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Low-ball drill leases tap Pennsylvania; As agreements expire, disputes sure to ensue

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 low-ball 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 Beinlichs, 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 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 e-mail.

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 in a March conference call with investors.

The industry points out that leases and 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.