Communities eye US-style fracking deal

Fracking set off a modern day land rush across the US, as “land men” acting on behalf of exploration and production firms scrambled to secure rights to drill and fracture underground formations for oil and gas.

Landowners received hundreds or even thousands of dollars per acre in exchange for allowing wells to be drilled and pressure pumped, and hundreds of thousands or even millions of dollars more if the wells struck petroleum and were put into production.

But recently, Shell, BHP Billiton and Chesapeake Energy have been forced to take billions of dollars in writedowns because they overpaid for mineral leases that proved less productive than expected. In many instances, companies have tried to renegotiate, or repudiate the contracts by finding legal defects.

But that has not stopped other landowners with older leases, signed before the boom, trying to terminate them in the hope of getting a better deal now.

In the meantime, land- owners and communities in other countries with shale gas and oil, such as Britain, can only look on with envy at the riches that fracking has brought. Already, a three-way fight is erupting in Britain between frackers, the government, and local communities over who gets to keep how much of future revenues.

In Britain, most mineral rights are privately owned, except for petroleum, which was reserved for the Crown by the 1934 Petroleum Production Act. Similar systems apply in the rest of the world. Oil and gas accumulations, and sometimes other valuable minerals like iron ore or phosphates, tend to be owned by the state.

Landowners and local communities may get small payments to compensate them for surface disruption, but have no legal right to a share in the revenues from the oil and gas.

In the US, mineral ownership rights are a matter for state law. The rights to use both the surface of the land and any minerals beneath generally started out in common ownership. In some instances, however, surface and mineral rights have been separated.

Surface owners may have sold the rights to any minerals occurring beneath their property (severance via mineral deed) or sold the surface land but retained their right to exploit any minerals under it (severance by mineral reservation).

A similar system applies in other oil and gas-producing states. It also applies in Britain, except the mineral rights owner is the Crown.

But assuming the land- owner had the mineral rights in the first place and still retains them, they can expect a stream of payments in exchange for letting exploration and production companies search for and exploit the oil and gas that they own.

On signing a mineral lease, the mineral owner will normally receive a bonus of so many much per acre. The lease gives an exploration and production company exclusive rights to search for and produce oil, gas and any other stipulated minerals on the leased acres for a period of years.

During the primary term of the lease, the company has so many years to drill its first well or the lease terminates. In the meantime, until it commences work, it must make small annual payments to the mineral rights owner called delay rentals.

Once oil, gas or other stipulated minerals start to be produced, the secondary term of the lease comes into effect. Delay rentals then stop. Instead, the mineral owner is entitled to a share of the production (royalties), either in kind or as cash from the proceeds of sale.

In Britain, landowners and local communities will not be eligible for the sort of bonuses, rentals, and royalties that come with owning oil and gas. Instead, the government will levy an effective tax rate of 62% in exchange for producing its oil and gas. But to spur shale drilling, the government is consulting on a revised fiscal scheme that would cut the effective tax rate to 30%.

To quieten local protests, the UK Onshore Operators Group, representing onshore exploration and production companies, has proposed a series of benefits, as part of its Community Engagement Charter.

Communities would receive “benefits” worth about £100,000 (€117,270) at the exploration/appraisal stage for each site where fracking takes place. They would also receive a share of the proceeds at the production stage of 1% of revenues with about two-thirds allocated to the local community, and one-third to the wider county community.

“Conservative and Labour members of parliament in Lancashire are joining forces to demand more money for their constituents in return for ‘fracking rights’ after concluding that the current sweeteners being offered are not good enough,” the Financial Times reported.