Many landowners are being approached by oil and gas producers to sign oil and gas leases for their residential home lot. Why would a producer be interested in a small parcel of land?
The answer is really quite simple. Under current Pennsylvania law, when a producer proposes to drill a 5,000 – 7,000 foot horizontal well a mile under a residential area which is part of a production unit, every individual landowner in the unit must sign a lease. A production unit can contain up to 1,280 acres, although a majority of production units are much smaller in size. Otherwise, a producer may be engaging in an illegal trespass against any unleased landowner and may be exposed to damages resulting from the trespass.
Unfortunately, the benefits for a small landowner are meager. The small landowner’s share of the production unit’s income will be extremely limited since the landowner’s pro rata share in the unit is based on the landowner’s contribution of acreage to the total acreage in the production unit. For example, if a landowner owns .25 acre residential lot and the production unit is 500 acres, the landowner’s proportionate share of the unit is .0005. The landowner’s percentage entitlement to the income from the unit is calculated by multiplying this proportionate share by the production royalty of the unit. Following our example, if the royalty for the unit is 17%, our landowner will receive .0085% of the income from the unit. And this is before deducting for post production costs!
As you can see, the potential to reap significant financial benefits from production royalties for a small landowner is not a good reason to sign a lease.
That is not to say all is lost for the small landowner. Producers generally offer to pay advance delay rentals to landowners as a “bonus” incentive to sign a lease. We have seen these payments range from $300 to $750 for a residential landowner. Remembering that a producer must have every landowner in a residential neighborhood under lease prior to drilling, the landowner may be able to negotiate a higher bonus when signing a lease. Since this will likely be the only real financial benefit realized by the small landowner, every effort should be undertaken to increase the size of the bonus payment.
Even small landowners must be aware that an oil and gas lease may contain terms and conditions that could affect their property. For example, the lease must be carefully reviewed for provisions that may grant a producer access to the surface of your land to lay pipelines, build roads, or construct any other structure which may support the production operation. In order to fully understand this complex document, we are available to review the proposed lease with you. Our fee will be commensurate with the size of your parcel and the potential payment you should receive from the producer.