Section 8: Consumer Protection and Legal Issues

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Section 8 of the report isn’t actually included in the Department of Natural Resources report itself. This section, which addresses consumer issues, was written by the Department of Justice and submitted separately to the General Assembly May 1.

Read a copy of the whole document.

This report, “Impacts of Landowners and Consumer Protection Issues,” is 67 pages long, and addresses a number of the issues related to leasing mineral rights to natural gas companies, and what that could mean for homeowners.

So there’s a lot of talk about money, and money to be made by homeowners, but what do those payments look like, and what do they mean?

The primary types of compensation made to homewoners are bonus payments, royalty payments and delay rentals.

A bonus payment is a lump sum payment made to the landowner when the landowner signs the lease, and is essentially a signing bonus. The amount paid to the individual homeowner is generally per acre, and varies based on a number of variables, such as the price of gas, the level of risk that there might not be gas under the property and competition for other leases in the area at the time.

These bonus payments have ranged from as low as $5 per acre in West Virginia in 2007 to as high as $20,000 per acre in Texas in 2009. Because the price of gas has been steadily dropping since 2009, though, and is currently very low, bonus payments are also much lower now.

Royalties paid to landowners are essentially a share of the production. But these payments only come if there is gas under the property, and when that gas is being extracted.

Delay rentals are rentals paid to the landowner to maintain the lease prior to beginning production for natural gas. Sometimes, though, this fee is included in the initial signing bonus and is known as a “paid-up” lease.

However, landowners don’t always have the right to sign away the gas under their own property.

The issue of split estates is not as common in North Carolina as it is in other states where the natural gas industry already has a strong hold. Because of that, however, it’s something not many homeowners in NC have even been aware of until recently. And while less common in NC, it isn’t uncommon. As the report points out, in Lee County officials had identified at least 36 parcels of land with severed mineral rights, totaling about 5,800 acres in Lee County.

Essentially, just because someone owns the property on the surface, for example, the actual land that person’s house is on, doesn’t necessarily mean that person owns the rights to the minerals beneath that house.

This is where the term split estate comes from. These mineral rights, once severed, can be sold or leased separately, and become a separate piece of property.

This means that in many cases, these mineral rights can be leased to oil and gas companies whether the person with surface rights wants to allow the extraction process or not.

For instance, some of the land with severed mineral rights in Lee County makes up Riverside subdivision. These homeowners, while they control their own surface property, have no say under the minerals beneath it, and those mineral and gas rights have already been leased to Whitmar Exploration Company as of 2010.

This is not the only subdivision like that in North Carolina. According to the report, around 2007 national homebuilder D.R. Horton began severing the mineral rights of its properties around Wake and Chatham and deeding them to an affiliate, DHR Energy. While homeowners were made aware of this in their contracts, it’s unclear whether homeowners fully understood the implications of that severed estate, especially since the natural gas industry and the issues related to it are relatively new to North Carolina.

And since there are no current statutes in NC that specifically require sellers to disclose the status of a piece of property’s mineral rights upon sale, there are likely still a number of homeowners in NC who just don’t know, and aren’t even aware that this could be an issue.

But what does this severed estate mean for the future of a property, and the surface owner’s right to control their own property? Check back on Monday, where we’ll delve into that, as well as talk about “pooling,” the practice of essentially forcing homeowners into allowing drilling once enough of their neighbors have signed leases.

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