AP Enterprise: Lowball gas drill leases haunt Pa.

FORKSVILLE, Pa. – A few short years after agreeing to lease their land to a natural gas company for $2 an acre, Dave and Karen Beinlich could do little but watch, and wait, as an overnight drilling boom turned fellow Pennsylvania landowners into millionaires.

While other landowners were striking increasingly lucrative deals with energy companies, the northern Pennsylvania couple's suddenly valuable 117-acre parcel netted them $234 per year. And there wasn't a thing they could do about it.

The Beinlichs are among thousands of residents living atop the gas-rich Marcellus Shale who signed lowball leases in the years leading up to the boom in Pennsylvania. In those early days a half-decade ago, virtually no layperson had even heard of the rock formation, let alone knew that drillers had found a way to access the huge reservoir of natural gas locked inside it.

An untold number of industry-friendly agreements are now approaching their expiration dates. But landowners who expected to sign new leases — and reap windfalls of thousands of dollars an acre — are facing the reality that energy companies with billion-dollar investments in the Marcellus are not about to let their prime acreage slip away.

As landowners in Ohio and New York prepare for their own round of Marcellus leasing, high-stakes battles are developing in law offices and courtrooms throughout Pennsylvania. Landowners who signed early for pittances are trying to get out of their leases, and gas companies are trying just as hard to keep them shackled to the original terms.

"There's just too much money at stake — between a $3 lease and a $7,500 lease — for the operators to walk away from," said Robert Jones, an attorney in Endicott, N.Y., who represented a group of landowners who sued successfully in federal court to shed their old leases. "They're desperate to hold on to them like the landowners are desperate to get rid of them."

Often, that means energy companies are drilling not to produce natural gas, at least not right away, but to extend their cheap leases indefinitely. It's called holding land by production. So long as the driller has sunk a well capable of producing gas, or even started preparations to drill a well, the original lease terms remain in force.

"It's going to be a topic of great litigation over time," said Dale Tice, an oil and gas attorney in Lycoming County, where hundreds of wells have been drilled. "The verbiage that appears in the leases may be relatively clear, but what's going to be unclear is what exactly the gas company has to do" to hold the land by production. "Does it mean they can just put a stake in the ground?"

That's the question at the heart of the Beinlichs' federal lawsuit against drilling company Chief Oil & Gas LLC.

The couple, who live in Forksville, in rural, mountainous Sullivan County, had been looking forward to the end of their 5-year lease, originally with The Keeton Group LLC but later transferred to Chief. They had signed it in haste. Their infant daughter was hospitalized in Philadelphia and "we really needed the money to travel," recalled Karen Beinlich, who pushed her reluctant husband to sign.

Fast-forward five years, to last fall. Their land had not yet been drilled. The couple knew that if Chief failed to begin developing a well by the time their lease expired at midnight on Oct. 24, they would be free to negotiate a new, more lucrative lease with Chief or some other company. Or free not to sign a lease at all.

Chief apparently knew it, too. On Oct. 21, the Dallas-based company placed the Beinlichs into a larger drilling unit with 19 other tracts of land. Then it staked out an access road and parked a bulldozer on one of their neighbors' parcels — 31 hours before the lease expired. Chief didn't actually begin clearing land for the access road until three days after expiration, according to the lawsuit.

A contractor tipped Karen Beinlich to Chief's tactics.

"Chief is hot and heavy all over me to get this bulldozer here because they've gotta lock in some landowners," Beinlich recalled the man saying. He was apparently unaware that she was one of the landowners in question.

"They're not playing fair," Beinlich said in an interview. "We expected them to be good neighbors and sit down with us."

The company asserted, through its lawyer, that its declaration of the drilling unit, and the placement of the bulldozer, constituted "operations in preparation for drilling" and kept the Beinlichs' original lease in force.

"Leases are legal contracts between the gas rights owner and Chief Oil & Gas. We honor the terms of the lease and we expect the gas rights owner to, as well," spokeswoman Kristi Gittins said via email.

Like other energy firms, Chief, which has drilled 147 Marcellus wells, drills to protect leases from expiring. But Gittins pointed out the ultimate intent is to develop the resource.

"We are a business and we don't make money by holding leases, we make money by selling natural gas," she said.

The Marcellus, a rock formation more than a mile underground that stretches from West Virginia to New York, holds one of the largest natural gas deposits in the world. It could supply a quarter of America's gas by 2020, according to industry projections.

Having perfected new ways to reach the gas, drillers secured the rights to millions of acres of Pennsylvania land in recent years. An Associated Press survey of 37 drilling companies has identified at least 8 million acres of leased land — more than a quarter of Pennsylvania's land mass. The tally includes all of the leading Marcellus drillers, but three dozen others either declined to reveal their holdings or did not return phone and e-mail messages.

That's a lot of land, and drillers are racing to bring it into production before they lose it to expiring leases.

The industry has been compelled by a "powerful, motivating force to drill wells that is not connected to natural gas prices, and that's the optionality of holding leases by production," Jeff Mobley, an executive with Oklahoma City-based Chesapeake Energy Corp., the biggest leaseholder in the Marcellus Shale with 1.73 million acres, said on a March conference call with investors.

