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Natural Gas Exploration: A Landowners Guide to Financial Management

By Michael Jacobson
Published by Penn State Extension on August 22, 2017

If you are a property owner in northern, southwestern, or central Pennsylvania, there’s a chance that you are leasing your property, or considering leasing your property, for natural gas exploration and drilling. Perhaps you have received a bonus payment for signing a gas lease and are trying to decide how to use your windfall. Or maybe you’ve been promised a bonus payment for signing a lease but you’re still waiting for your check from the gas company.

Exploration and extraction of natural gas from the Marcellus shale is a potentially valuable economic stimulus to rural communities in Pennsylvania. As landowners are paid for leasing their properties, and as the gas industry develops the regional drilling infrastructure, economic gains can be significant.

But while all the activity surrounding natural gas reserves in Pennsylvania can be exciting, it can also be confusing for landowners. You might be wondering how the nation’s economic situation is affecting the market for natural gas. You might find yourself confused or frustrated by gas development activity that seems erratic. Good, nonbiased information about leasing and payments is hard to come by, and the sudden interest and pace of drilling have led to uncertainty and suspicion about the gas exploration process.

This guide is meant to be a financial management tool for property owners, covering the basics of what you need to know, how to manage your income from natural gas leasing, and what to consider when making financial decisions. The more you understand the concepts behind wise financial management, the better decisions you can make for your land and your family.

While this guide outlines some things you should consider about financial issues surrounding natural gas leasing, it is not intended as legal or professional financial advice. You should consult with a financial professional, such as an attorney, certified public accountant (CPA), tax adviser, or financial planner, before making any legally binding decisions.

The Gas Lease

As a landowner, you should know that a natural gas lease is the product of negotiation between you and the gas company and will govern nearly all aspects of exploration and drilling on your property. The lease is a legal contract, and its written terms will supersede anything that is said orally during contract negotiations. An effective gas lease should spell out clearly what each party is agreeing to during the gas exploration and drilling process. It should detail the rights and responsibilities of each party in the agreement, how problems are to be handled, and how long the agreement lasts.

The length of your lease agreement is composed of a primary term and a secondary term. The primary term is the number of years stated in your lease agreement. In the current leasing environment, the typical length of a primary term is five years, but the primary term can be shorter or longer, depending on individual negotiations and market conditions. Generally, the commencement of drilling activities will convert the primary term into a secondary term. This secondary term will usually last as long as production is active on the leased property. If drilling does not begin before the primary term expires, most lease agreements will end at that time. You and your attorney should pay careful attention to the specific conditions listed in the lease that will trigger the initiation and termination of the secondary term.

You can read, print, download, purchase and save the entire guide by Michael Jacobson here.

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