Negotiating the Marcellus: The Role of Information in Building Trust in Extractive Deals

Collective bargaining is usually associated with unions and labor negotiations. In these negotiations, parties typically present a certain set of demands concerning a finite set of variables (pay, benefits, safety, etc.).Within each company, labor and management develop an ongoing relationship, facing each other repeatedly. Because there is so much at stake, both unions and management usually employ skilled professional negotiators to hammer out the deal.

In the past five years, a new type of collective bargaining has emerged as a strategy for negotiating mineral rights in the United States. In the U.S., unlike almost all other countries, most landowners own their subsurface mineral rights, so an oil, gas, or mining company must have a signed lease from the landowner to develop these resources. These companies’ traditional ability to gain lopsided deals — sometimes paying a signing bonus from ten to five hundred times smaller than standard value for the particular situation and rock-bottom royalties — has stemmed largely from the tremendous asymmetry of information between the parties.

The company, which specializes in both the business and the technology of getting the fuel out of the ground, is invariably equipped with much more information about value, costs, risks, and other variables than the landowner, who almost always faces such negotiations with absolutely no experience in natural resources or negotiating, and even less information about those same costs, risks, and rewards.

As the extremely unbalanced deals and unnecessary, sometimes extreme, environmental damage that have occurred over decades have become better known, many landowners have become more guarded, losing trust in the companies and the process. But they often still struggle to secure better deals because they lack information and leverage. They have no experience and little knowledge about those they are dealing with. Today, increasingly, such negotiations are characterized by a healthy, even necessary, amount of skepticism and distrust.

Faced with gas or oil company interest in drilling on their land, some landowners have begun to seek out others in their regions to leverage their holdings through collective bargaining. These alliances are led by amateurs with no negotiation experience who face an unknown number of variables and may not even know what they do not know (Avruch 2006). They are up against companies whose negotiators and lawyers often have world-class experience. Negotiation literature strongly suggests that such inexperienced negotiators will end up with a much worse deal when facing experienced opponents (Murningham et al. 1999).

In many of these alliances, however, the landowners have realized that they need to address the problem of asymmetric information (De Dreu et al. 2006) and to find a company they perceived they could trust with their land (Lewicki and Stevenson 1997).

The Internet and emerging social media have given these inexperienced negotiators access to much more useful information and have facilitated their ability to communicate with each other more easily and efficiently. Whether communicating with each other by telephone, e-mail, or through social media, many of those interested in negotiating their own gas deals have become better informed and better connected, which makes them better negotiators who are able to secure better deals (The Hindu Businessline 2011). Landowners are becoming more knowledgeable about the risks and rewards — the often very great risks and rewards — of these arrangements and are working to develop better negotiation strategies.

This case study focuses on how one group of landowners in northeastern Pennsylvania creatively rethought the process of negotiating in a natural gas deal. They used collective bargaining for leverage and new information systems to level the informational playing field. These techniques allowed them to develop trust and confidence within the group and ultimately with one company, as they sought to protect their environment and enhance their financial outcome.

Traditionally, lease-seeking companies have used a hoary, long-standing technique to make deals with private landowners: a visit from a traveling salesman called a “landman.” One day, a landman simply shows up at a landowner’s door. He tells her that a company thinks there may be a valuable resource in the ground — probably not, but on the off-chance there is, they would like her to sign this lease, which is typically a few pages long, giving the company permission to explore. If they are so lucky as to find something, the lease gives them permission to dig it out, and then she and the company will be rich! In reality, the extraction company will have done extensive geological research and will have ample reason to believe that land contains commercial quantities of whatever resource they are looking for.

To prove the company’s good faith, the landman will even throw in a small per acre bonus payment, perhaps $25 to $50 an acre. If the landowner is proactive enough to ask about environmental risks, the landman will brush it off, saying that such risks are exaggerated and that his company is totally compliant with the extremely strict laws that apply. (These laws vary in quality from state to state.) Often, the landman will mention that he is talking to all her neighbors, and they are all signing. But she must sign now, right now, he will say — it’s a now-or-never offer. Needless to say, it is also nearly always the worst possible offer.

The companies have reasons for this strategy. Once a resource (or the area it is located in, called a “play”) has been identified, the race is on to sign up mineral rights as quickly and cheaply as possible. One reason is competitive professional secrecy. Another is to minimize potential losses — such projects are extremely costly with a high rate of failure. For example, oil wells often cost millions to drill, but only 10–30 percent successfully strike oil (Wallace-Wells 2011), although the percentages cited vary. The U.S. Energy Information Administration estimated in 2008 that it cost $604 per foot to drill for natural gas. Much of the shale in Pennsylvania’s Marcellus district is about 8,000 feet below the surface, so just an exploratory well can cost nearly five million dollars (United States Department of Energy 2008). Transportation, refining, and marketing add additional costs. And, for all extraction resources, if the market price is too low, it will be unprofitable to even begin the process.

Companies are also justifiably concerned that once they start paying more, the next landowner will get wind of it and move his or her reservation point; like wages, mineral rights prices are sticky and resist falling. Extraction projects are immensely complicated productions: geologists and engineers spend considerable time, effort, and money trying to figure out the most efficient way to extract and move oil or natural gas (some of their techniques are quite ingenious), and the last thing they want is a landowner asking for environmental considerations that will complicate or limit their options. But the most powerful rationale for these tactics is to secure the greatest possible profit for the energy company.

All of these work against the landowner. An unsuspecting, blindsided landowner will typically not understand what the lease refers to with such phrases as “Pugh clause” or “shut-in clause.” He or she may not have known of the presence of the resource, much less its value. He or she will not know how good (or even solvent) the company is. He or she will not know applicable laws. He or she will not know anything about the actual process and how it may harm his or her land and water, or even his or her home and quality of life. And he or she will not know where to get such information or even what information he or she needs.

