TAKE 5: Study Group member advises landowners to educate themselves

Mar. 11, 2013 @ 12:40 PM

Today we have an extended Take 5 with John Humphrey, who is an attorney and the principal of The Humphrey Law Firm in Alexandria, Va. His practice includes public policy analysis and development, and he frequently works with communities in addressing matters relating to energy and natural resource issues. A Sanford native, John studied public policy at Duke University and eventually worked in Gov. Jim Hunt’s administration as Director of Policy Development in the Department of Environment, Health, and Natural Resources and as local government liaison in the governor's office. After attending The University of Michigan Law School, John joined the litigation practice in the Washington, D.C., office of Shearman & Sterling, where he worked with a number of natural resource companies before forming The Humphrey Law Firm in 2003.

1. You have been named a part of the N.C. Mining & Energy Commission's Compulsory Pooling Study Group. How would you assess the work of the MEC and this specific study group so far, based on your experience with the issue of natural gas exploration in other states?

The Commission as a whole and its Compulsory Pooling Study Group are just at the beginning of their work, but both have moved forward quickly in engaging the issues assigned to them. The Commission members have a monumental task before them: developing from nearly scratch a regulatory program and making recommendations for additional statutes needed to ensure that the environment and affected communities will be protected in the event that development of North Carolina’s shale gas resources proceeds. Currently North Carolina statutes on oil and gas development run fewer than 20 pages. From those statutes, there are only 10 regulations governing oil and gas development, dating from 1976. These existing regulations run fewer than 2,500 words and address only a minute fraction of the issues raised by shale gas development. On many issues, therefore, the Commission is working from a completely clean slate.

The Commission’s Compulsory Pooling Study Group on which I serve as a non-Commission member is one of eight committees and study groups that the Commission has established to organize and take on this work. The Compulsory Pooling Study Group is comprised of four Commission members plus representatives of about a dozen organizations and government agencies representing landowner, environmental, business, agricultural, and consumer interests. North Carolina’s current law gives the Commission the power to compel the production of unleased mineral rights by ordering the owners of those unleased rights to join a pool with other owners to develop their rights. The Study Group has been asked to review the current law on compulsory pooling and make recommendations about what changes should be made to it. There is a lot of information to be considered, but the Study Group has broad representation from experts in lots of areas, and the public has contributed substantially in the meetings, which has helped to identify issues in addition to providing substantive information for the Study Group to consider.

2. How has public participation shaped the work of the Study Group, and why is the public’s involvement important?

In the Compulsory Pooling Study Group, one of the most important aspects of the process is the engagement with representatives of a broad range of interests and with the public at large. Ray Covington, the Chairman of the Compulsory Pooling Study Group, has made including a wide array of voices and engaging the public a priority of the study group process. He has brought into the Study Group individuals representing the interests of landowners, consumers, farmers, the environmental community and the business community. All the meetings of the study group are being held in Lee and Chatham Counties to provide affected communities substantial access to the study group process.

Within each meeting, members of the public have been provided multiple opportunities to present questions orally and in writing, and Mr. Covington has provided his phone number and email address repeatedly during meetings and encouraged the public to contact him directly with questions and concerns. The public input has helped very much to shape the process by identifying issues and providing substantive information for the Study Group to consider.

For example, as a result of questions during the January meeting from the public about the impact of hydraulic fracturing on mortgages and homeowner's insurance held by individuals who were compelled into pools, I was asked to prepare a presentation on those issues for the study group to consider at the following meeting in February. These questions also led to Mr. Covington adding representatives of the state's banks, credit unions, Realtors, and the State Insurance Commissioner to the study group.

3. What advice would you give to landowners whose property is included in the Triassic Basin?

Landowners should think of themselves as having three layers of protection for their property, family and community: the state statutes passed by the General Assembly; the regulations enacted by the Mining and Energy Commission, and, if they lease their mineral rights or surface property, the mineral lease or surface agreement that they negotiate with a gas operator.

This year is probably the most important window during which landowners can shape the first two layers of protection: state statutes and regulations. The recommendations about how shale gas development will affect what living in Sanford in five, 10, or 20 years will be like — about how much power local governments should retain to regulate development activities, what buffers should exist between homes or schools and drilling rigs or other infrastructure, and what protections will be afforded landowners who don't own their mineral rights or who are compelled into a production pool — are being considered and formulated now in the Commission's Committee and Study Group meetings. Members of the community will have substantially less influence on their future if they wait to weigh in until the recommendations are before the General Assembly. Then, once all the recommendations have been considered and the state has created a more complete statutory and regulatory framework governing gas development, landowners who decide to lease their mineral rights will be in a much better position to understand what they need to do in their the their third layer of protection — their leases and surface use agreements — to protect themselves.

4. You've stated that under current N.C. law, landowners compelled into a pool have significantly fewer opportunities to protect themselves than those who negotiate their leases. So what advice would you give to a landowner considering negotiating a lease?

Landowners who educate themselves now by attending Study Group and Committee meetings and participating in the process in other ways will help themselves substantially to make thoughtful decisions later about their mineral rights. The more informed landowners are, the better able they will be to protect themselves against predatory leases or abusive surface use agreements. And then, if they do lease their mineral rights, landowners shouldn't go it alone. Even after they've educated themselves, they should get the advice of attorneys and other experts to help them evaluate any offers and ensure they are protecting their rights, family, property, and community, and they should strongly consider the additional bargaining power they'll gain by joining with other landowners in negotiating leases. Over the past several years, the large landowner groups that have formed in Ohio and Pennsylvania have been able to negotiate leases that are much more protective of landowners, their communities and the environment than individuals who have gone on their own.

