The Rise and Fall of "House Gas", Changing Royalties, and Other Well Operator vs. Landowner Issues

The Rise and Fall of “House Gas”, Changing Royalties, and Other Well Operator vs. Landowner Issues


I just read a LinkedIn post where an oilfield fabricator was hooking up wells for landowners in an abandoned Kansas coalbed methane field and it set me off on a quest for statistics and history of well-gas hookups for landowners.


Oil & Gas Royalties


The United States is one of the few countries in the word that allows landowners to collect royalties from the mineral resources extracted from their land by oil & gas companies. Details of the mineral lease are set down in the lease agreement. The ratio is quite generous. Typically, the royalty rate is at 1/8 or 12.5% of gross profit but in more recent prolific and competitive plays such as the shale gas and oil plays, 20% is more common and more than 20% is quite possible. The Canadian royalty rate is typically just a flat 10%. In other countries, the country may own all the minerals. Royalty rates vary in European countries from 0 to 20%. Some of these rates changed as it appeared that fracking could be viable in some European countries. One major reason fracking has been adopted in few other countries than the U.S. and Canada is that there are few well-established landowner royalty provisions and thus, few incentives for landowners to support it. Some states charge much higher royalties for leases on certain lands – the state of Texas charges a 25% royalty on some lands and other states have much higher than the 12.5% royalty. In 2015 the Obama administration upped federal land royalties to 18.75% on some lands. Also upped was the minimum delay rental bonus bid to hold leases for future drilling. This went up from the previous low of $2 per acre. 

It should also be noted that the landowner may not be the lease owner. This is perhaps unfortunate but this situation of a lease "severed" from the landowner became common
in the U.S. in the early-mid 20th century when shrewd politicians collected mineral leases, keeping them separated from landowners. Whether this is the case for a property is revealed when land is bought or sold. My own 35-acre property has the minerals severed which effectively means that the lease-owner could come a drill wells on my property without my permission, although I would have some rights in siting. This situation has served to create much antagonism among landowners.


The idea of landowners being mineral royalty owners in the U.S. began from the founding fathers rejecting the faraway British Crown collecting taxes from the colonists. Under President Warren G. Harding in 1920, the Mineral Leasing Act set landowner royalties at 12.5%.


In the early times of the shale gas and oil plays amidst high gas and oil prices and highest percentage of landowner cuts, landowner royalties were phenomenal, allowing landowners to strike it rich. As production grew and prices subsided those royalties also subsided. In addition, well operators looked for ways to increase their own revenue.


Changing Lease Requirements and Controversial “Post-Production Costs”


Oil and gas leases in the U.S. have tended to vary in requirements. For example, some have provisions for so-called “post-production costs,” while other don’t. Chesapeake Energy spurred the provisions for post-production costs by making leases to deduct them before paying landowner royalties which sparked some fierce debate about the practice. With high natural gas prices nobody saw a need for such provisions but as those prices dropped and profits became more constrained the well owners looked for ways to enhance dwindling profitability. The practice has sparked controversy. That is one reason among several that landowners in high-leasing unconventional gas and oil areas have banded together in landowner groups to more or less standardize their lease requirements. 


With unconventional horizontal wells the well units of a lease or multiple leases are necessarily much larger in areal extent than vertical wells so that more acreage is required for a single well and much more for a group of wells on a single well pad. If the well or pad site is on one’s property, the property owner may also receive a site fee, ranging from $2000 to $15000 per well, according to the Penn State Extension article referenced below.


Landowner Group Leasing


Since it sometimes takes quite a bit of time before a lease becomes available for drilling, the common practice is to pay landowners annual delay rental payments before well(s) are drilled on the lease in order to hold the lease for future drilling. If there is some production on the lease then future drilling is already secured by that production, a situation known as “held by production” so that rental payments are not required. What is payed to landowners for delay rental, also called a bonus, varies according to region, play, and presumed market value of the mineral resource.   


The following quote is from the very informative Penn State Extension article referenced below:


“A word about landowner groups: You might have heard friends or neighbors talk about landowner groups in the context of gas leasing. There are different types of landowner groups. Some exist simply for sharing information about what companies are looking to lease in their particular area, current rates, and any special terms or conditions to the leases. Other groups are involved in marketing their land--they seek out and maximize acres that share a border and make bid proposals to energy companies interested in leasing. Still other landowner groups engage in collective bargaining, in which all landowners sign off on leasing terms accepted by the majority. This saves energy companies many hours of individual negotiations and gives landowners a strong negotiating position with companies looking to lease land.”



Well Hook-Ups for House Gas


The practice of offering well gas hook-ups to landowners had been dropping and was being replaced by offering them a flat fee just before the advent of unconventional shale production. These days it is rarely offered. One reason is simply liabilities and maintenance. Typically, the landowners were required to pay for hook-up to the well, but hook-ups were often done by well tenders. Well tenders that work for the well operators need to plan and do the well hook-ups and maintain any potential problems. I remember working for a company that had variable lease requirements and landowner well hook-up issues. Some had multiple buildings outfitted with gas hook-ups, including multiple commercial greenhouses. Other situations involved people illegally hooking up gas to nearby residences, splitting off from their neighbor’s hook-ups. Leaks had to be fixed and disruptions addressed. Since natural gas is potentially explosive, this could be a safety issue as well. 


Depending on the comparative cost of purchasing natural gas from the local utility, free gas for landowners can be of very significant value that may last in full for decades. People who live in rural areas where utility natural gas hook-ups are not available also benefit much from such free house gas. 


A More Recent Source of “House Gas”


Portable aerobic digesters offer home and business owners another source of house gas, but one that is magnitudes lower in volume unless one is involved in agriculture that involves much agriculture waste, food waste, or collected manure. Inexpensive digesters are common in some places in Asia as a means to get methane for cooking and thus reduce the production of toxic wood and dung smoke from cooking fires. 


References:


Millions Own Gas and Oil Under Their Land. Here’s Why Only Some Strike It Rich – by Marie Cusick and Amy Sisk, in NPR (npr.org), March 15, 2018


Federal Oil and Gas Royalty and Revenue Reform – by Nicole Gentile, in Center for American Progress (americanprogress.org), June 19, 2015


An Overview on Royalties and Similar Taxes: Oil and Gas Upstream Sector Across Europe -by Deloitte, April 2017


Natural Gas Exploration: A Landowner’s Guide to Leasing in Pennsylvania – by Penn State Extension, last updated Sept. 19, 2017