The Ohio Department of Natural Resources (ODNR) recently issued two more unitization orders pursuant to R.C. 1509.28. These two orders bring the total number to four since the beginning of the Utica Shale play.
As we discussed after the last order was released, this statute is becoming a valuable tool for operators as they cobble together the rights to drill horizontal production wells. In the early stages of the Utica shale play, each new unitization order is noteworthy for operators who are trying to plan drilling units and to help companies evaluate their lease holdings.
The process of unitization is conceptually related to mandatory pooling (R.C. § 1509.27), and is part of our ongoing blog series on Ohio’s compelled participation laws. (Read part 1 and part 2.). A unitization order allows oil and gas operators to join, or unitize, recalcitrant mineral owners to create large tracts of land — often comprising hundreds of acres — necessary to profitably and efficiently produce hydrocarbons from shale formations while protecting each owner’s correlative rights.
On March 28, the Chief of the Division of Oil and Gas Resources Management (DOGRM — the oil and gas wing of ODNR) issued two orders to BP America Production Company (BP): the Lennington Unit and the Zerovich Unit.
The Lennington Unit: 500.13 acres/ 38 tracts / Trumbull County
In granting an order for the Lennington Unit, DOGRM encountered a new situation. BP had successfully negotiated lease agreements with owners of 30 tracts within the proposed unit comprising 93% of the total acreage in the unit. But unlike prior orders granted to Chesapeake (Rufener and Colescott South), the other eight tracts in the Lennington unit are already leased by operators, specifically EnerVest and Braxton Acquisitions, LLC. BP was unable to secure a joint operating agreement with the other operators so it applied to unitize their mineral rights in the Lennington Unit. In forming the unit, DOGRM forced the already leased tracts to take a working interest in the proposed unit, calling them “uncommitted working interest owners.”
The Lennington Order requires the uncommitted working interest owners to share in all charges, credits, and expenses for wells, tanks, pumps, machinery, materials, equipment and all other unit operation expenses. If those uncommitted working interest owners do not contribute their share, BP is required to carry them but may assess a risk penalty of 300% of such costs before distributing their working interest payments.
(Order for Unit Operations of the Utica/Point Pleasant Formations for the Lennington Unit, Trumbull County, Ohio. Order No. 2013-10, March 28, 2013.)
The Zerovich Unit: 653.78 acres / 61 tracts / Trumbull County
The Zerovich Unit is a hybrid order: part unleased mineral owners, part uncommitted working interest owners. The uncommitted working interest owners — Halcon and Blackridge — were given the same terms as in the Lennington Unit. Specifically, they are joined as working interest owners in the unit, and subject to a 300% risk penalty if they do not pay their share of expenses.
The unleased mineral owners were awarded royalty interest payments of 15% of gross income, and a 85% share of net production revenue. The net production revenue will begin to pay out only after BP recovers 300% of the costs for the first well and any subsequent wells.
Interestingly, DOGRM also required BP to pay the unleased mineral owners a one-time payment (similar to a signing bonus for a lease) of $2,000 per acre. This marks the first time the DOGRM has found circumstances that warranted payment of a “bonus payment” in conjunction with a unitization order. Time will tell whether this will become customary or if it will be reserved for unusual circumstances.
(Order for Unit Operations of the Utica/Point Pleasant Formations for the Zerovich Unit, Trumbull County, Ohio. Order No. 2013-11, March 28, 2013.)
These recent orders differ from prior orders in two notable ways. First, the risk penalty is increased to 300%. In previous orders, DOGRM established a risk penalty for nonparticipating unleased mineral owners of 200% for the first well and 150% of subsequent wells. Second, the royalty awarded to unleased mineral owners is increased to 15%. Prior orders awarded the unleased mineral owners 12.5% royalty interest.