By Derald Hay

Because of Pennsylvania’s long history of coal and oil extraction, many parcels have had their mineral rights severed from the surface rights decades ago. With the passage of time, many current landowners are no longer associated with parties that negotiated the sale or lease of the mineral rights.

Therefore, these surface owners are at a disadvantage because they are unable to protect themselves through negotiating acceptable terms of use in the oil and gas lease.

A proposed law in Pennsylvania, called the “Surface Owners’ Protection Act” (House Bill 1155 (George-D-Clearfield)), would provide additional protection for these types of landowners so that the drilling operators do not take advantage of archaic access rights under leases which are decades old. While there are components of this statute which are generally applicable, it is primarily aimed at protecting surface owners who are not the parties which sold or leased out the rights to extract the oil or gas.

The primary benefit that landowners are granted is the right to negotiate a compensation package with the drill operator.

The compensation package represents a payment for damages and diminution to property value resulting from drilling. The specific losses which must be accounted for in the compensation package include losses from the drilling operation resulting in damage or loss of (1) agricultural production, (2) timber production, (3) land value, (4) use and access or 5) water resources. In addition to providing a payment for the impact of the drilling operation, the compensation package must also detail specific activities which the operator will conduct on the property.

The surface owner may accept to the proposed compensation package, negotiate a mutually acceptable compensation package, or reject the compensation package. While the owner has the right to reject the compensation package, the drill operator will have the option to move forward with its operation if, after forty-five days, it is unable to reach an agreement with the landowner, by applying for a permit to the Department of Environmental Protection and posting a bond.

Another proposed mechanism to protect surface owners from unreasonable conduct is the right to recover attorney’s fees if surface owner sues the drill operator or oil company for violations of the law. For instance, the surface owner may recover damages and attorney’s fees if the drill operator conducts activities outside the scope of the operations described in the compensation package. However, the proposed law would also provide the oil and gas company with the opportunity to recover its attorney’s fees if the surface owner does not negotiate the compensation in good faith.

The proposed law expands on the existing protection for surface landowners set forth in the Oil and Gas Act. These protections should help increase awareness among surface owners of the operations being conducted on their property. It is important to realize as a landowner, that the compensation package proposed by the oil company is negotiable. There are some legal provisions that, by the terms of the proposed law, would be required to be in the compensation package.

A careful analysis of the indemnification provision is important to ensure that the landowner receives as broad protection as possible. Other information, such as insurance requirements, are not in the proposed law but may be a reasonable condition for the surface owner to require in the compensation package.

In addition, any compensation package should be carefully analyzed to ensure that no rights are inadvertently waived. One issue to be wary of is any release of claims because of the broad spectrum of rights that may be lost in signing a compensation package with a broad a release of claims. Because the negotiation period is only forty-five days, it is important to engage a lawyer early in the process to provide you advice regarding the legal provisions of any compensation package.

Derald Hay is an attorney with the law firm Fox Rothschild LLP, 747 Constitution Drive, Exton, Pa 19341. His practice focuses primarily on environmental law and real estate transactions. If you have any questions, please call Derald Hay at 610-458-2990 or send email to: dhay@foxrothschild.com.