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The language of production and storage of natural gas
leases may appear esoteric and is often confusing. However, with expansion
of natural gas markets and increasing interest in available underground
storage, more and more landowners in Southwestern Ontario are being
confronted with such leases and are considering surrender of sub-surface
rights. Before entering into leases, landowners should consider the extent
of the rights they are conveying and potential liabilities they may be
incurring.
Provisions common to many production and storage leases
currently in use constitute a significant concern for landowners. While
such leases are expressed to be for a specified number of years, and may
provide for termination in default of drilling or production, these leases
invariably contain provisions which permit their indefinite extension in
time upon payment of a minimal annual rental. In effect, such leases
provide the leasing company with an option on sub-surface rights which may
continue in perpetuity at the cost of only a small yearly payment to the
landowner. While the lease continues, the landowner has no further right
to convey or otherwise deal with the sub-surface rights in his lands.
Of equal concern to landowners are lease provisions which
purport to eliminate or limit a leasing company's liability for damages
and injuries caused by its operation because of, for example, some neglect
or default of the landowner. Considering the limited financial return to
landowners under these leases and their lack of control over the leasing
company's operations, landowners must be vigilant to ensure they do not
incur liability either during the period of the company's operation or
upon the abandonment of facilities.
The location and depth of facilities and the construction
and maintenance of temporary and permanent access also pose concern for
landowners, particularly with respect to interference with agricultural
operations. Landowners should not surrender to the leasing company blanket
rights to locate facilities and access upon their lands, but should ensure
they retain rights to determine these issues.
Certainly compensation provisions of production and
storage leases are of critical significance to landowners. In addition to
industry competitive royalties, landowners should establish before
entering into leases the minimum compensation to which they will be
entitled upon the leasing company undertaking investigation and
development activities on their lands for both access and facilities
sites. Such minimum compensation should include provision for present and
future crop loss, disturbance damages and temporary and permanent impacts.
Compensation for storage rights should address increased payments after
designation, payment for lands not included in the storage pool, and
payment for unproduced residual resources. Landowners should not be
content to leave pooling or unitization of production within the sole
discretion of the leasing company.
Most landowners presented with production and storage
leases for their consideration find the legal language of leases hard to
understand and feel ill-equipped to attempt negotiation of the issues
concerning them with the leasing company. In response to landowner
concerns, and recognizing that landowners will be more successful in
negotiating collectively satisfactory lease amendments, the Gas Lease
Landowners of Ontario (GALLO) has recently formed to represent and promote
landowner interests. The members of GALLO are landowners throughout
Southwestern Ontario who share concerns about the present form of leases
with which they have been presented and who would like to negotiate a form
of lease which better protects landowner interests. Any readers interested
in obtaining more information about GALLO and its objectives should
contact:
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