Such distributive, even possibly dishonest, tactics have exacerbated the negative public image of oil, gas, and mining companies. Stories of these tactics and damages travel, resulting in feelings of bitterness among landowners who perceive they have been cheated and in widespread public distrust. Public scrutiny of safety and environmental risks has been increasing, and numerous individual and group lawsuits have been filed around the country for sloppy work, damages, and deceptive practices (epitomized, perhaps, by the 2010 blowout of the British Petroleum Deepwater Horizon drilling rig in the Gulf of Mexico). In 2010, a former head of Shell Oil, John Hofmeister, wrote a book entitled Why We Hate the Oil Companies. While the author tends to blame politicians rather than examine actual grievances against the companies, his title clearly captures the profound distrust many Americans have when it comes to oil and gas companies. Unsurprisingly, many informed landowners often view landmen — and the companies they represent — with extreme distrust, making these deals increasingly adversarial (Pinkley 1995; Lewicki and Stevenson 1997; Tinsley, O’Connor, and Sullivan 2002).

In the past decade, gas companies in the U.S. have begun exploiting “unconventional” natural gas plays.¹ Of these, the one getting the most attention is shale gas. Shale gas developed from the remnants of four-hundred-million-year-old extinct inland seas, now 6,000–8,000 feet below the earth’s crust. Over time, the sediment in these seas, organic and inorganic, settled to the bottom, was covered over, and compressed into shale. The organic material within the shale was cooked by heat, time, and pressure into natural gas.

Shale gas was considered financially impractical until the past decade, when engineers perfected a combination of techniques: drilling wells horizontally (drilling vertically to a certain depth, then angling the wellbore to curve to a ninety-degree angle, and continue drilling horizontally for thousands more feet) with hydraulic fracturing of the shale. Because shale is rock and the gas is embedded within the rock, the rock must be fractured, called “fracking”— crushed by an explosive charge through the perforation holes out of the wellbore using a combination of water, sand, and chemicals (some toxic) to hold open the pulverized rock and release the gas. When companies developed the ability to frack the rock horizontally along a shale bed, shale gas extraction became economically viable.²

Shale gas is different from conventional natural gas in another important way: it is not tightly contained in one vertical space under a couple of properties. A shale play often stretches out for dozens, even hundreds, of miles horizontally. So instead of dealing with a handful of landowners, companies need to contact and make deals with dozens of landowners to be able to string along a contiguous stretch of land for a well with sufficient reach.

There are several major shale plays in the United States, including the Barnett in northern Texas, the Fayetteville in northern Arkansas, the Haynesville in northern Louisiana, and the Marcellus in Pennsylvania and neighboring states, as well as many around the world. “The Energy Information Administration estimates that the U.S. has more than 1,744 trillion cubic feet (tcf) of technically recoverable natural gas. . . . Technically recoverable unconventional gas accounts for 60 percent of the onshore recoverable resource.” Shale gas lifts the U.S. reserves of natural gas from a ninety- to a 116-year supply (United States Department of Energy 2009).

The Marcellus is of special interest. It stretches from upstate New York, diagonally through Pennsylvania, and into western Maryland and West Virginia. The formation is estimated to hold between 168 and 516 trillion cubic feet of natural gas, possibly enough to supply the entire U.S. with natural gas for fourteen to twenty years, depending on how much can be recovered.³ The area is also tantalizingly close to major energy markets in New York City, New Jersey, Boston, Washington, DC, Baltimore, Pittsburgh, Philadelphia, and Cleveland, meaning lower transportation costs (whichwould lead to higher profits) than usual for the gas extraction companies. It is easy to understand why petroleum companies would be in a frenzy to acquire access to the Marcellus (Applebome 2008).

But the Marcellus also lies beneath heavily agricultural and populated areas as well as the watersheds of many of the above-listed urban areas, and residents of these areas are concerned about the possible environmental and safety risks of extracting gas from the Marcellus, such as air and water pollution, explosions, and land contamination. Increasingly sophisticated extraction technology and rising commodity prices have led the industry to reevaluate sizable swaths of geology and land — even highly populated swaths of land — for possible extraction projects.

With more information available, people’s knowledge of the environmental risks of fossil fuel extraction has increased, leading to growing concerns about the uneven and limited regulation of the natural gas industry. Although natural gas drilling is considered to leave a lighter environmental footprint on the land than oil extraction or coal mining, it is not without significant risks. In the case of shale gas, these include dramatically increased ambient noise and traffic, gas leakage into the air or water, destruction of property for digging wells and pipelines, leakage from water-holding pits and pipelines leading to soil and stream contamination, spills and other accidents, explosions, and most especially, water problems associated with fracking.

Vast quantities of water are required from local sources (one to three million gallons) to frack a well. The chemicals in the fracking fluid, if spilled, can leach into the ground and the water supply (most dangerous at the spill site). Disposing of the enormous quantities of contaminated wastewater is also a problem — a mixture of the water, some fracking fluid, and the saltwater of the ancient sea, now with other dangerous minerals dissolved in it over the millennia.

Historically, this wastewater was simply dumped in local waterways or sprayed over road surfaces. Those practices are no longer considered environmentally acceptable or safe. But all this water must be somehow either completely cleansed or disposed of safely. Few gas companies have an easy or locally acceptable solution to this problem. Few community sewage systems are equipped to deal with the particulars of gas drilling fluids, and reinjection (pumping the water back into the ground at a different level) is often not feasible, safe, or economical.

Although much has been made of the risks of contamination to major aquifers during the fracking process, the greater risks are from hydraulic fracturing gel spills on the ground, which can then work their way down into a local aquifer, leaky wastewater-holding pits, and improper treatment and disposal of the wastewater. The risk of explosion is also ever present.

No federal law requires an environmental impact statement for a private landowner to lease his or her mineral rights to a company. All that is required in Pennsylvania is compliance with Chapter 78 in the state’s regulatory handbook, which contains regulations for both the industry and landowner for issues such as permits, water testing, liability, pit lining, disposal of fluids (in compliance with the state’s long-standing Clean Streams Law), no drilling within 100 feet of or dumping into a body of water, setbacks from buildings (200 feet), casing and cementing standards, plugging and reclamation requirements, gas migration, and other oversight issues. If water testing is not done before drilling, gas contamination from a well within one thousand feet of a building is assumed to be the company’s fault (Pennsylvania Code, Chapter 78 2011; Yoxtheimer 2011a).

Although many Pennsylvania and owners feel that state regulations do not offer sufficient protection, the state is considered to have a long and robust understanding of fossil fuel development (pro and con). Many states do not have comparable regulations, either because they do not need them because they lacked such extensive resources, such as New York State, or because they chose to make the state as appealing to industrial development as possible, such as Texas and Louisiana.

