Companies seek drilling contracts with landowners: Part 5 (with slideshow)

Oct 1, 2010

Hundreds of brokers for oil and gas companies are offering landowners in northern lower Michigan contracts to drill for natural gas. Energy companies are betting the access to deep shale gas reserves will pay off big. But landowners don't always know about the risks.

An exploratory well has produced good results from a new source of natural gas in northern lower Michigan. So, energy companies have hired agents, called landmen to go knocking on doors of private landowners, trying to get them to sign contracts to lease their land for drilling.

Whitney Gronski-Buffa is a reporter for the Pioneer Newspaper . She's covered the explosion of offers for drilling rights. Gronski-Buffa says contracts can vary anywhere from $150 per acre to as much as $1,500 per acre, and she says a landmen she talked to says most people don't ask about any problems associated with drilling.

"What he told me is he gives out enough information to explain it, but I think his quote was 'sometimes too much information can be a bad thing,'" said Gronski-Buffa.

The landowners just want to know how much money is being offered. They don't know to ask about reports that people in Pennsylvania and Wyoming claim this new drilling technology caused contamination of their water supplies.

Gary Worman is an attorney who advises the Michigan Association of Professional Landmen . He says the reason landowners are getting different prices for drilling rights, is simply because different oil and gas companies are offering different rates.

"For the most part, the people that are employed by the oil companies to landowners about leasing their land are honest and diligent who are there to acquire leases for their client," he said. "Though, just like when you buy property, the broker represents the seller, these landmen represent the oil and gas company."

Worman says landmen are not really obligated to talk about the claims people in other states make about water contamination.

"The obligations are to answer any questions honestly and the problem that other states are having," he said,"I'm not sure it's fair to suggest we'll have the same problems."

Worman says the geology here is different and Michigan's drilling regulations are stricter, so landmen should talk about the certainties of what the drilling lease contract is offering.

So if the landmen are agents for the oil and gas companies, who's working for the landowners? Economist and lawyer at Michigan State University's Extension Service, David Schweikhardt, says too often the answer is no one. He advises landowners to "be careful what you sign because with an oil and gas lease, you're basically stuck with the terms."

"The state laws of Michigan, by and large, will not bail out a landowner who signs a bad contract," said Schweikhardt.

He says first, get a lawyer before you sign, and not just any lawyer, "They have got to get an attorney who is familiar with oil and gas contracts. Second, begin to communicate with neighbors."

Find out what kind of offers your neighbors are considering to determine the going rate, and Schweikhardt says, don't worry about the landman telling you, 'it's a private matter, don't talk to anyone.' He says until you sign something, you're free to talk to anyone you want.

There are signs this speculative boom of drilling leases might be cooling off. Some of the oil and gas companies might have gotten too enthusiastic about the potential of these new reserves. Reports indicate at least one out-of-state company is now notifying some landowners who signed contracts that they won't be getting any money. The company is apparently using a legal technicality to get out of the contract. It's not clear whether that will hold up in court.

Energy companies are now waiting to see how productive a second exploratory well will be.

More Resources
ProPublica's vast coverage of horizontal fracking
Michigan DNRE paper on horizontal fracking (pdf)

A second Michigan DNRE paper on horizontal fracking (pdf)

Michigan Environmental Council on Fracking
Michigan Association of Professional Landmen

Encana Corporation
Michigan Oil and Gas Association