learn more about the upcoming 2013 NARO PA Annual Meeting and Convention
The Implied Covenant to Market vs The Shut-In Royalty Clause
Imagine you own 145 acres of leased land. After months of inactivity, operations finally commence in the summer of 2009 and the vertical well bore is completed that August. Your landman enthusiastically tells you that the vertical shaft has “bottomed-out” at 8,175 feet and will be “perforated” soon. The horizontal well bore is then completed and is hydraulically stimulated in September. You are excited. You anticipate paying off that farm loan and growing your children’s college fund. And then nothing happens. For months. Your excitement has been replaced with frustration and anger.
According to Robert Burnett, Chair of the HoustonHarbaugh’s Oil/Gas Practice Group, this is a familiar but troubling issue for a growing number of landowners throughout the Marcellus Shale fairway.
Burnett has seen an influx of landowners trying to figure out what they can do about the mysterious shut-in well. How long can the well remain shut-in? Does the gas operator have any obligation to actually market “my” gas?
According to Burnett, these questions “involve two unique oil/gas concepts that are often at odds with one another: the implied covenant to market and the typical shut-in royalty clause.”
Most modern oil/gas leases contain what is commonly known as a shut-in royalty clause. The clause developed over the years to mitigate the harshness of the automatic termination rule. Under this rule, an oil/gas lease will generally terminate any time after expiration of the primary term unless there is a well on the leased premises producing gas “in paying quantities”.
Unlike the shut-in royalty clause, an implied covenant to market gas exists regardless if such an express “marketing” clause is set forth in the parties’ lease. What are implied covenants? Implied covenants in oil and gas leases originated in the 1890’s as a means of “filling in the gaps” that the express terms of the lease failed to address or even consider.
Note: Burnett will be presenting at NARO-PA’s annual convention the morning of March 29th.
Engelder on the Benefits of the Shale Revolution
The benefits of the Marcellus Shale stretch well beyond the state boundaries of Pennsylvania, West Virginia, Ohio and New York according Dr. Terry Engelder, professor of geosciences at Penn State University and an expert in shale formations.
Engelder points to the global and local economic impact and the exchange of coal for natural gas use in electricity generation as two keypositive outcomes from the shale revolution.
“Switching to natural gas has slowed the growth CO2 emissions considerably because the best way to lower emissions is by simply leaving it [coal] in the ground. This will continue to have an extremely beneficial effect by slowing the rate of climate change driven by CO2” Engelder added.
Engelder points to EIA data that reinforces the belief that natural gas has proven instrumental in lower CO2 emissions and believes the United States has a unique opportunity for leadership in lowering emissions globally."
Note: Engelder will be presenting at NARO-PA’s annual convention the afternoon of March 28th.