Any company operating in the United States must also comply with federal law, especially the federal Clean Water Act of 1972, designed to protect against water pollution (especially in drinking water) and to deal with brownfields. But the 2005 Energy Policy Act exempted most fracking fluid chemicals, except diesel, from the Safe Drinking Water Act, even though some of the chemicals used are toxic. With only the most basic regulation by the Environmental Protection Agency, oversight of petroleum industries is largely a state-by-state affair. For example, Pennsylvania, which has a long experience with extraction and with industrial, urban, and agricultural water contamination, has its Clean Streams Act, first passed in 1937, and regularly updated since then, to address water pollution. Its current Oil and Gas Act oversees an industry that has been in the state for more than one hundred fifty years. It is considered an aggressive environmental regulator.

Until the Marcellus drilling got underway, petroleum was no longer considered a major part of the state’s economy and so received skimpy oversight: in 2005, there were 21,000 petroleum wells in the state; as of 2006, there were only eighty-eight people working on oversight. Bowing to obvious and public demand, the government increased the number of inspectors at the state’s Department of Environmental Protection (DEP). As of early 2011, there are now 202 inspectors. Pennsylvania state law supersedes federal law (in stringency) but prohibits local municipal laws from overriding it.

In Pennsylvania, oversight of water concerns also falls to the DEP. The DEP has the power to levy fines against violators. For example, following a botched cement job that allowed methane gas to migrate from a shallower gas formation into the water supplies of homes in Dimock, Pennsylvania, the company in question, Cabot, was forced to pay more than one million dollars in fines. In addition, the company paid about four million dollars to the landowners whose water had been contaminated by migrating gas (Yoxtheimer 2011a).

Individual states also have the power to require minimal royalties to landowners — in Pennsylvania, it is 12.5 percent — and to levy various taxes on both the company and the landowner. In eastern Pennsylvania, independent river commissions also meet to discuss protection of the Delaware and the Susquehanna rivers.⁴

In 2008, Pennsylvania found 179 violations (including administrative ones involving paperwork, signage, etc.) with fourteen environmental impacts, including spills, wetland encroachment, or water impact on ground or surface water such as methane migration. In 2009, there were 639 violations (with many more wells) with thirteen environmental impacts (Yoxtheimer 2011b). As of early 2011, there were approximately 1,150 producing gas wells in the segment of the Marcellus formation located in Pennsylvania (Pennsylvania Department of Oil and Gas 2011).

One small landowner has virtually no leverage to improve the deal offered by a petroleum or gas company. But over the past six years, neighboring landowners have begun uniting to form negotiating alliances, blocks of land available in one lease. Because of the sheer number of landowners whose signatures are required for a gas company to successfully exploit a shale gas play and because some of the earliest projects were under urban areas (which can have strict land-use zoning requirements), it seems almost inevitable that neighborhood committees would organize to speak for the group when it came to signing leases. These alliances change the dynamics of the negotiations: through collective bargaining, they offer the landowners much greater leverage.

It is not clear how large these alliances could potentially grow. In upstate New York and northern Pennsylvania in 2009, several local alliances proposed a “super alliance,” a combined 390,000 acres to strengthen their hand and perhaps to attract the attention of a major energy company.⁵

From energy companies’ perspective, this increased leverage makes life more difficult and expensive, but it does offer one silver lining — they can obtain access to large tracts of contiguous land rather than make tiny piecemeal acquisitions, which complicate operations for wells and pipelines (Mickley 2010) and must be reconciled.⁶ Such blocks can simplify extraction operations and lower costs in the long run.

Inevitably, this also requires the lead negotiators to engage in a continuous two-level game (Putnam 1988). Landowners are a much more loosely affiliated group than unions. Each landowner group seems to have developed its own set of rules for dealing with members’ demands versus negotiation with the companies. Most of them seem to depend on existing relationships or institutions led by local people who already have significant reserves of trust built up. (Leaders are typically elected.) They live in the community, so it is assumed they will have to live with the deal as much as anyone else — and must answer to their neighbors.

Because of their proximity to those on whose behalf they are negotiating, many negotiating leaders have relied on information sharing, especially about the rationale for their actions. This constant communication seems to be especially effective in not only building and retaining the trust and support of the community but also in expanding the deal beyond purely distributive financial considerations (Moye and Langfred 2004).

The first major landowners group to leverage their properties in a shale gas deal was the neighborhood committee of Mistletoe Heights, a 470-home older section of Fort Worth, Texas, which sits atop part of the Barnett Shale formation. In November 2006, a natural gas company sent letters to many residents of the neighborhood offering leases of $500 per lot and a 25 percent royalty after cleanup and transportation.

But unlike most situations, in which the company presents the lease to the landowners as nonnegotiable, in Mistletoe Heights, there were residents who were professionally familiar with the petroleum industry and knew they could, in fact, negotiate. The neighborhood’s executive committee appointed a committee of eight residents to review the situation and make recommendations. The committee comprised a petroleum engineer, two attorneys, two long-time residents, two business people, and a retired physicist with expertise in information technology.

According to Norm Stemple (2008), the information technology specialist and chair of the Mistletoe Heights committee

The Mistletoe Heights committee put the lease online so others in the area could see what they had done. This permanently eliminated not only the (local) asymmetry of information but also the impression that company leases could not be negotiated.

Since then, extraction companies have become more open to the idea of negotiating with groups of landowners. Research indicates that the more the lease represents the demands of the landowner (within limits), the fewer problems tend to follow. Under such conditions, the landowner becomes more of a stakeholder — he or she not only has more oversight of the project but also becomes more supportive of the process. Such lease negotiation, a win–win arrangement, could, in the end, be less costly on many levels. But most companies, given a choice, still seem to prefer the zero-sum game.

The story of Mistletoe Heights illustrates the first cardinal rule of negotiating with a gas company: make sure several companies know about it and are, hopefully, interested. It is basic economics — landowners get the most money if several companies compete for their resource. It is also basic negotiating — these moves “away from the table” (Lax and Sebenius 2006) significantly improve landowners’ best alternatives to a negotiated agreement (BATNA) (Fisher and Ury 1981).

