Shale Shocker: How Gas Drilling Companies Shift Risk to Landowners

Map image from U.S. EIA.

On a weekend trip near Monticello, New York during the summer of 2010, my family and I visited some friends of ours, a married couple we've known for years. Over lunch, I mentioned that we had passed by several anti-fracking signs on our way to their home. Gasland had recently aired on HBO and I was curious what our friends thought about fracking (aka high-volume, horizontal hydraulic fracturing), so I asked them. There was a pause; our friends looked at each other uneasily. Long story short, in 2009 they had leased some land they own in Pennsylvania to a gas drilling company. I can’t remember what I said but suffice it to say, I was taken aback.

To their credit, our friends, both of whom are environmentally conscious, considered the potential impacts to the community and environment before they signed. Of course at that time, the gas industry’s greenwashing campaign had successfully convinced many people that this domestically-produced fuel would help to reduce greenhouse gas emissions, since natural gas burns more cleanly than coal. (A claim that has increasingly been called into question.)

I couldn’t help but wonder, what if my friends had seen Gasland first? The award-winning documentary by filmmaker Josh Fox – who is now producing the upcoming sequel Gasland 2 – marked a sea change in the awareness of the controversial natural gas drilling process.

The idea for the film came about when Josh’s family was approached by a gas drilling company interested in leasing a property they own in northeast Pennsylvania. Prior to the release of Gasland, many homeowners living above shale-gas formations did not know about the hazards of fracking. So when landmen came a-knocking, some homeowners put their John Hancock on the gas leases. In our friends' case, they were approached by their neighboring landowners in northeast Pennsylvania, some of whom, like them, had not yet built a home on their properties.

New York is another state where landowners have signed leases with gas drilling companies. Yet no horizontal drilling activity has come to fruition because since 2008, this type of drilling has been temporarily banned while the state assesses the impact on the environment.

And if many did not realize the potential environmental impacts of their decisions, no doubt more did not realize the impact a drilling lease might have on their mortgages. In a November 2011 editorial, transactional attorney Elisabeth Radow pointed out that many “upstate homeowners did not know about the hazards of fracking when they signed the gas leases, it did not occur to them to check their mortgages.” Why is this a problem? “Residential mortgages prohibit heavy industrial activity and hazardous materials on the property,” explained Radow. “Fracking brings both.”

While not a new issue (and a little less interesting than flammable tap water), the subject of gas drilling leases is one of the more important aspects of the hydraulic fracturing debate as captured in last year’s Drilling Down series in the New York Times. Homeowners and taxpayers are being faced with complex questions about the hazards and uninsurable risks associated with fracking, and its impact on mortgages and the housing sector remains unknown.

Leases don’t get much press in the context of the never ending flow of coverage that fracking draws. But Elisabeth Radow’s 2011 editorial eloquently and persuasively captures what’s at stake:

The mortgaged property needs to stay safe and uncontaminated because lenders sell 90 percent of all home mortgage loans to the secondary mortgage market in exchange for funds to make new home loans. Gas leases allow gas companies to truck in tankers with chemicals, transport flammable gas and toxic waste, operate heavy equipment 24/7 and store gas underground, for years, all in a person’s backyard.

Gas leases also create easements which continue after the gas company leaves, with no funds for upkeep. Gas drillers can sell the lease without telling the homeowner, so there’s no way for a family to control who drills on their private property. Homeowner’s insurance doesn’t cover risks from fracking and neither does the gas lease. Industrial-sized risks are so expensive, even gas companies don’t get fully insured for them. Homeowners can get slammed with risks for the dangerous activity they don’t even control. (Emphasis ours)

To be sure, it’s a grim prospect for homeowners and communities alike. But what does this all mean in the broader context of the economy? Radow writes:

As fracking spreads across 34 shale-rich states, the $6.7 trillion secondary mortgage market — which holds 90 percent of the nation’s home mortgage debt — could get left bearing the liability; American taxpayers are next in line.

A growing number of banks won’t give new mortgage loans on homes with gas leases because they don’t meet secondary mortgage market guidelines. As a result, homeowners with a gas lease can be out of luck selling their homes since the lease impacts stick with the property. The impact falls not only on homeowners and taxpayers but also affects the banking, housing, insurance and secondary mortgage market interests and their investors. New construction, the sign of economic recovery, is threatened too because construction loans require a property to be free of the very risks that gas drilling brings.

For those, like my friends, eagerly awaiting the return of a strong economy, this shift of drilling risks from gas companies to the housing sector, homeowners and taxpayers begs for immediate attention. In the meantime, property owners are learning that the leases and agreements that they signed just a few years ago may contain some industry sleight-of-hand.

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RELATED READING:

Elisabeth N. Radow’s in-depth article on this topic is the cover story of the November/ December 2011 New York State Bar Association- NYSBA Journal Magazine.

Responses to "Shale Shocker: How Gas Drilling Companies Shift Risk to Landowners"

  1. North Carolina

    Quite a few landowners in North Carolina have also signed mineral rights leases. There is currently a ban on fracking... though clearly not for long. If you are a landowner considering signing a mineral rights lease, I recommend RAFI-USA’s Landowner Oil and Gas Rights Leasing Education Packet. It was written for NC landowners, but I think the issues apply to those in other states as well. You can access the document here: http://www.rafiusa.org/docs/gasleaselandownerpacket.pdf

  2. Bob Bernhardy

    I worked for 15 years in the Mortgage Business and we were very careful about the quality of the loans we sold on the secondary market. We had to pull loans form pools of loans as they were toxic due to an earthquake in CA. This current boom in gas leases has are the marking of creating another housing crisis.

  3. Kyle Rabin

    Nancy, Thank you very much for your comment and question. Your lease agreement contains the terms of your arrangement with the gas company lessee, including your rights and potential responsibilities. This would include the term of the lease, under what circumstances it might be terminated and under what circumstances the length of the lease will be extended because the well is considered capable of production or a producing well. To be certain you have the up-to-date agreement and the name of the lessee in case it was later amended or assigned to a new lessee, visit the recording office in the Town/County where you live and obtain a copy of whatever was recorded with respect to the gas lease. Take all of these documents to a local attorney who handles gas leases for property owners and ask her or him to go over it with you.

  4. nancy smith

    recently purchased a house, and there is a gas well that three properties share...we get a check monthly from this well...there is no fracking...as yet, is there a recourse I can take. Is there something I should know. Can I get out of this lease and should I tell my neighbors to beware. I feel like I need to know about this since I am in an area where fracking could happen. thanks

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