Oil & Gas Law Report

Ohio Supreme Court issues decision regarding post-production costs

This morning the Ohio Supreme Court issued a decision in Lutz, which arose when the federal Northern District Court of Ohio, Eastern Division, certified the following question of law to the Ohio Supreme Court: Does Ohio follow the “at the well” rule (which permits the deduction of postproduction costs) or does it follow some version of the “marketable product” rule (which limits the deduction of post-production costs under certain circumstances)?

The Supreme Court initially accepted the certified question and the issue was fully briefed and argued earlier this year. However, this morning the Court declined to make a blanket ruling regarding allocation of post-production costs. The Court concluded, “Under Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the certified question.” This essentially leaves the issue to the trial courts to decide, on a case by case basis, how the parties to a lease intended to allocate post-production costs.

Justice O’Neill dissented, explaining that he believes the court should have adopted the “at the well” rule, thereby allowing a lessee to deduct post-production costs from a lessor’s royalty. Justice Pfeifer also dissented, commenting that he would have liked the Court to answer the certified question by adopting the “marketable product rule,” thereby forcing lessees to bear the burden of all post-production costs.

Ohio Supreme Court issues key decisions on pending Dormant Mineral Act cases

This week, the Ohio Supreme Court issued key decisions on its pending Dormant Mineral Act (DMA) cases. The Supreme Court Announcement itemized the various decisions released this morning, which were further detailed in Court News Ohio . Only three cases received full opinions: Corban v. Chesapeake Exploration, L.L.C., Walker v. Shondrick-Nau and Albanese v. Batman, while the remaining cases were disposed of based on the authority of those three opinions.

Overall, the Corban opinion addresses the issues that were most anticipated by oil and gas lawyers around the state, finding that the 1989 version of the DMA applied a fixed look back from its effective date, and that it was only operative until its amendment in 2006. Critically, the Court also held that the 1989 DMA is not self-executing and that a surface owner was required to obtain a judicial determination of abandonment of a severed mineral interest under the 1989 DMA.  However, now that the 2006 version of the DMA has completely displaced any right to proceed under the 1989 DMA, only the 2006 version applies today.

 

Ohio Supreme Court still mulling many questions about the Dormant Mineral Act

Last year we reported on the flood of appeals pouring in to the Ohio Supreme Court raising dozens of questions about the Ohio Dormant Mineral Act (DMA), which can be found at R.C. 5301.56. A year later we finally have a few answers and the surge of new DMA appeals seems to have subsided.

This blog post provides a comprehensive update on DMA cases that have been decided and which remain pending before the Ohio Supreme Court to date. Overall, two cases have been decided – Dodd v. Croskey and Chesapeake Exploration, L.L.C. v. Buell – and 13 cases presenting 39 questions of law have been accepted and remain pending. There are no pending DMA appeals that have not been accepted for review.

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Ohio Supreme Court rules on Beck lease regarding delay rentals and tolling

On Jan. 21, 2016 the Ohio Supreme Court announced State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, Slip Opinion No. 2016-Ohio-178, a decision that finally laid to rest two important oil and gas cases that have been winding their way through the Ohio courts for more than four years – Hustack v. Beck Energy Corp., case No. 2014-1933 and State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, case No. 2014-0423.

The opinion, which was authored by Justice French and joined by four other Justices, upheld oil and gas leases held by Beck Energy Corporation and which are said to directly affect almost 700 landowners located in southern and eastern Ohio. The Supreme Court decision addressed three issues; two from the Hustack case and one from the Claugus case. The Court, in a separate matter, also denied a request to toll the terms of the Beck leases involved in the cases.

Justice Paul E. Pfeifer, joined by Justice Terrence O’Donnell, concur in part and dissent in part.

Hustack v. Beck

1) Is the Form G&T (83) lease void as against public policy?