Wayne County is located in the northeasternmost corner of Pennsylvania, where the Pocono Mountains meet the Catskill Mountains. Its eastern border is the upper Delaware River, which is a major aquifer for New York, New Jersey, and Philadelphia. Because Wayne County is near the edge of the Marcellus shale formation, gas companies chose to first explore and develop more central, deeper, richer sections of the Marcellus in the central and western parts of the state. At the time of this writing, how much gas Wayne County holds and whether it is economically feasible to extract are still unproven.

With an estimated population of 51,300, spread out over close to eight-hundred square miles (nearly half a million acres), the county is quite rural. The most recent U.S. Census lists the county’s per capita income at just under $17,000 a year, well below the national average of nearly $21,000. Dairy dominates the large agricultural sector; farms are small family farms, averaging only 154 acres in size (United States Department of Agriculture 2007 County Profile). According to the U.S. Census, the population is overwhelmingly white, just over 80 percent of the county’s residents are high school graduates (roughly in line with the national average), and almost 15 percent have a bachelor’s degree (compared to more than 22 percent nationally) In short, Wayne County is a relatively sparsely populated area whose residents are not unusually wealthy nor highly educated when compared to the rest of the United States.⁸

Until recently, it was not an area that attracted outsiders, and extended family networks are large and close, with many families tracing their history in the county back over a hundred years. In the past three decades, however, Wayne County has also increasingly attracted people from New York City, New Jersey, and southern Pennsylvania seeking vacation and retirement homes and who are drawn to the beautiful, quiet, and rural quality of the area.

In 2007, the first landmen came to Wayne County, focusing on those landowners with larger tracts of land. People in the area had sold short-term leases for mineral rights for decades, still believing nothing would happen because extracting the gas was not economical. No one had heard anything different or anything about the Marcellus, the shale gas, or any new negotiations. A number of people near the village of Pleasant Mount signed a company lease for twenty-five dollars an acre. The farmers were not informed about exactly why the companies wanted the mineral rights.

In July, a landman offered Damascus township farmer Karl Canfield $250 an acre; in conversation, he found out his son had been offered $500 an acre. He decided to call Marian Schweighofer, who lived on a farm a few miles away and worked with the local Farm Bureau.⁹“We had done stuff with her and Ed (her husband) before, like spraying for tent caterpillars. If you want something to get organized, they’re the ones,” said Canfield (2010).

Ed Schweighofer’s family had been in the county for six generations. Marian, who had been with the Farm Bureau for twenty years and on their board for twelve, was immediately concerned about two things. First, farmers who signed would have potentially been in violation of their Agricultural Preservation Program (an easement) and the Clean and Green Act 319 (a tax benefit). Second, through the Farm Bureau, she had seen what had happened in other areas of Pennsylvania when mineral rights were sold without environmental protections (Schweighofer 2010a). She recalled a case of long-wall mining in which some impoverished Pennsylvania landowners had sold off their mineral rights during the Depression. In 1998, a coal company acquired those rights and brought in a machine that could ground the bituminous coal out from beneath the houses of their descendants. The mining refuse leached into and ruined their water supply. “It raised my awareness,” she said.¹⁰

Like many others in the area, the Schweighofers had not had time for the landmen — they were busy with the county fair. But they called the neighbors, and fourteen of them held a meeting in Canfield’s kitchen. Members of the group met with a few neighbor farmers, holding three thousand acres. The group decided that they should hold off signing to “get educated” and should hire a lawyer.

By the weekend, the informal group included landowners holding ten thousand acres. They opened up the group to adjacent communities, and within weeks, the group grew to include landowners who collectively owned fifty to sixty thousand acres. Ultimately, it included more than 1,300 landowners holding over seventy thousand acres. Then, Ed Schweighofer happened to mention the shale gas to a business contact in Oklahoma who told him of problems his state was having and began offering advice. As Ed told the Pennsylvania group, “We’ve got a lot to learn” (Canfield 2010).

The first order of business was to organize. With so many interested and concerned landowners, Marian convened a meeting at the local community center. After the third meeting, which drew two hundred people, the group was forced to move meetings to the township school to accommodate the crowd. They formed the NWPOA in fall 2007.

Marian also held a private meeting with some of the owners of larger tracts of land, whom she asked to serve on the alliance’s steering committee. One of those was Justin O’Donnell, a retired bank president. He came on board to advise on banking and financial matters. Others on the committee included Dean Jamieson, a technology/computer specialist, and Owen Frederick, who had worked on Wall Street. Sue Mickley was recruited for her background in public health; she advised on health and environmental issues. These people became the core of the negotiating team as well. Throughout the negotiations, the negotiating team met at least every other week.

The group knew they needed to buy time. As O’Donnell (2010) remarked later, “I knew I didn’t know what I was doing. I’d negotiated contracts for years, but this was a different information base.” The group decided to go further than other collective bargaining units — to protect its lands and leverage the most money, the members decided to write their own lease.

The alliance faced a twofold problem in gathering information: how to collect enormous and diverse quantities of external information to use in their negotiations and how to disseminate it to their huge membership, all of whom expected to be approached by landmen and all of whom were eager to stay informed about findings and proceedings. They also knew they would need to keep the group together to maintain leverage.

According to Marian Schweighofer (2010c)

Unlike many landowners in similar situations, the group’s financial interests were matched by its members’ overwhelming determination to protect their land, water, and way of life.

The group determined that it was essential to keep the membership together through constant communication, letting people know both general information about the extraction process and also specific internal information about the progress of the negotiations, but its large size made consistent communications a challenge. In such a traditionally closed community, some members were leery of outsiders. A map of the area was drawn up and subdivided into sections; district representatives were voted on, and the person who placed second in the voting became the alternate. The group also chose a communicator and sent out regular e-mails and updates, but because one-quarter to one-third of the members did not have access to the Internet, the job of the district representatives was to be available to answer questions and keep these members in their districts informed by phone. The result was group cohesiveness. “We kept the trust that way,” said Marian (Schweighofer 2010a).

In January 2008, one member suggested setting up a website where members could privately log in, communicate with each other, and stay informed: http://www.pagaslease.com. This website, which grew to include other shale groups, contains useful and general information such as royalty calculators and lease offer trackers. Still, many farmers could not figure out how to log in. “Just e-mail me,” they told Marian Schweighofer. Throughout the entire process, she and Jamieson sent out regular updates, relevant information, and press clippings via e-mail. Another more locally specific website, http://www.nwpoa.info, was set up later.

