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Oil & Gas Law Report

Reporting on recent legal developments and trends in the oil and gas industry.

Sixth Circuit affirms Chesapeake’s right to “extend or renew” an oil and gas lease

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio

In Eastham v. Chesapeake Appalachia, L.L.C., 6th Cir. No. 13-4233, 2014 U.S. App. LEXIS 10531 (June 6, 2014), the Sixth Circuit court of appeals considered whether a provision in a 2007 oil and gas lease that granted Chesapeake the option to “extend or renew under similar terms a like lease” was ambiguous and whether it required Chesapeake to renegotiate the lease when it expired. The court held that the plain language of the lease allowed Chesapeake to “extend” the lease on the same terms. The decision contains insights about Ohio law and important lessons in contract drafting and interpretation.

Facts of the case

On April 9, 2007, William and Frostie Eastham signed an oil and gas lease with Great Lakes Energy Partners, LLC (“Great Lakes”) for their 49.066 acre parcel in Jefferson County, Ohio. The five-year primary term of the lease required Great Lakes to either drill a well or make delay rental payments to Mr. and Mrs. Eastham in the amount of $10.00 per acre per year until a well was drilled. The lease also provided that if the lease expired, Great Lakes would have the following option:

Upon the expiration of this lease and within sixty (60) days thereinafter, Lessor grants to Lessee an option to extend or renew under similar terms a like lease.

Sometime before the lease expired, Great Lakes assigned the lease to Chesapeake. There was apparently no dispute that the assignment was authorized by the lease and that all required delay rentals were timely paid throughout the primary term. Then, on March 14, 2012, about one month before the lease expired, Chesapeake recorded a notice of extension of the lease and sent a check for $490.66 (delay rentals for the first year of the extended five-year term) to Mr. and Mrs. Eastham along with a letter explaining that Chesapeake was exercising its option to extend the lease under the provision quoted above. Continue Reading

USFWS reopens comment period on proposed listing of northern long-eared bat as endangered until Aug. 29, 2014

Posted in Exploration & Production, Regulatory

Last fall, the U.S. Fish & Wildlife Service (USFWS) proposed listing the northern long-eared bat as an endangered species under the Endangered Species Act (ESA). Though a decision on the ESA listing was expected this fall, the USFWS recently delayed its deadline for a decision until April 2, 2015. The USFWS also reopened the comment period on the proposed ESA listing until Aug. 29, 2014, citing “substantial disagreement regarding the sufficiency and accuracy of the available data relevant to our determination regarding the proposed listing.”

The northern long-eared bat would be the second native Ohio bat, after the Indiana bat, to be classified as an endangered species. Both bat species have suffered population declines in recent years as a result of a naturally occurring condition called white-nose syndrome, which affects the bats. If listed, Ohio oil and gas operators and pipeline companies would have to assess the impact of their activities on the northern long-eared bat, as is already required for the Indiana bat, and local and/or seasonal restrictions on certain kinds of construction or clearing activities are also likely. Continue Reading

Keeping up with the dot-anythings

Posted in Porter Wright news

For the past several weeks, our colleagues at Technology Law Source have been working hard to keep readers apprised of developments related to The Internet Corporation for Assigned Names and Numbers’ new generic top-level domain (gTLD) program. This program, which is essentially redefining the face of the Internet, is likely to impact any business — or, indeed, any entity — with a web presence. If you haven’t been able to keep up with the hundreds of gTLDs already delegated this year, download this hot-off-the-press e-book: Protecting Your Brand in a New gTLD World.

You also may want to subscribe to Technology Law Source (use the “Subscribe by email” prompt in the left column of the site) to receive weekly updates about the evolution of the gTLD program and the dot-anythings launching each month.

 

Utah decision highlights unregistered finder risks in sale of oil and gas investments

Posted in Contracts and Leases, Exploration & Production, Securities

As we have noted previously, the sale to investors of interests in an oil and gas venture typically involves the sale of a security under federal and state securities laws, regardless of whether the investment vehicle is stock, a limited partnership or limited liability company interest, or even a fractional undivided interest in a lease (such as a working interest) if the investor is relying on someone else to manage operations. A corollary of this principle is that persons involved in marketing and selling the investment, if they receive compensation based on the transaction, must be licensed as a broker under state and federal securities laws. The lore that an unregistered “finder” can perform such services is mostly just that — lore. For the issuer, the consequence may well be loss of an exemption from registration and rescission claims from investors.  For the “finder” it may mean that his contract is not enforceable.

