Finding Fossil Fuels

What to do before you strike oil

Oil and natural gas production is on the rise in the United States, with energy companies rushing to acquire land in order to drill. Leasing ministry land to an oil or natural gas company can be a moneymaker, but leaders should consider the pros and cons before signing on the dotted line.

Call an Attorney

The first step when negotiating with a developer is to consult legal counsel. An attorney will be able to spell out the conditions of a contract, enabling the ministry to make an educated decision on whether or not to move forward. An attorney also may be able to negotiate changes in the contract to make it more ministry-friendly.

Ask the Right Questions

It may be wise to ask about the following issues that often come up in an oil or natural gas agreement:

• The “facilities” section. This section usually outlines the size and location of a “no-drill zone.” Some contracts stipulate that drilling cannot occur within 200 feet of any building.
• The length of the lease. Some agreements say that the lease lasts three years, but will remain in effect as long as there is exploration, drilling, or extraction occurring on the property. What the ministry initially sees as a short-term agreement could drag on into a much longer commitment, thanks to wording in the contract.
• Water issues. Some have raised concerns about how drilling may affect the groundwater supply. To form a baseline on the amount and quality of groundwater, conduct independent tests before drilling. Some local health departments keep records that can be helpful. Make sure the contract ensures that if drilling affects the water supply, the developer will replace it at his expense. Account for neighboring landowners’ water, as well.
• Free gas. If the contract allots a certain amount of natural gas to the ministry for free, it should specify what happens if the ministry doesn’t use the entire allotment. If the developer sells the excess gas at a profit, the ministry may want to pursue a percentage of the profit.
• Security and safety. Are there security measures in place to keep unauthorized people away from the operation? If there is a fire or explosion, could ministry or neighboring property be damaged? The developer should assume liability for any incidents.
• Tax concerns. Income from leasing ministry land may be classified as taxable income. Check with a qualified tax preparer for specific advice on how to properly report and pay these taxes.
• Dispute resolution. Decide in advance if it’s better to resolve conflicts in arbitration or in a court of law.
• Rights-of-way for pipelines. These should be negotiated separately.

When large sums of money are involved, it may be tempting to rush into a lease with an oil or natural gas developer. By enlisting the help of an attorney, your ministry can make sure that it’s comfortable with all aspects of an agreement that could have far-reaching implications.