Many members began their own independent research on gas extraction. Justin O’Donnell remembers how the representative of the Abrahamsville district “gathered a lot of data, she worked on it daily. There was a lot of energy, like a church group getting ready for a dinner.” The steering committee formed several committees to do research and bring back ideas. Sue Mickley said, “Everybody shared everything we found, good or bad” (Mickley 2010). O’Donnell was asked to use his finance background to investigate gas companies. Owen Frederick connected with lawyers and Wall Street specialists and then joined the American Association of Petroleum Geologists. In 2008, he attended a conference devoted to the Marcellus, took classes, and talked to a number of geologists. “Each time I would call a company,” he explained, “I would learn a little more . . . Lots of information was coming in. Marian had more intel than anyone on Wall Street” (Frederick 2010.) By the end of the process, Marty Byrd of Chesapeake Energy Company told Marian, “The people in the alliance learned in six months what it took the people in Texas ten years to learn” (Schweighofer 2010a).

The alliance also developed a three-pronged approach to gathering information: exploring the reliable information offered by Penn State University, reaching out to other shale gas groups, and hiring a law firm that specialized in the intricacies of extractive leases.

First, they turned to Penn State. Pennsylvania farmers normally look to the Farm Bureau for issues concerning their land. But because the Farm Bureau did not have the staff to advise the farmers on the Marcellus, the alliance utilized the resources of Penn State’s Cooperative Extension (the outreach arm of the College of Agricultural Sciences) and various other departments of the university. The extension’s Marcellus Education Team had been working on materials and doing outreach since 2001, even before the shale gas boom.

The cooperative extension’s website provides access to four dozen publications online about gas drilling issues, as well as dozens of “webinars,” PowerPoint presentations by specialists from around the country, and updates on taxes, legal, environmental, and economic issues (Penn State University, College of Agricultural Sciences Cooperative Extension 2011). For example, available webinars include water testing, community planning, royalty and lease management, infrastructure information, impact on forestry, taxes, environmental protection, pipelines, and an animation of the drilling and fracking process. Experts from the extension were invited to give multiple presentations to the alliance. Some of their recommendations would later be incorporated into the alliance’s lease.

Second, the alliance met and talked with parties working on shale gas in different regions, including Williamsport, Pennsylvania, Fort Worth, and upstate New York. They not only swapped stories but also acquired an extensive collection of sample leases to pore over and learn from. A number of these leases were disasters. But many others offered useful and creative ideas.

Third, although there were lawyers in the group, the steering committee charged a special committee with finding a specialist law firm. From an initial list of thirty firms, the alliance settled on Ballard Spahr of Philadelphia, which had an excellent environmental record, gas and oil experience, familiarity with Pennsylvania law, and political connections.¹¹ They also collaborated with Jackson Walker LLP of Texas, which had executed natural gas leases but had not worked for any of the gas companies involved in bidding for leases in Wayne County. The lawyers met with the alliance in January 2008. At that point, the participants estimated that the process to sign a lease would take six months.

The alliance faced indirect but growing pressure from those with second homes in the area and from recent arrivals, often people from more urban New York City and New Jersey. Many of these, as well as a number of longer-term residents, were absolute in their opposition to any drilling because they believed the threats to both the environment and their enjoyment of their property were too great (see Wade-Benzoni and Lin 2001; Karl, Susskind, and Wallace 2007). (Most local people who did not own significant amounts of land remained uncommitted and ambivalent.) Many people had legitimate concerns about accidents and had a sincere distrust of any energy company. But those recently arrived or second-home owners reached out to the press in a way the alliance never did, garnering a great deal of attention. Their most urgent appeal was in the name of the New York City water supply, which comes to the city virtually untreated from several sources farther upstate, including the upper Marcellus area.

By early 2008, a homemade film was shown in the area about problems related to drilling for shale oil in the western part of the state: leaky holding pits with run-off contaminating farmland, ruined water wells, noisy compressors running day and night in quiet farmland, and landowners who lacked legal recourse because they had signed away their rights when they signed energy company leases. This frightened many Wayne County landowners.

They knew that there could be extreme demands for water from the federally protected Upper Delaware River (later withdrawn) and that there had been a large fracking spill in nearby Dimock (Mouawad and Krauss 2009). Many local people feared that the area’s way of life for the past one hundred years was threatened. Newer arrivals who had “escaped” from the city and spent large sums on second homes now faced a potential loss of the bucolic quiet they had sought. They had limited legal ability to stop those who wished to sell their mineral rights but filed a number of lawsuits. (These were dismissed, but one filed against the powerless township ate up the entire year’s road-paving budget.) They also lobbied the Delaware River Basin Commission, whose jurisdiction includes much of eastern Wayne County and which, as of this writing, is still trying to formulate rules that allow drilling but protect the water.

Because it was important to keep expenses low, much of the work lawyers usually do to research gas leases was taken up by the NWPOA members, although the alliance did institute a twenty-five dollar membership fee to cover the $20,000 retainer for the lawyers.

In the late winter of 2008, the lawyers and the negotiating committee drafted the first lease. When presented for bidding (and to the members), it was 136 pages long, as opposed to the traditional two. Even at the time, some members of the negotiating team had doubts about its length and complexity. How the document became so complicated is unclear. Along with critical protections such as liability insurance and water security, the lease covered the use of port-a-potties, the color of machinery (neutral, to blend in), speed limits on back roads, and a prohibition against dogs on drilling sites.

For all intents and purposes, the first lease was “dead on arrival.” No company would touch it, although many remained interested in working with the group (Schweighofer 2010b).¹² According to one company representative I spoke with, the first lease was so excessively eccentric and complicated that it would have made operations unworkable. By summer, it was apparent the lease was a nonstarter. The unanimous rejection provided the alliance with a reality check (Canfield 2010; Schweighofer 2010a). O’Donnell said, “We were at an impasse. We were flat in the water and there was nothing we could get a grasp on” (O’Donnell 2010).

The problems were not immediately apparent to the general membership, but at meetings, there was a growing unease. With gas prices reaching fourteen dollars per million cubic feet and the bonuses offered at more than $2,700 an acre, many people were eager to sign. The committee did not publicly acknowledge the stalled talks. To help calm fears, the alliance held a public meeting on financial management, during which Marian Schweighofer spoke of an older woman who had told her that whenever the landmen wanted her to sign one of their leases, the gas whispered to her that it had been there millions of years, it would still be there when she got what she wanted. The credibility of the steering committee and the personal trust most people felt for the individuals involved in negotiations calmed fears for the time being.

