The land under parts of central Pennsylvania contains rock known as “Marcellus Shale.” Trapped within the shale are pockets of natural gas. Gas companies have long been aware of the shale, but until recently, the trapped gas was difficult to capture. Nonetheless, many gas companies entered into leases with landowners and agreed to pay royalties for any gas removed.
Technology has evolved to allow greater access to the gas, making drilling far easier and more profitable. Suddenly, properties with access to the gas are more valuable and gas companies are paying higher royalties for access to these properties. Landowners who already signed leases are looking for ways to renegotiate their leases to get higher royalty amounts from the gas companies. Many landowners have filed lawsuits attempting to invalidate their leases.
On March 24, 2010, the Pennsylvania Supreme Court issued an opinion regarding one landowner’s attempt to invalidate a Marcellus Shale lease in the case of Kilmer v. Elexco Land Services, Inc. In 2007, the landowner in this case signed a lease that entitled him to a one-eighth royalty, minus any expenses, for gas removed from his property. In other words, instead of simply getting one-eighth of the profits from the gas well, the landowner’s profits were reduced to cover a portion of the expenses in drilling for the gas. Two years later, the landowner initiated a lawsuit, seeking to invalidate the lease on the basis that royalties had to be paid without a reduction for expenses.
This case marked the first time the issue had been heard by the Pennsylvania Supreme Court, and the potential outcome posed a significant threat to the drilling industry. If the Court permitted the landowner to invalidate and renegotiate his lease, other landowners would likely do the same. The Pennsylvania Supreme Court held that the lease was valid, paving the way for continued drilling. The impact of this case has already been seen with the announcement of new drilling projects. For example, on August 13, 2010, UGI Corp. announced its plans to invest $300 million in Marcellus Shale development projects over the next two years.
Although companies such as UGI Corp., are moving forward with Marcellus Shale development projects, not everyone is in favor of these projects. On August 17, 2010, Councilman Doug Shields announced his intention to introduce a bill to ban natural gas drilling in the city of Pittsburgh. Those who oppose the drilling cite concerns including the loss of green space, noise and light pollution, environmental contamination, and the potential for accidents as reasons to ban these projects. These concerns may prompt additional legislation and litigation aimed at curbing natural gas drilling, and contractors hoping to bid on drilling projects should stay informed of new legal developments.
If you’re interested in finding out more about Marcellus Shale development in Pennsylvania, The Interstate Oil & Gas Compact Commission, Penn State Cooperative Extension, and Penn State Outreach are partnering to host the 2010 Marcellus Summit, formerly the PA Natural Gas Summit, scheduled for October 10-12 at The Penn Stater Conference Center Hotel.