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Be Wary When Entering Into Oil LeasesBe Wary When Entering Into Oil Leases

The first rule for private landowners looking to enter into energy development contracts and oil leases is to keep your eyes open.Read an attorney's advice on how to negotiate oil leases here.

March 27, 2013

7 Min Read
Be Wary When Entering Into Oil Leases

Extraction of natural minerals has occurred in the U.S. for centuries. Almost as omnipresent, by some accounts, have been strained relations between developers and private landowners. As development continues, particularly in the energy arena of the western U.S., both sides are learning how to utilize communication to improve these business relationships.

“When energy development started in earnest over 10 years ago in this part of the country, the agricultural economy was such that some producers thought development would be a new stream of income they needed and didn’t have before. So they put up with some things they wouldn’t necessarily tolerate today,” says Lucy Pauley, the Wyoming Department of Agriculture’s coordinator for its Agriculture and Natural Resources Mediation Program.

But, by and large, both sides today realize that communication and compromise can prevent a lot of anxiety and problems down the road.

There’s good, bad and ugly

Just as in entering any business deal, due diligence is important, Pauley says. Prior to signing any kind of development agreement, Pauley suggests landowners work to educate themselves on the subject, and be sure to communicate with others who’ve experienced development in their area.

“The first thing we recommend to any landowner is that they know their rights. Do they just own the surface, or are they the actual mineral owners, and do they understand the difference? That sets the stage for a lot of issues,” Pauley says.

Ownership of minerals can vary between states. For instance, the split-estate phenomenon generally occurs in the West. 

“People moving to Wyoming from the East Coast often aren’t aware that you can own the surface, and not the minerals, in this state. The federal government severed the mineral estate in many western states in an early homestead act. That’s important to know, and something to educate yourself on, regardless of the state you live in.

“In Wyoming, it means that if the minerals are owned by the federal government, which has leased that mineral estate to an energy company, there isn’t much a landowner can do to stop a development project. However, you will still have a surface-use agreement with the energy company, and you need to be well-informed before you sit down to negotiate that,” Pauley explains.

She advises researching state and federal legislation regarding development as one way of learning current rules and laws. Having a good attorney to help sort through documents and provide additional information is another. The Internet, and local, state and federal ag-based organizations, as well as friends and neighbors who have been involved in development, are also good educational sources, she adds.

“You need to thoroughly understand what’s going on before you sit down with an energy company to work out a surface-use agreement. That agreement will address any surface damages, like roads; how and when they will notify a landowner prior to coming on his property; if gates are to be kept open or closed; any number of other things. You will want to find some examples you like, and work with an expert on getting yours drafted. This is probably the most important component of development for a landowner, and the more you communicate and educate yourself, the better it will be,” Pauley says.

Communication is key

Loren Barritt is the operations manager for Williams Production Company, a nationwide energy development company currently involved in natural gas development on a number of privately owned parcels in Wyoming’s Powder River Basin. He agrees that open communication up front is the best policy for developing positive and lasting relationships with private landowners.

“Our natural gas development is centered on landowner relations, water and wildlife. I would say that 90% of our landowner relations have been positive, collaborative efforts with benefits for both us and the landowner.

“This industry has taken a few blows in the communications area over the years, but we make every effort to go in and communicate what we’re doing up front, from the start,” he says of how his company works.

The long-term benefits of a development project can be good and/or bad, according to Pauley.

“There are some folks with good working relationships, and sometimes development companies will use their equipment to make their roads better or make improvements to the operation. There are also stories of struggle, where people deal with increased traffic, injured livestock, increased trash, and other negative things,” she says.

Third-generation Powder River Basin rancher Tom Harriet’s personal experience has been very positive.

“My ranch looks better since I’ve been involved with development. It didn’t always look nice during development, but that’s why these companies provide compensation. After the development phase was over, the impact was minimal, and the range improved where development occurred,” he explains.            

Water, for instance, is a big deal in Harriet’s arid country.

“Coalbed methane development produces a lot of water as a byproduct, and the water we’re discharging is good, potable water. We’re able to utilize that water on these private lands in a number of ways that are beneficial to both livestock and wildlife,” Barritt says. On Harriet’s ranch, for instance, discharged water has been developed in numerous ways, including a center pivot.

“There is more water available everywhere as a result of the development, and we now have geese and ducks on our place, which we never saw before. There are also more deer and antelope, and several other wildlife species are seen with much greater frequency,” Harriet says.

“All wildlife will adapt, and they use the well pods and reclaimed areas, and in many cases prefer them. The environmental groups act like oil and gas development is destroying the wildlife and their habitat, and that’s a lie,” he adds.

Harriet says another perk in today’s development world is that these development firms have the money and equipment to reclaim land to a condition better than they found it.

“Williams has located and fixed multiple areas of concern on my land, including some washed-out cuts. And, they have continued to maintain those areas. The result for me has been some much improved areas with increased grass production that both livestock and wildlife enjoy. My cattle are always grazing up pipeline corridors and around well pads, because that’s where there’s more grass and less sagebrush,” Harriet says.

Pauley’s overall advice is to “be prepared” when considering entering into a development project.

“Have an idea of what you want out of development, and know what others around you are getting. Be proactive and look at how you can use the development to your advantage to improve your operation,” Pauley says.

Regulatory overreach

One of the biggest challenges for energy development is dealing with regulatory agencies and activist groups that oppose energy development.

“Dealing with the federal government and the constantly changing rules and regulations is our biggest challenge when working with landowners,” says Barritt.

“Landowners are the stewards of the land, and the folks we deal with have been ranching here forever. We think that we, along with those landowners, can manage the land as well, or better, than the federal government. People in Washington, D.C. have no idea how to manage land and wildlife in places like Wyoming.”

Third-generation, Wyoming rancher Tom Harriet’s family has been involved in development since the 1960s, when his grandfather made oil leases. He agrees that the big issue today is dealing with federal rules and regulations.

“The challenge for me is working with all the rules and regulations passed down by the federal government, rather than the actual development company,” Harriet says. “You’ll start out with one rule, and everybody goes with that rule and determines how they can proceed. Then the regulators change everything, and the development company has to change its development strategy, which affects everyone down the chain. It can be frustrating for everyone involved.”

Barritt believes overreach by agencies such as the Environmental Protection Agency (EPA) in what should be a state-run regulatory environment is becoming a big concern.

“It’s indicative of our country’s political environment as a whole. EPA doesn’t understand western issues, and if EPA gets its way, the impact will be felt in a lot of major industries – commerce, commercial development and several others. It’s not just an agriculture, and oil and gas issue,” Barritt says.

Heather Hamilton is a rancher and freelance writer based in Lance Creek, WY.


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