The leases at issue in this case were standard forms that were often used by Beck, known as a “Form G&T (83) lease.” The leases contained a provisions that allowed Beck to make delay rental payments if a well was not commenced within twelve months from the inception of each lease. The Lessors argued that this improperly allowed Beck to maintain the leases in perpetuity by making nominal delay rental payments, and with no obligation to drill. The Lessors argued that a contract that runs in perpetuity is void as against public policy in the state of Ohio.

The Court, citing precedent from Brown v. Fowler, 65 Ohio St. 507, 63 N.E. 76 (1902), disagreed with the Lessors, holding that Beck’s right to extend the leases by paying delay rentals, in lieu of drilling, only applied to the ten-year primary term of the lease.  Consequently, under the terms of the lease, if Beck failed to drill a well in the first twelve months it could extend the lease for up to ten years by making the required delay rental payments.  But, in order to extend the lease beyond the ten-year primary term, Beck would have to comply with the requirements stated in the leases to trigger the secondary term. In particular, to extend and maintain the leases into the secondary term, the form leases required proof that either oil and gas are being produced or are capable of being produced on the premises in paying quantities, or that the land is being operated in the search of oil and gas.

The Court discussed the definition of “capable of being produced,” as the Lessors also contended that this could extend the lease in perpetuity at Beck’s discretion. Again, the Court disagreed and held that Beck would not be able to determine if oil and gas were capable of being produced on the premises without first drilling a well.

The Court ultimately held that Beck’s form leases are not void as against public policy.

2) Is the Form G&T (83) lease subject to an implied covenant of reasonable development?

The second issue the Court addressed from the Hustack case was whether the form leases were subject to an implied covenant of reasonable development.

The Lessors claimed that Beck improperly failed to develop the leases, instead relying on payment of delay rentals to hold the leases. The Court ruled that Ohio law only imposes an implied covenant of reasonable development when a lease “fails to refer specifically to the timeliness of development.” The Form G&T (83) leases in these cases required Beck to commence development within ten years, and furthermore, expressly state that no implied covenant shall be read into the lease. For these reasons, the Court held that there was no implied covenant of reasonable development in these leases.

Claugus v. 7th District Court of Appeals

The Claugus case has its roots in the Hustack case.

In the early stages of the Hustack case, the trial court certified a class of Plaintiffs which included any Lessors who were subject to a Form G&T (83) lease.  Later, the Seventh District Court of Appeals entered various orders tolling the terms of all leases that were affected by the case. Claugus Family Farm was not a named party to the Hustack lawsuit and did not even receive notice of the lawsuit, but Claugus was a member of the certified class because their property was subject to a Form G&T (83) lease. Claugus discovered that they were affected by the Hustack lawsuit and tolling orders after another oil and gas company defected a new lease they had signed when due diligence revealed that their property was subject to a Form G&T (83) lease and tolling order.

Claugus sought a writ of prohibition from the Ohio Supreme Court to permanently enjoin the Seventh District Court of Appeals from enforcing its order tolling the Form G&T (83) leases on the Claugus property and a writ of mandamus directing the Seventh District to vacate its tolling order.

The Court laid out that in order to be entitled to a writ of prohibition, the moving party must establish “(1) the court of appeals is about to exercise or has exercised judicial power, (2) the exercise of that power is unauthorized by law, and (3) denying the writ would result in injury for which no other adequate remedy exists in the ordinary course of law.” The Court also noted that “Even if Claugus Family has an adequate remedy in the ordinary course of law, it may be entitled to a writ if the court of appeals ‘patently and unambiguously’ lacked jurisdiction.”

Similarly, for Claugus to be entitled to extraordinary relief in mandamus, it must “establish a clear legal right to the requested relief, a clear legal duty on the part of the court of appeals to provide it, and the lack of an adequate remedy in the ordinary course of law.”

