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Chesapeake Mortgages Marcellus Shale Mineral Rights

by Kenneth E. DuBose on August 2, 2011

Chesapeake Energy began to taking out mortgages on its most valuable leases to help fund drilling operations late in 2010. The company has taken out mortgages on mineral acreage and pipeline right of ways in Pennsylvania to help fund capital plans. The practice isn’t widely used and has only come to light recently as property owners in Bradford County, PA, were not able to get financing on their homes due to the loans taken out by Chesapeake. The practiced was first noted in a Mineral Rights Forum Discussion “Mortgages by Operators”.

Banks should be willing to loan as the mineral rights and surface rights are separate and Chesapeake is only borrowing against what it owns in the form of the lease. For Chesapeake, this practice might have major ramifications if banks are not willing to make loans or issue mortgages on properties where Chesapeake’s bank has a lien on the mineral rights. You can bet the property owners will want this issue resolved quickly.

Mortgages on mineral leases is not unheard of and has taken place for years in other areas of the country. The real issue will be how do Pennsylvania laws interpret the loans and mortgages by the operator. If it changes the value of the property, it will change the amount of money land owners can borrow against the property. That is likely an issue many didn’t consider when signing oil & gas leases.

“Chesapeake has mortgaged the mineral rights on over 1,000 properties on which it has a gas lease in Bradford County, in order to fund its drilling operations, Ward told the commissioners.”

” ‘The mortgage is technically on the mineral rights, but it has to be filed on the property,’ Ward said. ‘In the courthouse, there is no separation (between the mineral rights on the one hand, and the land and buildings on the other). So unless you’ve separated your property, it’s just one deed.’ “

Read the full news release at TheDailyReview.com

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