In Legacy Resources, Inc. v. Liberty Pioneer Energy Source, Inc. (No. 20120142, Dec. 20, 2013), the Utah Supreme Court held that a finder of investors for a prospective oil and gas project could not enforce an agent agreement with the issuer because the finder acted as an unregistered broker in violation of the Utah’s state securities laws. The court noted that the record contained undisputed evidence that the finder: Continue Reading

Ohio Supreme Court accepts second Dormant Mineral Act case

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio, Real Estate

The Ohio Supreme Court recently accepted a new group of civil cases; among them is Chesapeake Exploration, LLC v. Buell. In this case, the Supreme Court has agreed to answer the following two questions of Ohio law certified by United States District Judge Watson of the Southern District of Ohio in Case No. 2:12-cv-916:

  1. Is the recorded lease of a severed subsurface mineral estate a title transaction under the Ohio Dormant Mineral Act, R.C. 5301.56(B)(3)(a)?
  2. Is the expiration of a recorded lease and the reversion of the rights granted under that lease a title transaction that restarts the 20-year forfeiture clock under the ODMA at the time of the reversion?

Read the court’s certification order and preliminary memoranda. Continue Reading

Ohio EPA issues revised Model General Permits for oil and gas wells

Posted in Exploration & Production, Ohio, Refining, Regulatory

In February 2013, we reported that the Ohio Environmental Protection Agency (Ohio EPA) had issued proposed revisions to its Model General Permit for oil and gas well-site production operations. On April 4, Ohio EPA announced that it had finalized those revisions. The revisions bring the Model General Permits up-to-date with changes in the law since Ohio EPA originally issued the permits and make other changes to respond to industry comments. The revisions also include revised leak detection and repair requirements, which have been the subject of much recent discussion.

Ohio law generally requires each new source of air pollution to obtain a pre-construction permit from Ohio EPA’s Division of Air Pollution Control before “begin[ning] actual construction, erect[ing], locat[ing] or affix[ing] [the] air contaminant source.” Ohio law also requires sources of air pollution to obtain operating permits. Larger sources typically obtain permits-to-install (PTIs) and “Title V” operating permits; smaller sources typically obtain combined permits-to-install and operate (PTIOs). Ohio EPA may also develop Model General Permits — model PTIs and PTIOs — for categories of sources. Sources may choose to apply for regular PTIs or PTIOs if they like, but Model General Permits can be obtained more quickly, because, as Ohio EPA has explained, “all the terms and conditions of the permit have been developed in advance.” Continue Reading

Ohio severance tax is a point of ongoing negotiation

Posted in Exploration & Production, Ohio, Tax issues

Ohio Gov. John Kasich’s mid-biennium review plan calls for an increase in Ohio oil and gas severance taxes, as proposed in House Bill 472. These increased taxes would fund certain local governmental initiatives and the Ohio Department of Natural Resources. They also would help offset personal income tax cuts outlined in the mid-biennium plan.

The current production-based severance tax scheme does not distinguish between production generated by conventional oil and gas wells and production generated by horizontal wells. The current severance tax under R.C. § 5749.02 is levied at a rate of $0.10 per barrel of oil and $0.025 per thousand cubic feet (MCF) of natural gas.

For conventional oil and gas wells, the tax under H.B. 472 would remain a volume-based tax but the rates would increase to $0.20 per barrel of oil and $0.03 per MCF of natural gas. The tax would be imposed on the “severer,” defined for conventional wells as the person who actually removes the oil or gas from the ground. Other changes to the state’s regulatory scheme are intended to militate against this tax increase, however, resulting in no economic change to the costs of production for conventional wells.1 Moreover, low-producing conventional wells would be completely exempt from the severance tax. Continue Reading

Porter Wright to hold roundtable about “friend of the court” briefs

Posted in Ohio

From time to time we share news about educational opportunities that may be of interest to our subscribers. Members of Porter Wright’s Appellate and Supreme Court practice will hold a roundtable April 8 to discuss the benefits of amicus advocacy before the Ohio Supreme Court.

