REGULATION:

Sliver of common ground found on oversight of oil and gas landmen

As Mike Knapp examines proposed rules for his own job, he is more agreeable than expected.

"I would not be averse," begins the Pennsylvania landman as he considers part of a liberal wish list for restrictions on oil and gas leasing, "to a system of registering landmen so that a landowner could verify that they are who they say they are."

Most negotiations with landmen play out in the living room or at the kitchen table, so landowners need to know whom to trust, said Knapp, president of his own land acquisition company and a vice president at natural gas firm MDS Energy Development Ltd.

Landmen are a critical component of the shale development process, working as agents to line up deals for landowners' oil and gas rights so drillers can move in. Knapp's feedback is a rare bit of positive reception from an industry that often views proposed oil and gas rules as a slippery slope to overregulation.

But such proposed rules are popping up in a number of states in response to a boom in oil and gas drilling.

Ohio Gov. John Kasich (R) is said to also be interested in the registration idea. His state is the epicenter of public pressure to sharpen oversight of landmen. Critics there say landmen can be manipulative, pushy and not always mindful of landowners' best interests.

Ohio's Department of Commerce is now in talks with industry to craft a system of increased oversight that would, for one, require all landmen working in Ohio to be listed in a database, and that's one requirement industry representatives may get behind.

Tom Stewart, vice president of the Ohio Oil and Gas Association, said he could support a registration requirement as long as it did not turn into a type of certification in which the state would approve landmen's credentials before they could do business.

North Carolina has also broached the subject. Even though the state has no shale development to date, it is cobbling together a regulatory system to handle any future oil and gas exploration there.

A consumer protection section of the state's new energy law calls for landmen to register and allows the state to ban people from acting as landmen if they engage in deception, misrepresentation or "knowing omission of material facts related to oil or gas interests."

So far, the state's Department of Environment and Natural Resources has just one landman listed on its online registry. Posted with his name is a form that includes his address and phone number, along with information about whether he has worked as a landman in other states and whether there are any pending judgments or tax liens against him.

And in Michigan, "there's always pressure for the Legislature to enact rules or licensing requirements," said Erik Bauss, a former landman and current state field director for Energy in Depth, an arm of the Independent Petroleum Association of America.

Registration, but nothing else

But open-mindedness on landman registration may be as far as the common ground on industry rules stretches.

Industry has slammed more extensive regulation proposed by Democrats in Ohio's General Assembly, along with similar pushes in other states. Ohio's "Truth in Leasing Act" from Democratic lawmakers would overhaul oil and gas leasing in the region's productive Utica Shale.

In addition to registration, the bill would require landmen to be upfront about what company they represent, explain how oil and gas drilling works, disclose how long the lease could last, and explain a number of leasing options for landowners -- such as a clause that allows gas to be taken from beneath the property but not for a well to be drilled on it, or a clause that prohibits the storage of equipment or drilling waste on the property.

The bill goes even further, requiring that the state perform base-line groundwater testing before wells are drilled and that landowners receive a minimum royalty of 15 percent of gross revenue from oil and gas sold from under their land.

It's not clear yet whether the Kasich administration will consider these further proposed restrictions; his office did not respond last week to a request for comment. But Stewart, of the oil and gas group, told EnergyWire he was not willing to negotiate with the governor on those aspects.

"I think it's very odd for government to insert itself into a process and say that you need to negotiate against yourself," he said.

Attorneys at Porter Wright, a Columbus, Ohio, law firm, said such rules could be out of step with freedom of contract, a standard principle of common law.

"The assumption is that two private parties are competent and able to negotiate for their own interest," lawyer Andrew Trafford said. "It is somewhat of a rare occurrence when the state or a court gets in the middle of that."

But Dana Shimrock, a western Maryland resident who leased oil and gas rights to a company in 2006, said she wished more protections had been in place. Speaking on a panel of hydraulic fracturing critics at a conference in Baltimore over the weekend, Shimrock said that she and her husband should have consulted a lawyer at the time but that the land agents who approached her were pushy and deceptive.

She said they failed to disclose details of the shale drilling process -- which was not as widespread at the time -- and they were not forthright about a clause in the lease that allows the holding company to automatically renew it.

"I am the cautionary tale," she told more than 200 other Marylanders at the conference. The state's westernmost corner sits atop the booming Marcellus Shale, but a de facto moratorium there has prevented any drilling so far.

Knapp, the Pennsylvania landman, took issue with the idea of a disclosure responsibility for landmen. Though he said he encouraged his employees to be helpful in answering landowners' question, a rule like the one proposed in Ohio leaves too much room for interpretation on what is considered a "thorough explanation" of drilling.

"If one of my employees doesn't mention something specific about the process, are they or the company liable in some way?" he wrote in an email. "They are not geologists or engineers. What if they misspeak? What if they make a prognostication based on relevant data at the time that subsequently changes?"

In the end, Knapp said, landowners must be responsible for contracts they sign, or hire an attorney to do due diligence.

"Just being realistic, even the best intentioned [landman] does NOT necessarily have the best interests of the landowner in mind," he wrote, emphasizing that a landman works to advance a company's strategy. "It's an inescapable conflict of interest."