Water is a key component in the hydraulic fracturing process. Many landowners will be solicited to enter into an agreement to sell the water on and under their property. The agreement could allow the purchaser to drill a water well on the landowner’s property or to access above-ground streams, rivers, or lakes to aid in the production of oil and gas from the Utica Shale. Landowners should approach these agreements with caution, as there are a variety of items that a landowner must consider in the negotiation process. Consultation with an attorney experienced in oil and gas law is always advised.
Landowners should specifically identify and limit the access point where the water will be obtained. For example, some landowners may be willing to sell water from a spring-fed lake but may be unwilling to allow a water well to be drilled on their property. The agreement should also make clear that the landowner can continue taking water during the term of the agreement and specify any other rights the landowner desires to retain with respect to the water source.
It is also important to point out that Ohio has adopted the reasonable use doctrine with respect to water rights. The doctrine allows landowners to use water existing under their lands for reasonable purposes, so long as they do not unreasonably interfere with their neighbors’ water use. As a result, the agreement should limit how much water can be taken from the property on a daily and monthly basis to ensure the removal does not impact the rights of other neighboring landowners downstream. The landowner should also require a reduction in the amount of water used in the event of drought or changes in local, state or federal laws.
Landowners should require the purchaser to obtain all permits associated with the taking of water. The permitting process for the taking of water will be subject to change in the near future as Ohio finalizes its permitting process as part of the Great Lakes Compact. As a result, the purchaser should assume full responsibility for obtaining the necessary permits.
One of the more important terms of the agreement is the compensation to be paid to the landowner. The purchase price format will vary between a price per gallon or a fixed fee per month or year. If the agreement provides for a price per gallon, then the agreement should require the volume use and depth at the location of the water removal, a minimum gallon purchase requirement and grant the landowner the ability to conduct an accounting to verify the correct amount has been paid and the volume of the water taken from the property. The agreement should also require a provision for late fees in the event of a late payment.
Landowners should limit the term of the agreement to a set period of time and try to avoid automatic renewals. In the event a renewal cannot be avoided, then provisions should be included to require an increase in the purchase price for any subsequent renewals.
The agreement should require the purchaser to submit an operations plan, location of access roads, pipeline routes, etc., that the landowner can review and approve. This will ensure the landowner knows the full extent of surface access occurring on its property. All above-ground hoses and other equipment should be appropriately marked and secured to prevent any pedestrian or vehicular accidents on the property. Additionally, landowners will want to ensure that they have an indemnification provision requiring any damages or injuries arising from the water removal operations to be assumed by the purchaser of the water. The agreement should require the purchaser to maintain workers’ compensation coverage and insurance for its taking of water to ensure that there is appropriate funding for any accidents that may occur on the property.
The water purchase agreement will need to be tailored to the specific landowner’s property and concerns. As a result, landowners are encouraged to obtain the services of a licensed attorney to participate in the negotiations process.
NOTE: This general summary of oil and gas legal issues should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
If you have any questions about this article, feel free to contact Gregory W. Watts at 330-497-0700.