Energy companies using mineral leases as collateral sparks conce - Clarksburg, Morgantown: News, Sports, Weather

Energy companies using mineral leases as collateral sparks concern among some property owners

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The Hancock County couple suing Chesapeake Energy affiliates and Deutsche Bank for using their mineral rights as collateral for a $500 million line of credit have company, a Pennsylvania man who said he hasn't been able to buy, sell or borrow against his property because the enormous lien showed up on his title as well.

John and Jacqueline Bird of New Manchester had filed suit in Hancock County Circuit Court, saying Deutsche Bank had recorded the enormous lien — all $500 million — against individual properties in West Virginia, Ohio and Pennsylvania with mineral rights leased to Chesapeake.

While the lien itself is supposed to be attached to their mineral rights, the Birds say potential lenders stop reading when they see the words “lien” and “$500 million,” so the family hasn't been able to buy, sell or even borrow money against their property.

Sixteen miles away, Industry, Pennsylvania, resident Garry Miller says he's been living in the shadow of Chesapeake's debt for months. Like the Birds, he found out the hard way — when he contacted his credit union about refinancing to take advantage of lower interest rates.

“They told me I'd better come in, so I did,” he said. “They told me there was a $500 million lien on my property ... it's been nearly two years now, and I still can't get a loan. A lot of people say they'll help, but they don't.”

Miller said people tell him the lien is against the mineral rights to his 12 acres, “but if you look at the paperwork, the way it's stated, it says it's on my property.”

He said he's come away from meetings with lenders empty-handed three times.

“It's killing me,” he said. “I'm on a fixed income. If I could get a lower mortgage rate, I could save money — I can't save anything now.”

The Birds' lawyers figure 500 or more properties could be impacted by the lien. Miller thinks it could be even more, though others with experience in the oil and gas leasing arena figure it's likely just banks being overly cautious and landowners who don't understand the process.

“That lien, in reality, is probably not against the real property someone holds, but the mineral rights that were leased,” said Jackie Root, president of the National Association of Royalty Owners Pennsylvania Chapter. “Banks that are unfamiliar with it sometimes jump to conclusions.

“It seems like the local banks don't seem to have the same kind of issue with it.”

Root said they hadn't had any complaints from their members in Pennsylvania. Likewise, Bob Hart, president of the NARO's Appalachian Chapter, which includes royalty owners in West Virginia, Ohio, Kentucky and several other states, said he hadn't heard of any lien issues, “but we'll certainly survey our members, see if it impacts anybody.”

Root said oil and gas companies “borrow money against their holdings all the time,” and so far her members haven't raised an alarm about liens being improperly recorded against their properties.

“But we try to educate people,” she said. “We're about people being educated, taking some of the responsibility.”

Jim Souto, vice president and chief administrative officer at PS Bank in Bradford County, Pa., and an NARO member in his own right, said similar concerns have arisen in other parts of the country from time-to-time, “but I think a lot of people not being really familiar with what's been recorded.”

“There's no reason to be alarmed,” he said. “Believe me, it's been discussed at great lengths, but all the banks up here continue to lend money (to royalty owners) without concern.”

Bradford County is one of the most heavily drilled areas in Pennsylvania, he said.

Souto said energy companies routinely pledge their mineral lease holdings as collateral.

“They typically use parcel numbers to identify the instrument, identify the property,” he said. “But if you were to research deeper, you'll see they pledge the leases to the mineral rights. There is no new mortgage against anyone's property.”

While it's difficult to say what factors are at play in another bank's decision-making, Souto said the lien would belong to the actually borrower, in this case, the Chesapeake affiliates.

Root, meanwhile, said it's a learning process and there are no shortcuts.

“The first landsman that came to our house, back around 2000, he offered us $2 an acre,” she said. “He stood on our porch and told us everybody around us had already signed up. We have a 400-acre dairy farm, and we could have done a lot with $800. But we went inside and called my brother-in-law, he told us he hadn't signed so we knew (the landsman was lying).”

“Are you really going to sign something that's going to be recorded at the courthouse while you're sitting at your dining room table just because someone tells you everybody else has signed it?” she said. “You really need to ask questions.”

Leases need to be vetted by attorneys experienced in oil and gas issues. A thorough title search is critical, even for people looking at buying homes.

“We've had people who thought they owned the mineral rights because they'd had a title search done when they bought their property,” she said. But a standard title search “only goes back a certain number of years, and doesn't necessarily include minerals.”

To know who really owns the mineral rights requires tracking property transfers much farther back, even to the early 1800s.

But Root said a property owner's best defense is learning everything he or she can about how the oil and gas business works and making sure you understand all of the nuances, like pre- and post-production costs and how they are calculated.

In hindsight, Miller couldn't agree more.

“The landsmen have no idea what they're doing; the guy who came to my house never explained my lease to me,” he said. “Shame on me, I should have got a lawyer.”

The lien on the Bird property was recorded Sept. 15.