The primary reasons for the landowner groups' successes are threefold. First, they are able to put together a big enough offer that they can negotiate directly with higher level officials of the gas companies who have authority to negotiate over a wide range of terms rather than the gas companies’ landmen, who really can negotiate over little more than price. Second, that they have the resources to characterize and describe what they are presenting in their packages on their own rather than relying on the information presented to them by the gas company. Third, by working as a group they have been to avoid gas operators working one landowner against the other in a race to the bottom.

5. Back in July, Nationwide Insurance made national headlines by announcing its personal and commercial insurance lines wouldn't cover damages caused by hydraulic fracturing or other aspects of natural gas development. In doing so, Nationwide clarified its position that such damages have never been covered by its policies. So if a property owner wants to enter into a gas lease, what should they do for coverage?

This is a very important issue to landowners. It’s important to recognize that what Nationwide is saying — which is not different from the position that most homeowner insurers take — is not that they won't give homeowner's insurance if there is hydraulic fracturing occurring on the homeowner’s property, but that if the hydraulic fracturing causes damage to the property, they won't pay for it. This provision is not a new one in homeowner's insurance policy. It's an interpretation of two exclusions that most homeowner policies contain. First, almost all policies have an exclusion that provides they won't pay for damage caused by commercial or industrial activities on the property generally. Second, almost all policies have an exclusion that provides that the homeowner agrees not to store or use hazardous chemicals on the property beyond those required for typical household usage. It’s not just damage caused by activities related to hydraulic fracturing that homeowner policies won’t cover; it’s damage caused by any commercial or industrial activity on the property.

State law (N.C. Gen. Statute 113-422) provides that gas developers or operators must indemnify landowners against property damage and personal injury that arises from the developer's or operator's activities on the surface owner's property, but for some landowners, that indemnification in tandem with their homeowner (or commercial or farm) policy still will leave some gaps in coverage. As a result, individuals should always consult their insurance providers about where they may have coverage gaps. Then, if they lease mineral their rights or sign a surface agreement, they should negotiate with the gas operator for additional indemnification.

6. In the fracking process, “loose gas” can migrate from one owner's land to another's. Although it’s a prospect some experts say is unlikely, what are the risks, challenges, and benefits of such migration?

One of the things to remember is that North Carolina's primary onshore natural gas resource is called unconventional gas or “tight gas.” It is gas that is locked in shale rock formations and so cannot migrate to be developed without the rock being fractured under pressure in a way that then allows the gas to flow back up through encased pipes to the wellhead where it can be collected.

North Carolina's primary gas resources are different from conventional gas, sometimes called “loose gas,” which sits in geologic formations that allow gas to flow through them easily to a single well. In the conventional gas situations, you can essentially drill a single well and pull the gas to you from a large distance until you drain the entire formation. No injection of fluids or fracking the rock is required to get the gas to move to the well. In many respects, these two types of gas formations require different sets of rules to govern them because they behave differently.

Thus, while there are some similarities, there are a large number of differences in the technologies used in developing the two types of gas, and each set of technologies requires rules appropriate to it to ensure it is done properly.

One of the significant differences between conventional and unconventional gas in the compulsory pooling context is why compulsory pooling is conducted in the first place. In a conventional gas setting where the gas migrates easily, compulsory pooling was used in large measure to ensure that gas below on one property was not pulled to a well drilled on another property. Compulsory pooling was used to protect the rights of landowners whose gas might be pulled to a well on another property — since in a conventional gas setting there is no way to avoid it — by ensuring that they were compensated appropriately. It also obviously reduced overall costs and surface impacts by reducing the number of wells that needed to be drilled to develop the gas underneath.

In an unconventional, or “tight gas,” setting, there is no real risk of the gas being pulled from one property to another by a well. If there were, there would be no need to frack the well to open up the pathways to the gas. As a result, the rationales offered for compulsory pooling in a conventional gas setting is much more rooted in enabling the resource to be developed fully in a manner that is economical than in the protection of rights of neighbors. In unconventional settings, reducing the number of wells by pooling larger amounts of land also reduces the amount of surface impacts.

7. Another significant issue affecting landowners is which rules govern drilling, production and reclamation on pooled properties. How have other states addressed those rules, and is North Carolina on track to address them in a fair and effective way?

The Mining and Energy Commission has been working to reach broadly to look to other states to understand what the successes and failings of their regulatory regimes have been. That review, along with the help of a number of national groups such as the State Review of Oil & Gas Environmental Regulators (STRONGER), which conducted an audit of North Carolina's existing regulations last year, has been extremely helpful in the Commission’s process. However, those reviews of what other states are doing will not be enough. There is a lot to be learned about what North Carolina's own needs are, and how North Carolina wants to proceed with managing its own resources given our own particular circumstances, way of life and traditions, and for that to be done right requires significant input from the community and a wide range of stakeholders here in North Carolina. So, once again, public input and engagement is critical to North Carolina's efforts being a success.