Employing lawyers to help negotiate extractive deals, it turns out, can be a double-edged sword. In such negotiations, lawyers normally advise or even write a lease. Although the members of the alliance did the overwhelming majority of the research and legwork in this case, legal fees for the NWPOA deal came to more than $200,000. Even after the initial payment, a $7 fee needed to be tacked on for every acre signed. Another regional group, which also sought to secure environmental protections, hired lawyers to do the majority of the work, resulting in legal fees for all members of more than twenty-five dollars an acre. Also, the provisions of the lease that the lawyers initially drew up for the alliance, while undoubtedly well intentioned, nearly sank it with excessive complexity and onerous — sometimes petty — demands. It went beyond a legitimate starting point for any negotiation.

Ironically, the negotiations were saved once again by delay. In September 2008, the financial world was rocked by the collapse of Lehman Brothers and the near-collapse of AIG and a number of the largest banks in the country. The economy teetered, credit dried up, and over the next six months, energy prices cratered. By March 2009, oil had fallen from $147 a barrel to around thirty dollars; natural gas continued to sink from fourteen dollars per thousand cubic feet to about four dollars.

Unsurprisingly, over the winter, new energy development stood at a standstill, although negotiation team members never stopped talking to the interested companies. More importantly, they took the time to analyze the first lease’s failure and to make substantial revisions. It was the second phase of information gathering.

They reached out to members who owned private businesses for insight into the business mentality. They looked at good leases signed in nearby Deposit, New York and borrowed some ideas. They talked to companies that had been interested and then balked — what had been acceptable, what was not? They began to work on modifications to the first lease. For example, in the initial lease, a company would have needed to go into detailed surface development discussions with each landowner whose land they were drilling; in the new lease, they would present a plan to the landowner and be open to serious objections. They streamlined recommendations by incorporating federal Bureau of Land Management Gold Book practices and Pennsylvania Bureau of Oil and Gas regulations; using those conditions in the new lease gave them the force of law — but ones known to the energy industry. They got rid of the tiny individual details that are a bugaboo to operators. They incorporated National Park Service recommendations on recycling the fluids. In short, they stopped reinventing the wheel.

They whittled the lease down from 136 pages to seventeen without losing their most important demands. These were the “Christmas wish list” of sixty points, including special water treatment (trucked away or special recycling, not dumped or reinjected), limiting well pads to one per 640 acres (a square mile), improved setbacks from buildings, and respect for seasonal industries and activities such as summer camps and hunting, land reclamation, water testing, etc.¹³ There were safeguards to ensure severe repercussions if there were breaches of contract or environmental damages.

To sustain support, the alliance conducted a survey among the members, who by now were becoming upset, thinking they had missed the boat the previous summer. More than three-quarters of them voted to hold out for better royalties.¹⁴

Over the course of the negotiations, Owen Frederick had contacted forty gas companies and entered into serious talks with a dozen. He and Justin O’Donnell looked at each company’s capitalization, technical capability, experience, record, and history of lawsuits to see which companies would meet the alliance’s standards. Although the alliance had stayed in contact with a number of gas companies through the crash, the talks had not been serious or detailed. Some companies were rejected as unable to meet the alliance’s standards. A few companies dropped out after looking at the first lease. Ultimately, the two most interested in the alliance’s land were Chesapeake Energy and Hess Corporation.

Although working in the same field, the two companies were profoundly different in negotiation styles, almost classically so. Chesapeake Energy, based in Oklahoma City, is the second largest natural gas producer in the country, and, according to its website, the most active driller of new wells in the United States. (Chesapeake Energy Corporation 2010). It specializes in horizontal drilling, especially in unconventional gas fields such as shale gas. It was one of the first companies to target Wayne County. It used landmen continuously to make offers on the land and entered into substantial discussions with the members of the alliance even as the group was being formed. Chesapeake’s team was led by its eastern division vice president for land, Marty Byrd.

During the summer of 2008, the alliance believed it had a handshake deal with the company. At first, Chesapeake wanted the leases signed by late July. A few weeks later, however, Chesapeake backed away, hinting to Marian Schweighofer that the company was facing financial difficulties.¹⁵ Immediately before and during the financial crisis of 2008, Chesapeake temporarily pulled back on acquisitions and holdings.

Hess arrived in Wayne County later than the other companies. A major independent oil company with deep pockets, Hess was interested in entering the unconventional gas market. Top management at Hess had been leery of the move to shale gas, but that management changed in early 2009. Its team was led by Charles Sheppard, vice president of unconventional resources and global basins. Hess had its own concerns about the cost of investing in northern Wayne County.

The two companies’ objectives and styles were completely different. Chesapeake used landmen; Hess sought a large contiguous block and wanted to work with a group. Chesapeake’s company lease did not address such overriding concerns as environmental damage, liability, and control of surface land. Hess was less worried about compliance with the environmental restrictions but was shopping to make a deal with only one large group of landowners among the many now appearing in the northeastern section of the Marcellus.

Each company had different risk preferences: Chesapeake was much more eager to take a chance on an unproven reserve but was much less willing to engage in a real negotiation process, which they would only consider once they perceived a direct competitive threat. But few landowners signed with them (Schweighofer 2010c). Because the actual amount of gas reserves in the area were unproven, Hess offered less money, unwilling to risk losing millions of dollars on its first attempt at shale gas.

Each company had different negotiating styles. Chesapeake used a traditional distributive approach: a dollar more for the landowner was a dollar less for the company. Throughout the entire negotiation, the company continued to use landmen, whose tactics later on lapsed into outright dishonesty and even slander. (Some of them allegedly told landowners that they were working with the alliance, that the alliance had disbanded, that Marian Schweighofer was having an affair with one of them, etc.). When finally confronted by Schweighofer and the team about why they would offer virtually the same lease as the alliance to individual landowners but not to the alliance, Chesapeake backed down. In a community that historically relied on a low-key, by-the-book, we-have-to-live-together-and-get-along code of conduct in business dealings, Chesapeake’s hardball tactics alienated many people. Also, Chesapeake did not seem to understand how important the environmental concerns were to the people. But the money it offered was generous, and its representatives were aggressive, consistent suitors.

