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Pipeline Leases ARE Negotiable

June 11, 2013
dsp By JEFFREY J. ROKISKY

Much like an oil and gas lease, a pipeline agreement is absolutely negotiable. And just as the Marcellus and Utica shale boom swept across our area within the last few years, pipeline leasing activity is exploding across parts of Ohio, West Virginia and Pennsylvania.

(In this article we will use the term "pipeline agreement" to refer to a right-of-way, an easement, and/or a pipeline lease, which terms are often used interchangeably to mean a pipeline agreement. A pipeline agreement is nothing more than a document, or set of documents, that gives an oil and gas company the right to install a pipeline over a landowner's property).

In the mad rush to secure mineral leaseholds in the Marcellus and Utica, oil and gas companies weren't focusing on the infrastructure needed to develop the oil and gas underneath the land. Now that the "land grab" has slowed down a bit, and wells have been drilled and are waiting to be placed into production, the industry is switching gears to focus on developing the infrastructure in the region. Oil and gas companies are in desperate need of this infrastructure in order to gather the robust oil and gas in this area and transport it to the market to be sold.

Therefore, the oil and gas industry will once again be orchestrating armies of landmen to locate and approach landowners who are located within their proposed pipeline route in hopes of persuading them to sign a pipeline agreement. Landowners should know that their land is extremely valuable and that they should be fairly compensated for signing a pipeline agreement.

Landowners should also make certain that their land is adequately protected by negotiating into his/her lease the necessary protective provisions. Pipeline agreements are critically important legal documents that are highly complex and have a long-lasting effect. Landowners must know exactly what they are signing and be comfortable with it.

Many variables go into being able to successfully negotiate a landowner friendly pipeline agreement, such as the size and layout of the property, the level of drilling activity in the area and the proximity of the property to such drilling activity. However, I feel the most important factor is being adequately armed with the knowledge required to fairly negotiate a pipeline agreement. While there are entirely too many considerations regarding pipeline agreements to mention here, the following is a short list of important considerations for the landowner to keep in mind if they are approached by a landman to sign a pipeline agreement. We highly recommend a landowner seek the advice of an experienced oil and gas attorney, particularly one with pipeline leasing experience, if he/she is approached to sign a pipeline agreement.

Types of Pipeline and

Eminent Domain

Natural gas travels from the wellhead to consumers through a series of interconnected pipelines and facilities. Essentially there are three types of pipeline:

1. gathering lines (smaller diameter pipelines that gather natural gas and other hydrocarbons from wellheads and transport them to a processing facility or interconnect with a larger line);

2. transmission lines (wider diameter pipelines that transport natural gas and other hydrocarbons to utility companies); and

3. distribution lines (larger lines that the utility company uses to supply the gas to businesses and consumers). It is difficult to decipher when a pipeline stops being a gathering line and starts being a transmission line. The main difference between the two is that the oil and gas company does not maintain the power of eminent domain for gathering lines but it may possess such power for other lines. The power of eminent domain would essentially allow the gas company to enforce the pipeline agreement if the landowner will not voluntarily sign it. Oil and gas companies are reluctant to use this power but will do so if they feel it is absolutely necessary.

Location

A landowner should never sign a pipeline agreement without there being a map included within the pipeline agreement documents that clearly pinpoints and evidences the proposed pipeline route. A landowner should have the final say as to where the pipeline is permitted to be placed.

Number of Pipelines

Normally, the landowner will be presented with a standard form pipeline agreement from the oil and gas company. This agreement often gives the oil and gas company the right to lay multiple lines on the property along with the right to lay additional lines in the future with no additional compensation to the landowner. The agreement should clearly state that the oil and gas company is only permitted to place a single line on the property and any additional line is strictly prohibited unless there is a separate written agreement and compensation for said additional lines.

Size, Pressure and

Natural Gas Only

The diameter of the pipeline to be installed should be specifically listed within the agreement, which should also include a limit on the maximum size of diameter permitted to be used. Another important consideration is the speed, or pressure, that the gas is going to be traveling. The higher the speed, the more potentially dangerous the pipeline could be. The amount of pressure permitted should be expressly stated in the agreement.

The agreement should also list what materials are to be transported through the pipeline, which should be limited to only natural gas and associated hydrocarbons.

Indemnity

A landowner should expressly require that the oil and gas company indemnify and/or hold harmless the landowner from the acts and omissions of the contractors and employees of the company. This means that if somebody is injured or something on the property is damaged through the fault of the oil and gas company or their contractors, the company is responsible if you are subsequently sued for it.

Restoration of Land

The landowner should always mandate that the property be restored to its previous condition, or as close to its previous condition as is reasonably possible, after construction of the pipeline is finished. The landowner should be sure to place a time limit on when the property must be fully restored.

The agreement should mention any specifics regarding type of seeding to be used, fencing, gating or any other type of special consideration when restoring the property to its original condition.

Construction of Pipeline

The standard form agreement used by the oil and gas company normally provides for a fairly wide permanent easement. The landowner should expressly state in the agreement that there can be a wider easement during the construction phase but that the permanent easement should be significantly smaller. The landowner should agree in writing to allocate a certain amount of time to permit the oil and gas company to install the pipeline and if it is not installed by a certain date/time then the agreement lapses and is null and void. The oil and gas company should not be entitled to reimbursement in such event.

Timber, Crops, Etc.

Normally, without expressly agreeing in writing, the compensation paid to the landowner for the pipeline agreement includes consideration for any damaged crops, timber, etc. It should be expressly agreed to in writing that the oil and gas company will pay the fair market value of any crops, timber, etc. that is destroyed or damaged in the construction of the pipeline. The landowner may also want to have an independent professional appraise said crops, timber, etc. before construction begins.

Abandonment

What happens when the pipeline is no longer being used? The agreement must include a definition of "abandonment" of the pipeline and require the pipeline company to remove all lines if that definition is met. It must be clear that the pipeline agreement is terminated if the abandonment event occurs.

Taxes

The structure of the compensation package paid to the landowner will determine how the payment is treated as far as taxes are concerned. A portion of the payment can be treated as consideration to the landowner for the value of the land they are taking, which will likely be taxed as income. The other portion can be treated as consideration to the landowner for the damage done to the property, which may not be taxed as income but could reduce your basis in the property. We highly recommend a landowner consult an experienced tax professional when dealing with consideration from pipeline agreements to determine how he/she should structure his/her payment.

Jeffrey J. Rokisky is an elder law attorney with offices in Wheeling, Weirton, Elkins, Clarksburg and Robinson Township. If you would like to submit a question for publication, please email it to rrokisky@ rokiskylaw.com

 
 

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