TPT September 2011

G lobal M arketplace

Q: What is an oil and gas lease? A: Signed by you, this document gives the driller the right to site a well on your property, bring in a drilling rig, set it up, and extract any oil and/or natural gas located there. The driller must have obtained a permit from the State of Ohio. Q: What is the chance that a driller will choose my property for a well? A: If you have been offered a lease, the driller probably knows there is a reasonably good possibility of locating oil and/or natural gas on your property. Q: If this proves to be true, what happens next? A: The driller will extract the oil and/or gas through the well hole and sell it. For gas, the driller will build a small gas sales line to transport it to a transmission pipeline. For oil, the driller will put storage tanks on your land to store it for pickup by truck. Other equipment may also be brought in. Q: Assuming the success of a well on my property, what will I receive? A: Under the current standard lease in Ohio, you can expect a small cash bonus payment and, normally, 12.5 per cent of what the driller receives from sales. The costs of producing a well on your property are not deducted from this, but severance taxes [imposed by a state on the removal of nonrenewable resources that will be used in other states: TPT] are deducted from your share of the sales. Usually, you can also receive up to 300Mcf of “free gas” for use in your home. [Mcf=1,000 cubic feet of natural gas: TPT] You are

responsible for installing and maintaining the gas line to your home. There are both advantages and risks to accepting gas for home use from a well on your property. You should discuss the pros and cons with an adviser. Q: How long does the oil and gas lease last? A: Normally, to permit time for drilling, the initial term is from one to five years. If a well is successful, that producing well automatically extends the lease until it no longer yields anything. A well sometimes produces for many years. Q: What happens when the well no longer produces? A: The driller will plug and abandon the well, and you will again own the mineral rights in your property. Q: What else should I know? A: Recently, drillers have come into Ohio to explore for much deeper and bigger wells than in the past. The companies drilling wells to the Marcellus and Utica Shale formations are typically large and can offer correspondingly larger signing bonuses than have previously been offered to Ohioans. You should be aware, however, that the risks associated with drilling deeper wells are different from those associated with drilling the shallower wells common in Ohio up to this point. The lawyers’ primer on leasing ends on another cautionary note: “Whenever you consider leasing your property to a driller, regardless of the well type, you should contact a lawyer who is familiar with oil and gas leases.”

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S eptember 2011

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