The Court ultimately found that Claugus had an adequate remedy in the ordinary course of law because it had a chance to intervene during the Seventh District Appellate proceedings. Despite Claugus not receiving formal notice of the proceedings, Claugus’ counsel admitted to knowing about the September 26, 2013 tolling order sometime in October 2013. The decision rendered on the merits of the appeal did not occur until September 26, 2014. Thus, the Court found that Claugus should have moved to intervene during this eleven-month period.

The Court, in applying the part of the test requiring relators to demonstrate a lack of jurisdiction, ruled that the Seventh District had jurisdiction to issue an order to maintain the status quo during the course of appeal, and the tolling order did that. For these reasons, the Court denied Claugus’ writs of prohibition and mandamus, resulting in the validity of the original tolling orders

Beck’s motion for a tolling order

As Beck had done in each of the lower courts, it also asked the Ohio Supreme Court to toll the leases at issue in these cases during the pendency of the appeal to the Ohio Supreme Court. While Beck prevailed on every other issue in the case, it did not prevail on this point.  The Court, in a brief statement, denied Beck’s motion to toll the terms of the Form G&T (83) leases during the proceedings before the Ohio Supreme Court.

What to take away

Broadly, the Claugus decision seems to reaffirm the Court’s intention to apply traditional contract law concepts and analysis to oil and gas leases and to enforce leases as written, without allowing amorphous public policy arguments supplant traditional analysis to any greater extent with oil and gas lease disputes than with any other contract dispute.

More specifically, the Claugus decision (1) approves and refreshes old precedent which holds that under lease terms such as those at issue in these cases, delay rentals allow a lessee to extend a lease through only the primary term of the lease, and (2) holds that the phrase “capable of being produced,” when used in connection with the right to extend a lease into the secondary term, refers only to production from a well, not the possibility of production from undeveloped land, and (3) holds that Ohio law does not impose an implied covenant to develop when a lease requires development to commence within a certain period or when the lease specifies that no implied covenant shall be read into the agreement.

No ifs ands or butts about it: Ohio plaintiffs must prove injuries are “reasonably foreseeable”

Our colleagues on Porter Wright’s product liability team shared an alert about a decision that should be of interest to our manufacturing readers. In Butts v. OMG, Inc., et al., the Sixth Circuit Court of Appeals clarified that a plaintiff’s burden, when bringing a design defect or inadequate warnings claim under the Ohio Products Liability Act, is to prove the injury was reasonably foreseeable to the manufacturer. Read more

The dawn of .sucks — protecting your brand

Our colleagues at Porter Wright’s Technology Law Source blog have watched the launch of hundreds of new generic top-level domains (gTLDs) through the past several months. Introduced to increase competition in the domain name market, and enhance the Internet’s stability and security, these new gTLDs are projected to change the face of the Internet and how we use it. Today, our attorneys share an article that should be of interest to anyone with a recognizable brand: The .sucks gTLD entered its sunrise period. What does that mean? If unclaimed, brand owners could wake up to a full-fledged — and completely legal — gripe site come September. Read more

2015-2016 Ohio budget bill proposes severance tax increase

On Feb. 11, 2015, the biennial budget bill appropriating money for 2015 and 2016 was introduced in the Ohio House of Representatives. The bill incorporates Gov. Kasich’s proposals, which were released earlier this month in his Blueprint for a New Ohio. Generally, if enacted in its current form, there would be an overall reduction in personal income tax, with an increase severance tax, commercial activity tax and sales tax. This article focuses on the severance and commercial activity tax components of the bill.

Severance tax

The structure of the severance tax would be altered to incorporate an average price — the spot price — into the calculation of tax owed for extraction of natural resources horizontal drilling techniques. In the bill, a “horizontal well” is defined as “a well that is drilled for the production of oil or gas in which the wellbore reaches a horizontal or near horizontal position in the Point Pleasant, Utica, or Marcellus formation and the well is stimulated.” The new severance tax formula for those horizontal wells would be: Continue Reading

Ohio’s appellate courts wrestle with oil and gas issues concerning domestic relations and dual-agent Realtors

We have spilled a lot of “digital ink” on this blog addressing how Ohio courts have confronted oil and gas disputes about Ohio’s Dormant Mineral Act (DMA) and regulatory/zoning matters. As we noted previously, there are no less than five cases now pending before the Ohio Supreme Court about the DMA, presenting some 15 propositions of law. And the court still has not ruled on the long-pending Munroe Falls appeal, which addresses the extent to which municipalities may be preempted from applying zoning regulations to state-permitted oil and gas wells.

