Two years ago, Lee County Extension Director Susan Condlin and some local Cooperative Extension advisors began seeing paid advertisements in the local newspaper, inquiring about leases for mineral rights. Condlin discovered that the natural gas industry was knocking on Lee County’s door, and many landowners didn’t have the information they needed to make informed decisions on leasing their mineral rights.
Since that time, N.C. Cooperative Extension has played a key role in helping landowners in Lee and other counties understand how to protect themselves and their property when negotiating with natural gas companies. Dr. Ted Feitshans, attorney and Extension associate professor in the Department of Agricultural and Resource Economics at N.C. State University, has conducted several workshops for landowners in key natural gas counties, and on Dec. 8, he will conduct a workshop in Raleigh for attorneys.
Lee, Moore and Chatham counties are at the center of what may be a large natural gas deposit. In Lee County alone, natural gas companies have acquired mineral rights leases on more than 9,000 acres of land. Though the two practices key releasing natural gas in shale deposits –injection of fluids and horizontal drilling – are not legal in the state, a legislative study on the practices is due out in May 2012.
Cooperative Extension isn’t taking a position on the controversial natural gas drilling practice known as “fracing” or “fracking” that is used to access shale gas. Feitshans and Condlin say Extension’s role is educating the public.
After Condlin saw ads in the newspaper for mineral rights leases, she also heard stories of natural gas company representatives or brokers knocking on people’s doors to ask about mineral rights leases. She and Extension advisory board member Wayne Watson asked Feitshans to put together a training program on mineral rights leases.
“Before you sign on the dotted line, you need to know what you’re signing and what you can negotiate,” Condlin said.
The issue of mineral rights leases is new to North Carolina, but Feitshans was a quick study. He contacted Extension colleagues in other states for information, and in June 2010, he conducted the first education session in Lee County for a crowd of 250. He has participated in other Lee County training programs, most recently in November, and has contributed to training programs in Chatham, Moore and Anson counties.
“We’re trying to do what Extension does best, which is present as unbiased picture of the situation as is humanly possible,” Feitshans said.
Joining Feitshans for recent education sessions is Brandon King, Extension associate in the Department of Agricultural and Resource Economics. King focuses on zoning issues and negotiation of mineral rights leases. Both are passionate about helping citizens and decision makers understand what’s at stake as the natural gas industry moves toward North Carolina.
Feitshans and King stress the importance of dealing with an attorney who has experience with natural gas leases before signing any mineral rights lease. Without an experienced advocate, landowners can face losses of thousands of dollars in bonus payments and even greater losses in royalty payment income over the life of the lease, King said.
“Everything in a gas lease is negotiable. It usually is inadvisable to sign a standard mineral rights lease,” Feitshans said. “It’s also inadvisable to sign any lease without the advice of a North Carolina licensed attorney, who has some experience with the oil and gas industry or knows someone to advise him or her on oil or gas.”
Some potential problems associated with mineral rights leases include:
• Property owners who hold a mortgage may find the mortgage must be paid in full upon transferring mineral rights through a lease.
• Transferring mineral rights can change a landowner’s present-use tax status, resulting in higher tax payments.
• Land conservation programs with the U.S. Department of Agriculture can be nullified upon signing away mineral rights.
One problem for consumers is that North Carolina doesn’t really have attorneys with experience in oil and gas leasing, unless they’ve worked in that area in another state.
Feitshans and other experts will present a half-day workshop with the N.C. Bar Association to give N.C. attorneys an introduction to issues surrounding natural gas drilling. The session will be held Dec. 8 at the N.C. Bar Center in Cary, 8:30 a.m. to 12:15 p.m.
“This program is just a primer for lawyers,” Feitshans said. “If you’ve got a client who’s been approached by a natural gas company, here are the basics that you need to know.”
Brandon King shares concern about property owners getting a fair deal. “Now, in my opinion, is not a good time to sign a mineral rights lease,” he says, citing these reasons. “There are so few companies leasing in North Carolina there is currently no real competition between companies seeking to sign leases with landowners. We need a competitive market for leasing that allows landowners to negotiate better lease terms and financial compensation as has already been the case in some parts of the country.”
The lack of competition can be largely due to the fact that the key practices associated with natural gas production are not legal here, King said. Currently, natural gas wellhead prices are low – from a high of over $10 per 1,000 cubic feet in 2008, prices have dropped to under $4 per 1,000 cubic feet in 2011. But the price could go up in the future as utilities shift electricity production to natural gas and its demand increases.
The very issue of who actually owns mineral rights associated with a land tract can be complicated. Mineral rights don’t always transfer with property rights. During the 1800s, Lee County was the site of several coal mining operations that closed in the 1920s, after several major explosions and flooding from the nearby Deep River. Historically, some mineral rights in the county date back to the days of coal mining. Many landowners in the Cumnock area of Lee County know that they don’t own the mineral rights associated with their land, Feitshans said.
King believes that communities need to carefully consider how to address any impacts the natural gas industry could have on their communities. North Carolina law, for instance, currently doesn’t have specific provisions for the zoning of activities associated with natural gas drilling, which would address property values, noise, safety and other concerns. However, it’s possible that state legislation on natural gas drilling could modify the zoning authority of counties and municipalities, and other ordinance-making authorities, to regulate natural gas activities.
In addition, communities will incur costs associated with natural gas drilling, including public safety, emergency response, traffic and housing for a temporary workforce, just to name a few. Communities also will be faced with the costs of inspections and enforcement of auxiliary drilling facilities, although the state will likely be the primary regulator of the industry. As the law stands now, tax revenues generated from any drilling would go to the state, not to local governments.
“We just don’t know now what the costs will be to local government,” King said.
Protecting both the quality and quantity of groundwater and surface water is also a concern with natural gas drilling. The drilling process requires pumping large amounts of water into wells to break up the shale rock and extract the natural gas.
“There’s not a lot of groundwater in Lee County, and surface water comes mainly from rivers,” Feitshans said. “Farmers I’ve talked with are particularly concerned with having sufficient amounts of water for irrigating crops.”
In Lee County, Cooperative Extension plans to partner with the county health department, the U.S. Geological Survey and Duke University to collect baseline data on the quality of well water in the county, Condlin said. If natural gas drilling does come, Lee County officials will be able to determine if the water quality is changed as a result.
As a family and consumer sciences professional, Condlin wants to make consumers and the local community “get the most bang for their buck.” She acknowledges that these are hard economic times for Lee County families and county government. While the natural gas industry has the potential to turn this around, landowners need to carefully consider their options, Condlin said.
Before any state laws change, Feitshans says Cooperative Extension will continue to raise public awareness regarding mineral rights leases. “We want to ensure that consumers understand their rights and have adequate legal representation, so they don’t sign a lease disadvantageous to them,” he said.
More N.C. Cooperative Extension information on mineral rights leases is available online at: www.ag-econ.ncsu.edu/gasleasing.html%20.