Since my article last month, it has become abundantly clear that mastering stakeholder conduct is the key to developing
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the Marcellus Shale natural gas development opportunity.
In the last few weeks local citizens, leaders and environmental experts have gathered at colleges and universities in Pennsylvania and New York to discuss the impact of the Marcellus Shale industry. A major concern at these forums was the impact of development in the local communities.
Three weeks ago at Pennsylvania State University, PennFuture, a leading environmental group in Pennsylvania, sponsored the Marcellus Shale Muster. During this muster leading state legislators expressed concern over development, environmental impacts and the case for a severance tax. Highly-skilled professionals also volunteered their expertise to help local citizens understand the potential adverse impacts of drilling on public lands, earth disturbance and water quality, as well as current legal and policy trends. Finally, this muster started the process of helping communities shape local Marcellus Shale development through education and well-placed activism.
At Cornell University earlier this week, New York local environmental groups and national environmental groups (e.g., Sierra Club) differed on the level of support for the promotion of natural gas development. The local groups, with members that reside near forests and the Finger Lakes, do not support natural gas drilling in their backyards because of the potential environmental damage to water quality and the natural landscape. The Sierra Club is inclined to support natural gas development, like the Marcellus Shale opportunity, because natural gas production and the energy derived from natural gas are generally much less damaging to the environment than coal.
As you can see from the two examples above, stakeholders are quickly drawing their lines in the sand. The Marcellus Shale development issues are complex, the interests of stakeholders will vary and a one size solution does not fit all. Consequently, as the impeding storm gathers all stakeholders would be well advised to understand: (1) the basic legal framework; (2) how the legal framework impacts their interests; and, (3) what strategy will help them to best advance their cause. Today we will continue the discussion of the basic legal framework in Pennsylvania.
As we discussed earlier, in Pennsylvania, the law has settled on three separate estates in land: the surface area, the minerals below, and the surface support. Schuster v. Pa. Turnpike Comm’n, 395 Pa. 441, 447, 149 A. 2d 447, 449 (1959); Machipongo Land & Coal Co., Inc. v. Commonwealth, Dept of Envtl. Res., 719 A.2d 19, 28-29 (Pa. Comwlth.1998). Each estate can be held separately by different owners and generally can be encumber, occupied, or transferred separately for the other. City of Erie v. Pub. Serv. Comm’n, 278 Pa. 512, 521, 123 A. 471, 475 (1924). Also, Pennsylvania courts treat oil and natural gas as minerals, Marshall v. Mellon, 36 A. 201 (Pa. 1897), and the owner of land also owns the minerals below until he/she conveys away ownership. Westmoreland Gas Co. v. DeWitt, 18 A. 724 (Pa. 1889).
Pennsylvania natural gas production is usually governed by a lease agreement as well as the prevailing laws, regulations and ordnances. The governing state laws and regulations may include the Oil and Gas Act (58 P.S. §§ 601.101, et seq.) & (25 Pa. Code Ch. 78), Clean Streams Law (35 P.S. §§ 691.9 et seq.), Pollution Prevention General Provisions (25 Pa. Code Ch. 91), Water Resources Planning Act (25 Pa. Code Ch. 110), Erosion and Sediment Control (25 Pa. Code Ch. 102) and the Oil and Gas Conservation Law (which is not yet applicable to the Marcellus Shale) (58 P.S. §§ 401-410). Local ordnances also influence natural gas production. However, the provisions in the lease often have the most influence over the conduct of the stakeholders.
Contract law and general contract law principles govern natural gas lease agreements in Pennsylvania. The lease, a powerful document, conveys from the lessor to the lessee an interest in the natural gas and it prescribes the reasonable expectations the parties may have to production and development. The standard lease, the Producer’s Form 88, contains various clauses that address issues such as consideration (i.e. payment) for supporting the contract, any specific rights and interests conveyed, the description of the leased premises and the duration of the lease. It also contains clauses to address delay rentals (i.e. payment for not drilling immediately), royalties, bonuses, shut-in royalties (payments to keep the lease alive after shutting in productive wells), pooling/unitization (combination of production from leased premises with production from other leased premises) as well as a clause not to terminate the lease for failure to abide by lease terms (No Automatic Forfeiture/Termination). How the parties specifically develop lease clauses will directly impact future stakeholder conduct.
Laws, regulations and local ordinances as well as the provisions of the lease will influence the bulk of stakeholder conduct issues in Marcellus Shale development. In the coming articles we will continue to explore deeper into the lease, the expectations of the parties, the interests conveyed by the lease, what effect, if any, does the lease have on the surface estate and the potential terms of the lease as well as how the conduct of the regulators and local communities may influence development.
By Michael Corbin, Esq.
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