Commission Told of Need for Consumer Protections From Fracking | Eastern North Carolina Now

   Publisher's note: The author of this fine report, Dan Way, is a contributor to the Carolina Journal, John Hood Publisher.

Oil and gas leases could impose burdens on property owners

    RALEIGH     Landowners need consumer protections built into North Carolina law to prevent potential financial losses, property damage, and mortgage mayhem from complicated oil and gas leases, said officials in the state Attorney General's Office April 26 to members of the Environmental Review Commission.

    State Rep. Mitch Gillespie, R-McDowell, said he is adding those measures to his legislative timeline by which hydraulic fracturing to extract the fossil fuels could begin as early as July 2014.

    "It's an important issue. It's also a new and complex issue for the state" because North Carolina has not been involved in natural gas and oil extraction before, said Kevin Anderson, director of the Consumer Protection Division in the Attorney General's Office.

    That is likely to change pending legislative approval of fracking, a horizontal drilling process using water, sand and chemicals to crack underground shale formations and remove gas and oil deposits.

    "We recommend and believe that strong consumer protections need to be in place for landowners before the state moves forward," said Lynn Weaver, assistant attorney general in the Consumer Protection Division. She updated commission members on a draft report to do just that. (A PDF of the report can be downloaded here.)

    "I'm all in favor of oil and natural gas extraction and moving ahead in a reasonable way," said Gillespie, who chaired the commission meeting.

    "There should be very little disagreement between the House and Senate" on the new rules, Gillespie said. Fracking could start by 2014 "if everything went perfect." A more likely scenario would coincide with the Senate timetable of 2015, he said.

    House Minority Leader Joe Hackney, D-Orange, a member of the commission, said it "depends on what the law looks like" whether Gillespie's timetable is practical. "I doubt if most critics of fracking are going to be satisfied as long as extraction involves injection of unidentified compounds into our groundwater."

    He praised Gillespie for "trying to assuage all the concerns." By contrast, Hackney said, state Sen. Bob Rucho, R-Mecklenburg, "just sort of brushes off those concerns" in working on the fracking issue from the Senate side.

    Rucho has not responded to requests from Carolina Journal for comment.

    Gillespie wants lawmakers to draft the vast majority of regulations.

    "We do not need to be giving away our authority to an unelected board," he said.

    Gillespie hopes to introduce some consumer protection measures in 2013, and the bulk of them in 2014.

    "I have sent that piece of legislation to the Attorney General's Office" for review, he said.

    Gillespie has been dismayed that the AG's Office has not explored consumer protection measures more quickly.

    "I've had long discussions with [Attorney General] Roy Cooper and [state Consumer Protection Division head] Kevin Anderson," Gillespie said.

    "We think the report has shown where there are significant holes that need a lot more work, a lot more research," said Scott Marlow. He is executive director of Rural Advancement Foundation International, an agricultural advocacy organization in Pittsboro that has been pushing for landowner education and protection as the oil and gas industry moves into the state.

    "We're not making comment on the environmental impact," Marlow said, but are concerned about the leasing arrangements and "who's looking out for the landowner, for the landowners' rights."

    Weaver said environmental concerns have gotten significant attention in a report from the state Department of Environment and Natural Resources.

    "There can be chemical spills, there can be well blowouts," she said. Well pads take up 7-10 acres and "can disrupt the surface of the land. That land is taken out of production . . . and can cause a decrease in the value of some landowners' land."

    Home mortgage giants Fannie Mae and Freddie Mac have said landowners who enter into an oil or gas lease could violate the "due-on-sale clause" terms of their mortgage loans that prohibit sale of any portion of the property or interest in the property without prior approval of the lender, Weaver said.

    Landowners seeking a new mortgage or to refinance a mortgage could fail to qualify under a hazardous substance clause because of constituents used in fracking, she said.

    The State Employees Credit Union and North Carolina Housing Finance Agency "will not make mortgage loans to borrowers who enter into oil and gas leases," Weaver said.

    Some lenders might require subordination and indemnity agreements if the landowner wants new credit or financing for equipment, but oil and gas companies may be reluctant to enter such an agreement, Weaver said.

    Mineral rights are also an issue of concern. "It is not uncommon" for those to have been severed by a previous landowner who transferred, sold or conveyed them to another party, she said.

    In Lee County, where coal mining companies maintained the rights after selling their property, tax officials "identified approximately 36 parcels that contained a minimum of 5,800 acres where the person who owns the surface does not own the mineral rights," and there could be more, Weaver said.

    Sometimes there are covenants in new developments that affect mineral rights, such as those imposed by homebuilder D.R. Horton, starting in 2007. The Fort Worth, Texas, company "began a practice of holding on to mineral rights," Weaver said. In late April, the company announced it was suspending that practice.

    As a result of looking into that matter, "It has come to our attention that there is no required disclosure at the time of sale that the seller is not conveying those mineral rights," and that needs to be corrected, Weaver said.

    Companies have implied consent to enter property, build roads, and drill. Should a homeowner deny access to the minerals, the courts could determine that to be an unlawful property taking under North Carolina common law, Weaver said.

    Because of that common law standard, North Carolina is exploring a surface damages act to protect and compensate surface owners from damage or negligence if drilling is conducted by a third party, Weaver said. At least 15 states have adopted such laws.

    The state also is exploring compensation for damage to an existing water supply due to drilling. DENR has recommended baseline testing before drilling starts.

    "That is essential to proving damage has occurred to a water supply," Weaver said.

    Lease brokers, many of whom belong to the American Association of Professional Land Men based in Fort Worth, Texas, bring high-pressure tactics to get immediate lease deals, she said.

    There is a need for a "a reasonable cooling-off period" of 15 to 30 days for landowners to decide whether they want to cancel a lease that may have been an impulse decision, Weaver said.

    "Landowners need time to sit down and talk with a lender, they need to talk to a lawyer and they really need to understand these impacts," Weaver said.

    She also recommends "that the landowner be provided with some sort of information sheet" created by an independent agency and listing sources for information, as well as a registry requirement for land men for accountability and identification.

    Safeguards should be in place to require oil and gas companies to make bonus payments in a short period of time or else allow the landowner to back out of the lease, Weaver said. Complaints have arisen in other states that the companies have not paid those bonuses.

    The state also should require leases to be recorded to avoid a cloud on the title. There is no such requirement on the books, Weaver said. And gas and oil companies should be mandated to provide notice to the landowner if they sell leases to other companies.

    Dan Way is a contributor to Carolina Journal.