Too often, the Ohio Supreme Court decides issues that affect an industry statewide without first hearing from the industry itself. Trade associations and companies can address this issue by filing “friend of the court” briefs. To learn more about how your organization can be part of this process, join Kathleen Trafford, Brad Hughes and Dennis Hirsch for a breakfast briefing. Using a roundtable format, they plan to cover the benefits of amicus advocacy, strategies for effective amicus advocacy and the rules governing “friend of the court” briefs.

Schedule
Tuesday, April 8, 2014
7:30 a.m. – 8 a.m. — Registration and breakfast
8 a.m. – 9 a.m. — Roundtable discussion

Location
Porter Wright
41 S. High St., 29th Floor
Columbus, OH 43215

Register online for this complimentary event.

An agreement to enter into an oil and gas lease is an enforceable contract in Ohio

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio

An agreement to enter into an oil and gas lease is an enforceable contract in Ohio

Landowner enters into an agreement to sign an oil and gas lease, finds outs there may be a better deal elsewhere and tries to get out of the first deal. A federal court in Ohio says, “No, a deal is a deal.” Bruzzese v. Chesapeake Exploration, LLC, U.S. District Court for the Southern District of Ohio, Eastern Division (Feb. 13, 2014).

Background

A group of landowners in eastern Ohio had engaged attorneys to negotiate oil and gas leases on their collective behalves. They signed an Agreement to Accept Lease Offer from Chesapeake Exploration, LLC. About 75 members of the group later sued Chesapeake Exploration, LLC, claiming that the agreement was unenforceable. Chesapeake settled with all the landowners except Stephen and Elizabeth Albery.

The Alberys had printed out the agreement, filled in blanks, signed it and emailed it to the group attorneys on July 16, 2011. Immediately thereafter, Mrs. Albery’s sister told them that she had heard that other energy companies were making better offers to landowners. Under the apparent understanding that they could back out of the agreement because they believed they could still opt out of the landowners group, the Alberys sent a letter to counsel on July 24, 2011, stating that they wished to terminate the agreement. Continue Reading

The Ohio Dormant Minerals Act: Part 4

Posted in Contracts and Leases, Exploration & Production, Mineral Interest, Ohio, Real Estate

In the previous three parts of this series (read part 1, part 2 and part 3), we reviewed the Ohio Marketable Title Act (MTA), its application to severed minerals, and the experience of neighboring states, all of which played a role in the development of the Ohio Dormant Minerals Act (DMA).

To summarize:

  • The MTA was enacted in 1961 to make land titles marketable, i.e., free of stale claims. It included a grace period and did not require notice before a chain of title was extinguished in favor of another.
  • The MTA generally applies to any property interest (presumably still including oil and gas interests) where no conveyance or claim to preserve has been filed during the past 40 years.
  • The MTA does not necessarily extinguish all old severed mineral interests, even those with a root of title more than 40 years old, because the severed interest may be a separate chain of title.
  • The Illinois DMA was found unconstitutional by the Illinois Supreme Court in 1980 as violating due process because it did not require severed mineral owners to be given notice and an opportunity to be heard.
  • Indiana’s Dormant Mineral Interests Act, Ind. Code §§ 32-5-11-1 through 32-5-11-8 (1976) — which includes a grace period, a 20-year use-it-or-lose-it attribute and no notice requirement — was held to be constitutional by the U.S. Supreme Court in 1982. Texaco, Inc. v. Short, 454 U.S. 516, 102 S. Ct. 781, 70 L. Ed. 2d 738, (1982)
  • Illinois enacted its Severed Mineral Interest Act, which is based on presumptive adverse possession and requires notice, in 1983.
  • Ohio’s lease forfeiture law requires notice and the filing of an affidavit. The law suspends the statutory determination when the lessee files an affidavit contesting the alleged forfeiture. The lessee’s filing must occur no more than 30 days after receiving notice.
  • The National Conference of Commissioners on Uniform State Laws approved the Uniform Dormant Interests Act in 1986. Continue Reading