writing to one
of three conveyances. First, the buyers who are lucky can be
agreeing to buy the surface and all of the ownership of all of the
mineral rights (with no leases signed by prior owners). And if
that is what they are agreeing to, a 60-year title search is not enough.
Second, buyers can be agreeing to buy the surface and not be buying
ownership of the mineral rights. If that is the case, they need
to be specifically agreeing that what they are purchasing can have an
access road and a multi-acre gas well site bulldozed on it, a gas well
and a pipeline installed on it, and that the mineral owners can keep
all of that on the surface for generations to come with no royalties
paid to the surface owner.
Third, the buyers can be agreeing to buy the surface without knowing
whether or not they are buying all of the mineral rights. They
should understand a complete title search can be done so they would
know for sure whether or not they are agreeing to buy all of the
mineral rights. And if they decide to agree to purchase the
surface without knowing whether or not they are buying all of the
mineral rights, they need to clearly agree that what they are
purchasing may allow the owner of the mineral rights to bulldoze an
access road and a multi-acre gas well site on their land, to drill a
gas well and install a pipeline, and to keep all of that on their land
for generations to come with no royalties to the surface owner.
We as a profession owe a duty to the client public to put all of what
is being agreed to in the contracts, title opinions, and deeds.
We should not continue to draft documents that duck the issue of
mineral ownership and, even more importantly, leave out the burdens on
the land that are the consequences of the lack of mineral
ownership. The contracts, the title reports, and the deeds need
to be changed. The increased financial significance and impact on
the surface of the Marcellus Shale play, however, demand changes be
made now.
Finally, one wag once said that what we learn from history is that we
do not learn from history. I hope in this case an exception can
be made. Almost everyone bemoans the effects of the separation of
the ownership of the surface from the ownership of the minerals that
happened in large tracts in much of southern West Virginia and that
happened in small tracts in west-central West Virginia. It will
happen again east of I-79 and the Turnpike unless we do something now
either to prevent it happening again, or to at least ameliorate the
impact.
Current owners of fee simple land in the Highlands and other parts of
West Virginia east of I-79 and the Turnpike now see their land as much
more valuable than it once was, because of the Marcellus Shale
underlying it. Their ship has come in. When they sell the
surface they are likely not to want to part with the right to lease the
Marcellus Shale. Or if they would sell the ship, they would want
a very hefty premium that someone wanting a little surface Almost
Heaven may not be able to pay.
My hope is that the motivations to sever the surface and mineral
estates can be resisted so that the problems, abuses and economic
unfairness that severance has caused in other parts of the state will
not happen again. But it probably is going to happen in lots of
instances. In which case I urge a partial solution. If you
represent a buyer, and the seller will not sell, or the buyer cannot
afford, the mineral rights, then advise the buyer to insist on getting
at least some portion of any future royalty. The seller will
probably insist on keeping the ability to sign the lease without the
surface owner’s signature. That can be done and still give the
surface owner some portion of the royalty as real compensation for the
burden that will be imposed on them. It is only fair, and it is
likely to make the surface owner a more cooperative partner. Also
require the mineral owner to obtain “the consent of the surface owner
to the location of the well site and access road, which consent may not
unreasonably be withheld or delayed.”
Even oil and gas industry members bemoan the problems caused by severed
minerals. We as a profession should do what we can to avoid or
ameliorate future problems arising out of severing surface and mineral
ownership.