On the other hand, Hess took a much more integrative approach — the company was open to the idea of a hybrid lease and to exploring creative possibilities. Instead of Chesapeake’s zero-sum approach, Hess chose a value-creation approach. Also, from the beginning, the Hess representatives struck an entirely different tone with the negotiations. Alliance members recalled them as “amicable,”“cordial,”“refreshing,”“people who could think out of the box” (Fredericks 2010; O’Donnell 2010; Schweighofer 2010a). They fostered an attitude of “what I can do for you.” In his town hall meeting with alliance members, Sheppard answered questions by suggesting selection was a personal choice. This approach increased the trust people felt toward Hess. Hess also appealed to the members’ desire for commercial success with their pitch: unlike Chesapeake, they would market the gas better because they already had markets and pipelines in the eastern U.S. But Hess was offering less money to landowners for signing up than Chesapeake was.

Over the course of the nearly two years of the negotiations, the alliance’s negotiating team and the representatives from Chesapeake and Hess had gotten to know each other fairly well. The longer and better negotiators know each other, the better they believe themselves to be at assessing their trustworthiness (Lewicki 2006). But while openness and information exchange can lead to trust, professional negotiators often worry that too much openness leaves them vulnerable (Mnookin, Peppet, and Tulumello 2000). This disconnect began to shape how the alliance viewed the two companies.

With Chesapeake, every element in the lease was a struggle — environmental protection, royalties, bonus money, indemnity — everything. During negotiations with Hess, it had become clear that although the company was a potentially fine partner, the promise of all the bonus money that Chesapeake offered up front was the main sticking point: to the struggling farmers of Wayne County, the money mattered a lot.

During negotiations, the alliance learned that while Hess was unwilling to put up as much up-front bonus money as Chesapeake, it was willing to pay the bonus payments over time. Hess’s time preferences were different from its competitors because it sought to minimize risk and reduce lump sum payments.

The company also wanted to divide up the alliance’s holdings into three zones (the alliance got them down to two) whose payments would depend on the geological likelihood of finding gas. Because the county is on the edge of the Marcellus play, there was a chance that some of the eastern territory did not have enough gas to warrant the investment. The alliance knew this but was unwilling to abandon those eastern members.

From the interviews, it is clear that the NWPOA members felt greater trust toward Hess. They also knew that Hess had been the most forthcoming on environmental issues and appeared to be the most open to an ongoing, responsive relationship. Most other landowner alliances in the area were primarily interested in maximizing their financial outcomes, but NWPOA stood firm on the protection issues. Because they understood Hess’s concerns, they began to work with the company to figure out a more flexible financial arrangement that would work for both parties.

By early June 2009, NWPOA had acceptable offers from Chesapeake and Hess. When Chesapeake returned after the crash, they offered less than they had in 2007. Chesapeake executive Marty Byrd told Marian that the company could obtain individual leases for even less than before (Schweighofer 2010b, 2010c). Chesapeake’s final offer to the NWPOA gave its members two payment options to choose from: $2,450 an acre signing bonus with 15 percent royalty payments or $1,800 per acre with an 18 percent royalty.

Hess proposed to divide the acreage into different “zones.” The landowners whose land had greater likelihood of producing gas based on seismic data would receive signing bonuses of $1,500 per acre, guaranteed up front, while those who owned land in more questionable areas would receive $1,100 per acre. Hess proposed to spread the bonus payments out over four years. If the company was able to successfully extract the gas, all those whose gas was extracted would receive an additional bonus payment to equal $3,000 per acre total over multiple years. To sweeten the deal, Hess offered a 20 percent royalty to all landowners. The negotiating team accepted the structured payment plan but refused to allow Hess to cherry-pick properties.

In June, after making its final offer, Chesapeake issued an ultimatum, demanding an answer in three days. Marian Schweighofer stalled, telling the company she could not convene a meeting that fast, mollifying them with a scheduled meeting in a few days. In the meantime, she spoke to Hess. On June 10, Hess accepted the NWPOA lease and offered a letter of intent. Although some areas of disagreement remained unresolved (including some issues of environmental compliance and liability), after comparing offers, the steering committee unanimously decided to make the deal with Hess (Fredericks 2010; Schweighofer 2010c).

NWPOA members told me that the deciding factor was the level of their trust in the two companies. The way Chesapeake had bargained confirmed to local people that it was much harder to work with — the company did not behave as a partner. The dishonesty and abuses of the landmen and the company’s early attempts to break the alliance rankled many people in the area, some of whom came to see the company’s representatives as crooks. Chesapeake had refused to reconsider planned environmental shortcuts such as its practice of filling contaminated holding pits with cement — in the middle of otherwise arable land — instead of removing the toxic waste. On occasion, the company also made what the steering committee perceived were compromising offers: a special overriding royalty for the board members at the expense of the overall deal, offering them trips to Texas in a private jet. It left an impression that they were trying to buy the board.

In addition, Hess let it be known it had engaged Newfield, a company with an excellent environmental track record, as the local operator for exploration and drilling. To assuage the company’s concern about landowner interest, the alliance held a straw poll. The overwhelming majority of landowners agreed to the Hess terms. The alliance notified Chesapeake, which withdrew on June 24, 2009.

On Thursday, July 13, 2009, at the request of the NWPOA, Marian Schweighofer, Owen Frederick, Sue Mickley, Karl Canfield, Dean Jamieson, and their lawyers went into final negotiations with Hess executives Charles Sheppard and Gene Linscomb, attorneys for Hess, and representatives from Newfield, at Jamieson’s house. The talks began at 9 a.m. and went till 6 p.m. the following day. Initially, Hess wanted to split into small groups to work out specific details, but the alliance refused. They needed to hammer out differences between the two parties on the right to audit, point of pricing,¹⁶ and dispute resolution.¹⁷

In the afternoon session, however, Newfield’s representative tried to renegotiate the entire lease. This was met with angry dismissal by Schweighofer, who smacked the table between them and said, “We are not going to renegotiate. We have a letter of intent.” Newfield backed down (Canfield 2010).

