Lawyers Prepare for Gas Rush

Carol Lundberg | Aug 5, 2011

Market factors, technological advances, and a growing interest in cleaner energy could be aligning to create another genuine “gas rush” in Michigan. And Michigan lawyers are anticipating turning that gas rush into gold.

The rush started in 2010 when the State of Michigan oil and gas lease auction netted some $178 million – almost as much as the $190 million collected from all the auctions combined since 1929, according to the state. After the May 2010 auction, gas companies started competing to get individual property owners in Northern Michigan to sign leases.

That started an all-out lease grab and fierce competition between energy companies-- primarily Oklahoma-based Chesapeake Energy and Canada’s EnCana-- that were offering to pay as much as $1,200 per acre plus a percentage of proceeds from gas production to property owners.

That could add up to a lot of money when the wells start to operate, said Gaylord represent based attorney, Susan Hlywa Topp, who is representing land owners in disputes over leases in the Collingwood shale, mainly in Kalkaska and Antrim counties.

“If its producible, it will produce huge amounts of money for the property owners and the gas companies,” she said. “It has gone as high as $8,000 per acre in sales when the wells start producing.”

And that kind of money and profit has lawyers’ phones ringing.

“What’s trending now is that I’m seeing a definite uptick in the number of clients who have been contacted by landmen,” contractors who negotiate for the acquisition and divestiture of mineral rights, said Arthur H. Siegal, partner who chairs the environmental practice group at Jaffe Raitt Heuer & Wiess, P.C. in Southfield.

‘More aggressive’ fracturing

He’s expecting that noticeable unpick to lead to growth in the oil and gas segment of his practice and other attorneys around the state in that area of practice.

Until now, Siegal said, most of the gas drilling in Michigan has been for easy-to-reach shallow deposits, even though it’s been well-known that Michigan is situated on top of a very large natural gas shale.

Michigan has been very conservative in its environmental regulations, due to the Great Lakes, and regulation equals higher cost of extraction.

It’s not until the price of gas rises high enough that drilling becomes economically viable, he said.

At the same time, technology has advanced to allow for deeper hydraulic fracturing, commonly called fracking, a process that uses millions of gallons of water, sand and chemicals to fracture rock and increase extraction rates.

“Most of the wells in Michigan are the result of fracking, but this is more aggressive. These are not shallow wells; they are two miles underground,” Siegal said.

Another factor fueling Siegal’s hunch that there will be another gash rush is the push toward green energy and domestic fuel sources.

“The EPA is talking about phasing out large-scale coal power plants,” he said. “As those will be phased out, the hope has been that we would move to cleaner, greener, solar and wind energy. But the interim is going to be natural gas.”
Kate F. Fetkenheir of the Gallagher Law Firm PLC in Lansing represents gas and oil companies, and said her practice is booming as a result of increased leasing activity.

One issue that’s been coming up in her practice lately is that of obtaining subordination agreements on the leases.

“It’s being complicated by foreclosures,” Fetkenheir said. “How do you clear title when a property is, or was, in foreclosure? There have generally been a lot of questions about clearing title”.

She anticipates more of that in the future.

And she also is expecting there to be litigation over fracking, which has been controversial due to concerns over safety and ground water.

Fetkenheir is a member of the Michigan Oil and Gas Association and Michigan Professional of Landmen, and said she hasn’t yet heard of any environmental groups filing suit, but she anticipates it when intensive drilling operations become immediately imminent.

Unique approach

Siegal said while lawyers with expertise specific to the oil and gas industry may be a very small group, there are many lawyers who should get familiar with the oil and gas activities in Michigan, because their clients are going to need advice.

“A smart lawyer who might do things like contracts for clients, if he or she thinks things through about how issues might affect clients, will have opportunities,” he said.

Attorney Michael J. Zwick, president of Southfield-based Assets International LLC, seized on the opportunities associated with increased natural gas exploration and drilling.

His firm locates missing heirs of estates in probate, and works on commission to help the heirs get paid. At the beginning of this year he expanded his business to include locating people who have mineral rights.

“It was a perfect fit for us,” Zwick said. “When a company wants to drill, landmen will determine who the owners are. They don’t know who will be affected; they just sign up everyone they can. We hope it’s the landmen who will come to us because we’re really good at untangling these kinds of cases. We find out who is on record, or if the person has died, we find their heirs.”

Though he’s working primarily in the areas where there is already exploration and drilling going on--Oklahoma, Louisiana and Texas--he anticipates a lot of business in Michigan.

“Landsmen are digging around in Northwest Michigan as we speak,” he said.
Michigan is a little bit different than other markets because it has the Dormant Minerals Act.

“In Michigan, if I don’t exercise my drilling rights in 20 years, the rights go back to the surface owner. I lose the right unless you file at the register of deeds to say you’re reserving your rights,” Zwick said.

“Whereas in Oklahoma, there is no dormant mineral rights act. So we’re finding people who were granted the mineral rights in the 1920’s. Their heirs could be entitled to those rights.”

Opportunities for all

Siegal’s clients are not average; they’re savvy, and have some money. And they call on him because of his familiarity with the confluence of environmental laws and regulations, case law and common law.

It’s a knowledge base, he said, that is not readily available to the average land owner.

At the same time, that expertise in oil and gas lease negotiations might be hard to come by, especially in smaller markets. Land owners are facing slick sales pitches to get them to sign on the dotted line.

“I just got an email from a client who forwarded me a flurry of emails from a company using high pressure tactics to get them to sign,” Siegal said. “This person is not succumbing to it. But there are people who do.”

Siegals’s hope is that land owners who are being approached by landmen would never sign a lease without consulting a lawyer first. That means that lawyers in the regions where the landmen are working on leases--primarily in Northern Michigan--need to be ready to handle the questions and concerns of their clients.

His advice to clients and other lawyers is that everything is negotiable. Even solo and small firms who help clients with routine matters like contracts and residential leases or sales, can help clients negotiate with a gas company.

“You may miss out on a nuanced issue here and there, but you want to be sure the client is protected from liability and that impact on their property is limited,” Siegal said. “You may not be able to negotiate something like no fracking, but you can negotiate the level of monitoring of the water quality.

“You can negotiate access to the property and working around farm operations, and insurance and indemnity and property restoration,” he said.

Clients will have different needs and expectations in negotiating, Siegal said.
In general terms, after a landman comes knocking on a property owner’s door, most people will fall into one of two categories.

“A lot of property owners are interested in getting the biggest return possible. That’s their primary focus,” he said. “And other property owners are concerned mainly with protecting their property for future generations. If they’re on a lot of acres, and maybe have a lake or stream on their property, they’re going to be concerned about that.”

They’ll each have varying levels of leverage.

Some will have surface rights but not mineral rights. They have limited leverage.
“But with property owners who own the mineral rights, that’s where you have the greatest opportunity to negotiate, no matter what the posture is,” he said

“You might not be able to limit hydraulic fracturing, but you can negotiate for minimal impact, for property restoration, and you can limit the amount of time the well might be there. Everything is negotiable.”