Will Gas Leases Hamper Your Credit?

Pennsylvania's blind rush into the natural gas boom has produced a host of surprises, mostly in the form of environmental issues. The state government was not prepared, by statute, regulation or practice, to deal with a massive new extraction industry and has been playing catch-up for nearly five years.

Now some Bradford County land owners, who have negotiated mineral rights leases, have received a surprise on the financial side.

Like most companies, gas companies use lines of credit secured by company assets to finance ongoing operations. Gas company assets include the leases by which they access natural gas.

As revealed during a recent Bradford County commissioners meeting, Chesapeake Energy Corp. has mortgaged the mineral rights to about 1,000 properties in Bradford County, in order to access a $5 billion line of credit with a California bank.

The problem is that land owners who have leased those mineral rights typically are not aware of the mineral rights mortgage until they attempt to use their land as collateral for financing of their own. Then the title search reveals the mineral rights lease.

Since the mineral rights are distinct, the company's use of the lease to secure its financing should not adversely affect a land owner's attempt to secure financing.

But that's up to individual lending institutions. According to Diane Ward, a former supervisor of Standing Stone Twp., some banks have rejected loan applications from land owners because of the company's mineral rights mortgage.

Companies must be allowed to use their assets for their own financial purposes. But that also is true of land owners.

State law should require specific notification to land owners when a company uses a lease as collateral on a loan. And the law should be clear that the company's use of the lease for that purpose must not adversely affect the land owner's ability to secure financing.

Read more: http://standardspeaker.com/opinion/gas-leases-tied-to-landowners-financing-woes-

If the gas company owns these leases and can use them as collateral, should the gas compamy not be liable for the taxes on this asset?

The Lessee (i.e., gas company) does NOT own the gas rights; the landowner/Lessor owns the same and is responsible for the real property taxes on such rights. This is the same with someone who rents out a house with a lease. The owner is still responsible for the real property taxes on the house, not the renter. The point I was making is that now that some folks have cashed in with big upfront royalties, their property (i.e., their gas rights) should now be reevaluated as to the appraised value thereon, most likely resulting in higher real property tax revenue for the county. Landowners who expose their neighbors to the risk of fracking should pay their fair share in taxes for the windfall they've received.

More importantly, the WV legislature needs to enact meaningful tax measures regarding the extraction of gas from the Marcellus shale. Senator Jeff Kessler had a brillant idea that made a lot of sense (which is why his bill went nowhere during the past session). He advocated an extraction tax that would be placed into a fund to be divided among all taxpayers in WV, just like Alaska has an annual oil royalty payment to all residents in AK. This State has been raped long enough by out of state interests, so Senator Kessler's legislation was a way of keeping some of that money here in this State. I hope he revives that idea during the next session.

Good point by Higher. However, the only way to put a value on a gas deposit is when it's sold or leased. If you don't sell or lease your mineral rights then they are only worth what you paid for them originally.

Using your example, if your neighbor's house increases in value, and your house is similar, your taxes should go up as well. However, if your neighbor sells mineral rights the price should have no effect on your taxes. Only a detailed geological study can determine that the gas deposit under your neighbor's land "is similar to" the gas deposit under your land. Add to this the fact that, in tapping the deposit under your neighbor's land the deposit under your land could disappear... So your taxes should not change based on a neighbor's prices for mineral rights.

Look at it this way: If your neighbor replaces all his plumbing with solid gold pipes and fixtures, the value of his house would skyrocket. But that shouldn't change the value of any nearby house that doesn't have gold faucets because your neighbor's house is no longer "similar to" those other houses.

I'm more concerned about the fact that gas wells can ruin the value of the surface owner's land and the surface owner has no recourse. Owners of mineral rights have more influence in Charleston than owners of surface rights.

This is the first time I've heard of Senator Jeff Kessler's proposal. We may not be able to stop the gas companies from messing up our land and water but at least we can make certain that the people get something in return. Any politician who opposes Kessler's bill is dead set against the interests of his constituents. Let's all write to our state politicos and ask them what they are going to do to support Kessler's bill. Rub their noses in it. -- Rich