Negotiating a Pipeline Right-of-Way Agreement
In 2008 the gas leasing boom was at its peak. Landowners throughout the Marcellus region of Pennsylvania were approached with Oil and Gas Leases, and thanks to the efforts of the Penn State Cooperative Extension educators, many landowners had a good idea of the potential pitfalls in signing a lease and the importance of legal counsel.
Now, many of the same landowners who signed a lease are being requested to sign a Pipeline Right-of–Way Agreement. The need for pipelines is readily apparent – gas companies are drilling hundreds of wells, but in many cases are unable to transport gas production due to the lack of pipeline infrastructure, or because existing lines are already at maximum capacity.
Landowners should understand that the provisions of a pipeline agreement are negotiable, just as terms of the oil and gas lease they signed were open to modification. In fact, while it has become increasingly difficult to negotiate favorable gas lease terms as the competition for leases has decreased, the gas companies are often willing to work with property owners on pipeline agreement terms. It is absolutely critical for the drillers to develop the pipeline infrastructure, so landowners are in a good position to negotiate.
As always, a landowner’s ability to negotiate a favorable contract will depend on a variety of factors, including the location and size of the parcel and the drilling activity in the area. The issues of concern in signing a pipeline agreement will vary among landowners, but there are a number of common issues that will be important for almost all property owners to consider before allowing pipeline construction on their land.
Payment – As the Marcellus play has matured, payments for pipelines have increased in a manner similar to the dramatic increases in cash bonus payments for leases. In most cases landowners will be paid based on the length of the right-of-way calculated in linear feet. Compensation of $15 per foot is not uncommon, and in some cases pipeline companies have paid substantially more. The landowner may also request an additional payment as compensation for surface damages. The Internal Revenue Service construes payment for the actual right-of-way as capital gains, while the payment for surface damages is taxed as ordinary income. It is advisable for landowners to consult an accountant in regard to questions about taxation of payments under a pipeline agreement.
Location – Landowners should always retain the right to control where on their property the pipeline will be placed. A detailed map showing the location of the proposed pipeline should be included as part of the agreement and there should be no deviation from the location as shown on the map without the landowner’s consent.
Number of Pipelines – Most right-of-way agreements will give the gas company the right to place multiple pipelines on the property and will also allow the company to place additional pipelines on the right-of-way in the future with no additional compensation to the landowner. If the landowner is amenable to multiple pipelines, the company should be requested to provide payment for each pipeline; the cumulative payment may exceed $50 per foot. The agreement should state that the company may not place additional pipelines in the future without a separate written agreement, thus giving the landowner the opportunity to negotiate further compensation at that time.
Natural Gas Only – The agreement should allow transportation through the pipeline of natural gas and associated non-liquid hydrocarbons only.
Water Line – One of the major, very legitimate complaints about Marcellus development is increased truck traffic on local roads. A substantial portion of the traffic arises from transportation of water to well sites for hydrofracking. In an effort to reduce truck traffic, many companies are now placing surface lines in the area of existing pipeline right-of-ways to move water from impoundments to well sites. Many pipeline agreements will specifically allow the pipeline company to place a surface water line on the property, or to include a buried water line along with the natural gas pipeline. If the landowner agrees to allow a surface water line, the agreement should specify the duration of time the line will be allowed and require removal of the line when the period of time is complete. The agreement should state that any water line can be used to transport clean water only, and prohibit transportation of waste water from hydrofracturing operations. As with additional gas pipelines, landowners may negotiate additional payment for placement of a surface or buried water line on the property.
Right-of-Way Construction – Pipeline agreements are typically generous to the company in the amount of land granted for the right-of-way. Landowners may negotiate a narrower right-of-way, reducing the total acreage granted for the easement. The agreement may also specify the pipeline depth and require conservation of topsoil for restoration of the site after construction is complete. If a driveway or road crosses the right-of-way, the property owner may request placement of a temporary crossing that will maintain access to the property during pipeline construction. Access to the area of construction should be restricted to where the right-of-way enters and exits the property, and the landowner may request placement of gates at the property boundaries to prevent use of the right-of-way as a recreational area by (intoxicated) neighbors riding ATVs.
Surface Facilities – Most right-of-way agreements will give the pipeline company the right to place various surface facilities on the property, including pipeline testing equipment such as pig launchers and catchers, and potentially even a compressor station. It may be hoped that the companies operating in the Marcellus would not attempt to place a compressor on the landowner’s property under the terms of a pipeline agreement. However, the landowner should request written clarification stating that no surface facility or above-ground equipment of any type will be placed on the premises without the landowner’s separate, written consent. If the landowner does not object to permanent surface construction, additional payment for the loss of use of the surface should be requested.
Landowner Indemnity – It is not difficult to imagine various scenarios where a person could be injured, or property damaged, as a result of pipeline construction operations. As the owner of the property where the injury occurred, the landowner could potentially be named as a party to a lawsuit if the injured party attempts to recover damages. Recognizing the potential for liability, landowners should always demand a strong indemnity clause in any pipeline agreement, requiring the pipeline company to defend any lawsuits and pay any claim for damages that arise as a result of its operations on the premises.
Timber and Crops – In many instances the proposed pipeline will cross areas with valuable timber or crop fields. However, the agreement presented to the landowner will typically be drafted so that the payment per foot is the total compensation, and will thus not require any additional payment for the diminution in value to the landowner when the trees and crops are cleared. Landowners who own property with timber or crops may request additional payment for trees harvested during pipeline construction and the loss of crops. The value of the timber in the area of the easement may be determined by appraisal prior to construction, and payment for crops should be based on the current fair-market value.
Restoration – Any pipeline agreement should require that the company restore the area of the right-of-way to pre-construction condition. The landowner may require that all large stumps and rocks be removed and that smaller brush is mulched. Many individuals request a specific seed mix for site restoration that will provide cover and grazing for wildlife. Farmers may request soil testing and subsequent fertilization to ensure that the area of the pipeline is restored to the same level of soil fertility as the neighboring fields. The pipeline company should be required to maintain the right-of-way in a clean condition after site restoration.
Termination of Easement – The pipeline agreement as drafted by the company will create a permanent easement for the right-of-way on the property. It would be preferable for the landowner to include verbiage terminating the easement when the pipeline is no longer being used to transport natural gas. With the potential for Marcellus wells to produce for over twenty years, and even greater potential if the Utica shale is developed, the easement granted in the pipeline agreement could continue for a very long time. Nevertheless, it is to the landowner’s advantage for the easement to terminate at some point, even if the date of termination is in the indefinite future. The landowner may also request that the pipeline company remove the pipeline and restore the property to pre-construction conditions at such time as the easement terminates.
Perhaps the most critical point for the landowner to keep in mind is the importance of consulting qualified legal counsel when negotiating a pipeline right-of-way agreement. The information provided above is of a very general nature and is intended only to highlight common concerns. Each landowner will have unique issues that should be discussed with an attorney and addressed in the pipeline negotiations.