In the end, the alliance got its wish list of strong provisions for land protection, reclamation, water security, wastewater disposal, liability protection, and environmental compliance, plus the staggered $3,000 bonus and a 20 percent royalty (NWPOA Lease with Hess, Sections 2.1, 2.2, and 4.0). Newfield has announced they plan to recycle the water used in the process by taking it from site to site and to use air drilling, both of which minimize the amount of water needed from external sources (Wayne Independent 2010). Hess obtained its large contiguous block of land in the Marcellus for drilling, with staggered payments and an active and engaged partnership with the landowners.

The lease signing began at the end of July 2009 at local fire halls and community centers and continued through August. The company had been worried that they might not have sufficient acceptance, but during the initial phase, turnout was so heavy that the company ran out of checks. In all, about 85 percent of the alliance’s 1,300 members signed the deal.

Most extractive deals have an adversarial, distributive financial component. Environmental considerations can intensify the adversarial aspects of these negotiations: companies often ask landowners to give up financial compensation in exchange for more stringent environmental protections, even though these arrangements typically incur relatively negligible costs in the overall expense of the project.

The deal reached between the NWPOA and the Hess Corporation largely avoided such a head-to-head struggle and was characterized by flexibility and accommodation. Many NWPOA members received six times more money than they were initially offered by the landmen and also successfully negotiated a deal that included major environmental safeguards. Hess was able to create a deal that cost the company less money up front for access to gas reserves whose value was not yet proven; in exchange, the company agreed to implement environmental modifications that it acknowledged would not substantially increase its operating costs.

What actions helped the NWPOA achieve its goals in this negotiation? What lessons did members learn that could be applied to other landowners involved in negotiating extractive deals?

In extractive negotiations, collective bargaining works. Landowners gain power if they join a local alliance, but for the arrangement to succeed, their goals and values must match those of the alliance. Some alliances are only interested in the bonus money. Landowners who do not join an alliance may expect they will be able to free ride on the money or even leverage their obtrusive landholdings for more money later. But usually, the company will not offer them the same terms on the nonmonetary protections. And that solitary landowner will have no one with whom to split legal fees.

Constant communications and transparency of operations are also critical. When it comes to such risky and potentially lucrative projects as petroleum extraction, a communications vacuum can fill people with concern and fear, generating gossip and rumor mongering. Involving people in the process and keeping them informed builds crucial trust within the group. Both the Mistletoe Heights association and the NWPOA found that keeping the membership intensively informed both about the gas and about the negotiations kept the group unified and empowered, although some literature suggests that this is not necessarily critical in all forms of collective bargaining (Hongbin 2000).

Selecting leaders with strong reputations for integrity can also be critical to trust building. Interviewees reported that an essential element in building trust within the alliance was the strong and respected leadership of Marian Schweighofer. Although she had no background in negotiations, she proved to be a surprisingly effective, tenacious negotiator. Her philosophy was “If you have integrity and a group of like-minded people, you can get it done. Unless you ask, you never know what you can get” (Schweighofer 2010a). Other team members mentioned her ability to identify people whose talents could help the group. It was also immeasurably helpful that she had deep and strong roots in the community. As O’Donnell told me, “They all talk to her like they know her. She’s open and honest and not out for herself and it comes across” (O’Donnell 2010). It should also be mentioned that, unlike some leaders of other alliances, Schweighofer received no additional compensation for her efforts beyond her family’s lease with Hess.

Traditionally, landowners in extractive deals have relied on the energy companies for information. But in the Internet era, it is much easier for them to uncover information about the resource in question (shale gas in this case), extraction technologies, energy markets, environmental risks and remedies, and, most critically, what other landowners have been able to achieve. The energy companies can no longer use information scarcity and secrecy to gain the upper hand in these negotiations at the expense of landowners and their communities.

In some cases, addressing environmental concerns is more of an inconvenience to companies than a deal breaker. Starting with the Alaska pipeline in the 1970s, energy companies have been increasingly pushed to protect the environment. At least on industry executive told me that most companies resist, but the resistance is often based less on real costs than on operational workability and convenience. Lobbying efforts by professional environmental groups have also successfully pushed gas companies to better practices. Even Chesapeake, which lost the deal in Wayne County, is now offering recycled water drilling (Stouffer 2009). Operating companies often find it impossible to change their entire processes from well site to well site or leave them to the discretion of the landowner. On the other hand, as the alliance found out, while most competent deals do insist on setbacks from buildings, water protection, etc., landowners cannot expect that all of their more minor concerns (such as no dogs on site) will always be accommodated.

Of course, every situation is unique. The geology, the geography, the demographics and culture, and the public reaction will be different in every setting. No template or boilerplate will work equally well in all situations. Not every company is looking to be a “trusted partner.” And not every landowner will care about that. Sometimes, it is just about the money.

Forces are pushing the U.S. and the world to greater and greater exploration for and exploitation of energy and mineral resources. When companies neglect the concerns and interests of local people, it can destroy trust and generate hostility and adversarial relationships, which can lead to a poor negotiating environment, lawsuits, bad public relations (a concern for company shareholders), and unnecessary environmental damage. Once a company begins this kind of project, it is stuck — it must be where the gas is and, unlike some manufacturers, cannot just pack up operations and leave.

The negotiating position of the people on whose land these valuable resources lie has traditionally been much weaker than the companies that seek to exploit these resources. But that is changing. They are becoming better informed of the potential benefits and risks of making these deals. As they become better informed, they become better at asking for what they want — and in theory, better negotiators. They see themselves less as helpless individuals than as fully involved stakeholders. Many landowners are open to such bargains but seek to receive a fair deal that also minimizes damage to their property. They are learning how to form alliances to increase their bargaining leverage, secure better deals, and minimize the negative impacts of such deals on the entire community.

Nonetheless, for landowners, serious risks remain. All legal extractive deals adhere to state law, but these protections are often inadequate, especially in states without a significant history of drilling or whose laws are industry friendly. State agencies can only enforce laws on the books, but courts are able to enforce much stronger individual contracts.

No matter what is in the lease, spills, contamination, explosions, and other nasty surprises are always possible. That said, most sites never experience a significant environmental problem.

As information technology expands its potential and reach, it can help private individuals protect themselves and acquire a fairer share of extraction deals. It can help them decide which companies they can trust to work with in the most productive way and can change how business is conducted in this important, lucrative, and risky industry.