It has been interesting for those of us who practice in the firm’s Appellate and Supreme Court Practice Group to watch Ohio’s oil and gas boom touch other areas of the law, beyond the predictable DMA, leasing, and regulatory contexts. Two recent appellate decisions from Guernsey County – one of which is set to be argued before the Ohio Supreme Court in May – reflect how Ohioans’ interest in valuable mineral rights is affecting other facets of the law.

Is income from an oil and gas lease marital property?

On May 5, the Ohio Supreme Court is scheduled to hear arguments in Kuhn v. Kuhn n.k.a. Cottle. In Kuhn we see the effects of the oil and gas boom in the context of a divorce. Mr. Kuhn owned certain property, including mineral rights, before the parties were married. After their marriage, the husband’s property became the marital residence. Four years into their marriage, Mr. and Mrs. Kuhn executed an oil and gas lease with Gulfport Energy Corp., leasing the property for oil and gas development. The lease provided for a signing bonus of more than $120,000 and 20% royalties from any future oil and gas production. Continue Reading

The Dormant Mineral Act: Lots of questions, few answers

Litigation over Ohio’s Dormant Mineral Act, R.C. 5301.56, (DMA) began as a trickle in 2012 and turned into a flood in 2014 that continues to confound mineral title attorneys and challenge judges. Questions about the DMA have all but paralyzed oil and gas companies still looking to acquire and develop mineral leases. Now all eyes are on the Ohio Supreme Court for guidance on myriad questions regarding the validity and application of the statute. This post provides an update of DMA appeals and issues pending before the Ohio Supreme Court to date.

Though the Ohio Supreme Court hasn’t yet issued any decisions related to DMA, that is about to change. The court has accepted five DMA cases for review — all accepted in 2014. These five cases present a total of 15 questions of DMA law. Only two of these cases (Dodd and Buell) have been argued, at least in part (the question accepted sua sponte in Dodd was not argued). The other cases have yet to be scheduled for oral argument. In addition, six more cases present another 20 questions of law that have been appealed to the Ohio Supreme Court but are not yet accepted for review.

The overlap between many of the cases and issues highlights the hottest current DMA issues. However, this list of questions and issues is far from complete. In hindsight, we may find that the wave of DMA litigation crested in 2014, but experienced oil and gas attorneys expect litigation surrounding the Dormant Mineral Act will continue for years as landowners and courts wrestle with unique fact scenarios and title transactions. But for now, any definitive guidance from the Ohio Supreme Court would be helpful. Following are cases, issues and questions of law appealed to the Ohio Supreme Court to date: Continue Reading

Porter Wright launches Antitrust Law Source

We wanted to take a moment to announce our newest endeavor, Antitrust Law Source. Antitrust Law Source is a new site designed for visitors to quickly and easily learn about developments in this growing arena. The site will focus primarily on news and legal updates related to antitrust in a podcasting format. The podcasts will feature a variety of insights, educational offerings, discussions and interviews with thought leaders across a variety of industries.

The site is prepared by members of our firm’s Antitrust Practice Group and will feature news and information on a range of areas, including:

  • Agriculture
  • Civil litigation
  • Compliance programs/audits
  • Consumer protection
  • Criminal and civil government enforcement
  • Distribution, pricing and promotional allowance programs
  • Healthcare
  • Intellectual property/Technology
  • International issues
  • Legislative matters
  • Mergers, acquisitions and joint ventures
  • Privacy and data security

We encourage you to share your thoughts with us.

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