Many gas companies are attempting to carry out cost-saving measures through changes in their gas drilling lease practice, which has included terminating leases prematurely, selling off leases, and making adjustments in the royalty payments through adjustment of costs included in the calculation of royalty payments. I'm sure many reading this has experienced one, or perhaps all three, of these instances. Has the rising use of these cost-saving measures by the gas companies made the environment for gas drilling leases more contentious? Litigation in the area of gas leases has always existed as the product of disputes between property owners and gas companies, yet as the industry has become depressed following its extended boom period, the risk of litigation has increased as property owners take exception to the cost-cutting measures implemented by gas companies. Has this difficult period produced more litigation? 

An analysis of litigation trends since the gas market began to decline indicates that the number of legal disputes arising from cost-cutting measures by gas companies is increasing. The May 2013 issue of Navigant's Unconventional Oil & Gas Litigation Trends Report showed a greater than 60 percent increase in the volume of U.S. cases filed in the second half of 2012. Royalty and land and lease rights disputes were the most common types of unconventional oil and gas litigation during 2012, with both experiencing a notable increase during the second half of 2012. This spike in litigation was driven by an elevated number of cases filed in Texas, Oklahoma, and Nebraska. Pennsylvania and Ohio have also reported dramatic increases in gas lease litigation. The Pennsylvania Bar Institute recently reported that between 2009–2012, gas lease litigation in State Courts and Federal Courts within Pennsylvania increased from 9 cases to 36 cases. As of August 31, 2013, the group reports that 24 cases had been filed for the year. Similar trends are present in Ohio, particularly with regard to parties to existing leases seeking to cancel, terminate, or abandon old leases and enter into newer, more profitable leases; and parties seeking judicial determinations related to their royalty interests.

To appreciate the scope of this increase in litigation, the ten biggest drillers in the US natural gas market who account for almost one-third of all production, have all been involved in some form of significant litigation over the last two years involving either individual or class action suits over lease/royalty disputes. This does not account for the thousands of smaller companies engaged in natural gas drilling or associated industries involved in litigation arising from lease/royalty practices. The percentage of active drilling leases in the US in some form of informal or formal dispute could be significant given these data. Further, a number of these companies have also been subject to Department of Justice or State Attorneys General litigation concerning lease/royalty practices which potentially could present problems for the profitability of some of these companies. 

For leaseholders, the short term “blips” on the market should not be a concern. It is the long-term trends indicating permanent shifts in prices which should concern them. When prices drop over an extended period of time, the profitability of gas leases for companies is impacted negatively. As for profit entities, these companies owe a duty to their shareholders to be profitable; as such, don’t expect charity when it comes to a difficult natural gas market. When profits are declining, accommodations must be made to reduce operating expenses. For gas companies, this often involves changing the structure of gas leases and the royalty payouts available on them. Landowners who signed lease agreements allowing a drilling company to extract natural gas from their land probably thought little about the gas commodities market at the time, given the long period of growth the gas market experienced in the US. Now, however, landowners allowing drilling on their property are beginning to feel the ripple effects of this shift in the market and financial retraction by gas companies. This shift from a period of boom to depression in the market has caused a second type of boom—a litigation boom over gas leases.

What is certain given the litigation trends is that the shale boom has been replaced by gas lease litigation boom; as the after effects of the gas industry's financial retraction is hitting home with mineral owners. Many of these mineral owners feel they have been taken on a roller coaster ride through the high and lows of the gas market and are unfairly (perhaps illegally) bearing the burden of a gas industry that over extended itself during a boom period. Now, Courts located in gas producing regions will be forced to balance the rights of property owners against the gas industry in what is shaping up to be contentious period for the gas industry. The results of these cases will likely provide the legal foundation for the gas leases in the future.