Laura White blogs for the Record about all things fracking in North Carolina. Have a specific question you want us to address? Email lwhite@raleighpublicrecord.org or Tweet @lewhite.
So you have natural gas under your property, and you own your mineral rights, and you want to make a little money. You should be able to lease at your leisure, right?
Wrong.
What many homeowners aren’t aware of is that entering into oil and gas leases could impact their existing mortgage and their ability to obtain new credit.
The North Carolina Department of Justice’s consumer protection report points out an interesting little clause most home owners probably haven’t noticed — the due-on-sale clause. Most mortgages have them, and they prohibit a borrower from selling any portion of the mortgaged property or any interest in the property without prior approval of the lender.
This includes the leasing of mineral rights, and it could be considered an act of default under the mortgage, triggering the lender’s rights to demand payment in full and foreclose on the property if that payment can’t be made.
According to the report, while that is possible, the Consumer Protection Division is unaware of any previous instances of it actually happening.
Another clause most mortgages have that could be violated: hazardous substances clauses. Because it is difficult to assess the impacts of shale gas extraction on a property, and therefore that property’s value, it could cause lenders to hesitate on homeowners looking to refinance their mortgage or obtain new loans. And if shale gas extraction causes environmental damage that requires cleanup, then this could also be seen as a breach of mortgage.
Because of the current ban on hydraulic fracturing, and the relatively low number of gas leases in North Carolina, these issues are still fairly new to lenders in North Carolina. But both the North Carolina State Employees Credit Union and the North Carolina Housing Finance Agency have stated that they will not make or purchase mortgage loans on residential properties where a borrower has leased their mineral rights, or does not own them.
So far only one company, Whitmar Exploration Company, has entered into a significant number of leases with landowners in North Carolina.
At this point, Whitmar holds 63 leases covering 5,958.41 acres of land in Lee County. Tar Heel Natural Gas, LLC, holds one three-year lease that expires in 2013, and Hanover NC, LLC holds one lease of 628 acres in Lee County that also expires in 2013.
A lease may not matter
It’s important for homeowners to know, however, that just because they haven’t signed a lease for extraction their own property doesn’t mean they are necessarily safe from it.
North Carolina’s current Oil and Gas Conservation Act, which was enacted in 1945, was designed to protect the environment, prevent economic waste of oil and gas caused by excessive drilling, and ensure that landowners are fairly compensated.
This prevention of “waste” had an unfortunate side effect, though. According to the Act, the Department of Environment and Natural Resources is able to, after a notice and a hearing, designate a drilling unit or units in each “pool” of natural gas. A “pool” refers to a specific underground reservoir of gas.
These drilling units are meant to be helpful. Establishing a unit for drilling means that rather than four or five or 20 wells popping up, spread out over a certain amount of land, one or two central wells will be drilled. This cuts back on unnecessary costs and damage to the land.
However, it also causes “pooling,” which is the grouping together of tracts of land to form a complete drilling unit.
Essentially, this means that if you are a landowner who chooses not to sign away your mineral rights, you might be forced to do just that anyway.
Once a certain number of other landowners around your property have opted to sign contracts with gas companies, if your property is the missing piece of the pool puzzle, so to speak, then you could be forced to allow extraction.
Of course, you would be given notice, and a hearing would happen first. But if it was decided that your property should then be incorporated to constitute a full unit, then so be it.
According to Grady McCallie, policy director for the NC Conservation Network, this holds particular ramifications for minority members in the community who are less likely to be approached initially.
“If you’re in one of the properties that gets force pooled, you still get a part of the royalty, but it may not be much and you don’t get a signing bonus, and you don’t have a contract,” McCallie said.
So while there may be protections for a lessor, who leases to the gas company and writes provisions into that lease about liabilty and the protection of water supplies, those who are force pooled have no protections in place — unless there is a statute establishing those protections. And currently, there is no such statute in North Carolina.
“Forced pooling is deeply unfair to landowners who don’t want to tap their natural gas,” McCallie said.
And that isn’t just environmentally speaking. Even from a purely profit-driven perspective, being forced into allowing extraction could undercut landowners hoping to hold out until they could receive more worthwhile compensation for their own mineral rights.
And none of the legislation currently working its way through the General Assembly addresses these issues. The bill being pushed by Senator Bob Rucho (R-Mecklenburg) essentially re-enacts the outdated policies of the 1945 act, with a few changes in regards to horizontal drilling. The piece of legislation proposed by Representative Mitch Gillespie (R-Burke and McDowell) calls for a study of the issue, but doesn’t actively change it, so it would remain in place as-is until a change was made.
Our next post will take a look at the different legislative proposals and help break them down, so stay tuned.
