Left Behind: Is Valley Missing Royalty Rapture?

Left Behind: Is Valley Missing Royalty Rapture?

But there were relatively few wells drilled early on in Mahoning and Trumbull counties. Many wells were drilled in Columbiana County; but other than in a few Columbiana townships, things have slowed downed significantly there.

This year, Halcon Resources publicly and colorfully announced it was backing away from the area, and BP announced it was basically walking away. Chesapeake appears to have cancelled numerous drilling permits. And the March earthquake activity might have a chilling effect on further development in portions of the Mahoning Valley.

What options does all this leave for lessors?

Patience. Things could change. Natural gas prices could rise along with demand. New technologies could make drilling in the Mahoning Valley's reputedly less permeable “tight rock” more economically feasible. Just because the drilling companies have concentrated on more productive regions further south for the moment does not mean they will not come back.

Re-upping. Many recently signed leases have primary terms that will expire within the next couple of years. Many of those leases include options for the lessee to renew for an extended primary term. When the parties signed these leases, the lessors probably had visions of “second bonus” payments before the end of the primary term. This will not necessarily happen. If the lessee (or by now, a successor or assignee of the lessee) wants to continue to own the lease, it might offer less than the original monetary terms, royalty percentage and lessor-favorable language. The lessor does not have to accept these reduced terms, and can remain “unleased” after the primary term expires, or shop for another lease. But the market for new lessees could be disappointing.

Selling out. As always, there are those who have figured out ways to take advantage of this situation. Lessors disappointed by the lack of royalties and an uncertain future for their oil and gas rights might be willing to take low-ball offers to outright sell their rights for “cash now.”  Speculators may well buy these rights for the right price. And that is the problem – what is the “right price?” Property owners must always be very cautious in selling mineral rights, and particularly so when there could be signs of a “fire sale.”

Top leasing. There are also speculators soliciting a top lease — a lease that will recognize the existing lease and promise (usually for no or little consideration to the lessor) that if the top lessee can find better terms (bonus and royalty) or perhaps “free up” the undeveloped deep rights and have them developed, the top lessee will share some of the bounty with the lessor. Lessors have to be extremely careful with these arrangements because they could have many unintended consequences, including violating the existing lease or tying up the lessor's oil and gas rights for extended periods with little accountability.

Mahoning Valley lessors should not panic or make any rushed decisions.  Ohio's Utica development is the real deal. It simply might not involve a lot of drilling activity in the Mahoning Valley – at least not right now.

Meanwhile, the Valley has undeniably enjoyed huge benefits with the investment by drilling companies in leases over the past few years, as well as the rapid development of business investment and employment opportunities connected to the oil and gas industry.

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Alan D. Wenger is an oil & gas lawyer in Youngstown, Ohio, and chair of the Oil & Gas Law Practice Group at HHM.