According to the U.S. Geological Survey, there is an estimated 520 million barrels of oil and .95 trillion cubic feet of natural gas trapped in the Niobrara shale formation. Because oil and gas companies have approached El Paso County residents about leasing options to set up drilling, Protect Our Wells hosted a panel of experts in the oil business at an informational meeting in May.ìWe want people to have all the information so that they get what they deserve,î said Sandra Martin, president of POW, which advocates for private well owners.One presenter, Michelle Smith, land manager for the Quait Companies and board member of the National Association of Royalty Owners, said all the production from the Niobrara shale formation has so far taken place in Weld County, Colo. Besides Colorado, including eastern El Paso County; the Niobra formation is located in parts of Wyoming, Nebraska and Kansas.Smith said NAROís mission is to educate mineral rights owners on oil and gas lease agreements before they sign up as a royalty owner. She said residents need to be knowledgeable about information and language included in the lease agreement. She defined the language.Term: The shorter the lease term, the better. She said often oil and gas companies want lessees to sign a five-year lease, but she advised that residents negotiate for three or less.Bonus: The dollar amount ñ or bonus ñ per net acre the lessee receives is negotiable. Smith advised residents to talk to their neighbors and an oil and gas lawyer to compare bonus amounts.Royalty: Once the lease is signed, the lessee becomes a royalty owner. She said most oil and gas companies are offering between 16.66 and 18.75 percent of the well production, and lessees must pay taxes on the amount they receive.Post production cost: If there is a clause in the lease that allows post production costs, the operator can deduct costs to market, gather, store, press, dehydrate and sweeten the oil from the lessee’s royalty check, Smith said. Look for the clause ìfree from all costs,î which indicates the lessee won’t be charged the post production costs.Warranty clause: The lessee must guarantee the title on the land is good, Smith said. Instead of including this in the lease, Smith recommended that lessees require that the oil and gas companies do the legwork to find out the status of the title.Amount of acreage on lease: Smith recommended that lessees limit the amount of acreage included in the lease.Well testing requirements, if both surface and mineral rights are intact: ìThere is a very wide range that you can pay for well testing, which is why it’s important to band together with neighbors to cut the cost,î Smith said. ìIt depends on your level of concern and your pocketbook. You can always try to negotiate it in your lease for the oil companies to cover the baseline testing and subsequent testing at certain times during the whole process. It can either be included in the lease or you can have them raise your bonus to cover the costs.î Panel member Richard Hirsch, hydrogeologist with Hirsch Gibney, said establishing a baseline for water in a resident’s well is an essential step prior to signing a leasing agreement. Most tests look for colliform, lead and other standard contaminates, he said. However, Hirsh suggested that residents test their drinking water, not only for these contaminates but also for contaminates typical in oil and gas drilling. He cited a recent USA Today article, in which a Duke University study found methane in groundwater wells near drilling sites. The author of the study admitted that no baseline testing had been performed to determine the condition of the water prior to the drilling, so there was no way to determine the cause of the presence of methane.Smith also discussed forced pooling, which is a concern for small acreage owners. According to www.oil-gas-leases.com, pooling is defined as the consolidation and combining of leased land with adjoining leased tracts. Forced pooling or compulsory pooling is the involuntary surrender of or sharing of interest by the landowner. As an industry standard, forced pooling usually occurs when at least 75 percent of landowners in a certain area have signed leases and 25 percent havenít, Smith said. To force pooling, the operator requests a hearing that typically favors the operator, not the landowner, Smith added. ìYou’re much better off negotiating a lease sooner rather than going through a forced pooling situation,î she said. Not only will lessees end up with a smaller royalty percentage, but they are usually paid later in the production process.Generally, the best production is earliest in the operation, before it tapers off, Smith said. It’s in the lesseesí best interest to receive royalties from the highest production period.ìNothing we’re going to do in our meetings is a substitute for a good lawyer,î Martin said, adding that the purpose of the meeting was to inform and not to advise on the decision to sign a lease. Smith agreed. ìBecause it’s becoming a big issue, you need to get the exact language (for a lease) from a professional,î she said.Panelist Edward McCord, a Colorado Springs oil and gas lawyer, said negotiating a lease involves about two to three hours of a lawyerís time, and the fee varies with each lawyer.Mike Leonard, field production supervisor for the Colorado Oil and Gas Commission, served as a panel member as well.Martin said Protect Our Wells plans to hold more meetings to continue helping residents through the process.For more information, visit http://protectourwells.org.
