Haggle hard on drilling rights

With fracking for shale gas in the news, James Savelli-Holt explains the major implications for landowners if a drilling operator comes knocking on their door

Landowners, with a constant need to diversify income streams, might be eager to grant rights of way and drilling privileges on or under their land. They should, however, be mindful that, although they have unrestricted rights of enjoyment over their land, they do not hold rights over the minerals found on or under it.

Under the Petroleum Act 1998, independent operators may be granted licences from the Secretary of State (Department of Energy and Climate Change) to mine for such minerals, paying a commission to the Crown.

In assessing the value of a commercial arrangement with an operator, a land-owner will need to consider the terms and its position carefully. Depending on the type of mining, an operator will need sufficient security for access, well excavation and continued operations from above ground, to be set out in a lease. Further consideration would revolve around establishing a commercial rent (to be paid on an annual basis and index linked), the lease term, the extent of the well(s) and rights of access.

Horizontal drilling has allowed the commercial mining of harder-to-reach pockets of minerals. This presents the risk of a developer trespassing onto land under which it has no consent to go.

The case of Bocardo v Star Energy (2010) in the Supreme Court confirmed that for instances of deviational drilling, outside a consented route, this amounted to trespass and therefore compensation would be assessed by reference to loss suffered under the general principles of compulsory purchase valuation as opposed to the benefit grained by an operator accessing the land. In this case the difference was substantial – at first instance, the High Court awarded the landowner £621,180 and 9% of all future revenue. On appeal this was reduced to a nominal £1,000.

An operator would need to consider its drilling requirements and the potential impact across sites in multiple ownership. In the event that an operator is unable to reach agreement with all landowners affected, a statutory framework exists for the compulsory acquisition of ancillary rights, under the Mines (Working Facilities and Support) Act 1966.

Potentially, the negotiating position between an operator and a determined objector could result in a contractual stalemate and therefore dissuade an operator from taking a lease of the land. However, while there is no express right for an operator to drill under land in someone else’s ownership, the 1966 Act does provide a mechanism to deal with affected owners.

An application to the Court could take around 18 months to secure the ancillary rights. Faced with the decision between outright refusal or a negotiated agreement, landowners would likely be better to grant express rights rather than proceed through the Court as the likely level of compensation would be greater. They should, however, consider their reputation locally. If they are seen to be giving an operator an ‘easy time’ this might impact their standing in the community and potentially their business.

James Savelli-Holt is an associate at Charles Russell LLP.

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