Companies are testing the bounds of what it means to hold land by production, said Taunya Knolles Rosenbloom, an attorney in Bradford County who often represents Marcellus landowners.

Companies typically group adjoining landowners together into larger drilling "units" consisting of hundreds of acres. The practice eliminates the need to drill a well on every single landowner's property, but it also means that any production that takes place on one parcel of land automatically holds all of the other parcels by production.

Rosenbloom said she's seen bogus unit declarations filed by drilling companies well after lease expiration, with no surface activity whatsoever. In one Bradford County case, she said, a drilling company placed a single half-acre of a landowner's 127-acre property into a drilling unit — yet the gas well that was supposed to have tied up all of her land indefinitely ended 400 feet from the edge of her property.

"The companies will make you enforce your rights, which is the sad part," she said. "That's the part that really gets under your skin."

Some legal disputes have arisen over the conduct of the landmen who secured the leases in the first place.

Dairy farmers John and Mary Alice Castrogiovanni of Montrose signed a lease with Houston-based Cabot Oil & Gas Corp. for $25 an acre in 2006. The couple sued Cabot for fraud earlier this year, saying in court papers the company's landman had falsely told them that $25 "was the most that would ever be paid," and that if they didn't sign, Cabot would drill a well on a neighboring parcel and take their gas anyway.

John Castrogiovanni, 85, said in an interview he would never have agreed had he known about the Marcellus Shale and its impact on lease prices. He said he assumed the 2006 lease was similar to earlier gas leases that he had signed for pennies an acre decades ago.

"What Dad thought was, little gas guys come, they sell you a lease, they pay you and you never see them," said Castrogiovanni's son, Matt. "Because it's been that way for decades. They would pay you and you would never see anything of them. It was like free money, in a sense, and this was going to be no different."

Except this time it was different, a lot different.

"You know a landman's lying if his mouth is moving," Matt Castrogiovanni said.

In its legal reply, Cabot said the couple couldn't prove the landman knew his statements were false, a required element of fraud. The company also argued that state law bars fraud claims regarding statements about "what a person will or will not do in the future."

The Castrogiovannis withdrew their federal lawsuit in March, citing an adverse ruling in another case. Though they believe they were wronged, John Castrogiovanni said he concluded they stood little chance of winning.

While Pennsylvania landowners face up to the consequences of leasing decisions they made years ago, the attorneys general of Maryland and Ohio, states underlain with Marcellus Shale but much slower to develop the industry, recently warned residents about speculators. They counsel that landowners should be careful about what they sign, resist pressure to strike a deal right away, and seek legal help.

That's good advice, said Pennsylvania consultant Jackie Root, who helps landowners strike deals with gas companies.

"The idea that (a landowner) would sign something at their kitchen table with someone whom they've never met before — that is really a deed on their property — is ludicrous," said Root, who's on the board of the National Association of Royalty Owners. "People still haven't gotten the message. We still get calls from people who haven't an idea what's going on."

The industry points out that upfront bonus payments represent only one portion of the compensation that a landowner will ultimately receive. Once there is a producing well, the landowner gets a state-minimum royalty of 12.5 percent of the value of the gas, or more, depending on the lease.

In New York state, many landowners in the Southern Tier signed low-dollar leases with gas companies in 1999 and 2000, well ahead of the Marcellus Shale boom.

Years later, as land prices shot up as high as $7,000 an acre and royalties doubled to 25 percent, landowners who signed early hoped to get a better deal when their 10-year leases expired.

The gas companies had another idea.

One of them, Chesapeake, said its New York leases would be extended indefinitely because the state's imposition of a fracking moratorium in 2008 had prevented it from drilling.

Nineteen of the landowners sued. A judge terminated their leases earlier this year, saying the moratorium did not release Chesapeake from having to make "delay rental" payments to the landowners.

"These were $3 per acre payments," said Robert Jones, the landowners' attorney, who has since filed a second, similar lawsuit on behalf of 146 landowners in the Southern Tier. "A lot of these people had 50 acres. For crying out loud, Chesapeake couldn't pay them $150."

While much of New York remains unleased, that could soon change.

Landmen have been out in force since July 1, according to oil and gas attorney Chris Denton of Elmira. That's when an executive order that prohibited fracking expired, and New York environmental regulators gave Gov. Andrew Cuomo long-awaited permitting guidelines for Marcellus Shale gas development. Drilling could begin early next year.

Lloyd Tompkins, 69, a landowner in Newfield, N.Y., who's trying to get out of his expired 10-year, $3-an-acre lease, said the drillers haven't acting honorably in their dealings with landowners.

"They seem to think, because they've got a lot of high-powered lawyers and money, that they can come out into the country and cheat people out of what is rightfully theirs," he said. "But if it weren't for the landowners, they wouldn't have anything to drill on."

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Associated Press writer Mary Esch in Albany, N.Y., contributed to this story.