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Oil & Gas Law Report

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

Ownership Theory of Oil and Gas Influences Bankruptcy Law in Ohio

By Jeff Fort on Posted in Contracts and Leases, Mineral Interest, Ohio, Real Estate

One of the most fundamental questions in oil and gas law is whether oil and gas in the ground are capable of being “owned.” The answer to this question shapes the law and influences legal analysis in a variety of ways.

Different states have answered this question in different ways, and the answer is not yet clear in Ohio. But the characterization under Ohio law is critically important in federal bankruptcy law, as Andy Nicoll discusses in his recent post on the Banking & Finance Law Report blog. It is worth the read.

Unitization in Ohio: Compelled Participation in the New Context of the Utica Shale

By Andrew Trafford on Posted in Contracts and Leases, Exploration & Production, Ohio, Real Estate, Regulatory

In many ways, the Utica Shale play caught Ohio off guard. The state became a main focus of the oil and gas industry almost overnight. Ohio responded by updating its oil and gas laws, including major overhauls resulting from Senate bills 165 in 2010 and 315 in 2012. But in some cases, operators and regulatory agencies are still applying old law that was written with conventional drilling methods in mind. In this post, part 3 of our series on compelled participation (see Part 1 and Part 2), we look at unitization — one of these old laws being put to new use.

What Is Unitization?

Unitization is the creation or designation of a contiguous area of land, called a “unit,” for the efficient development of the oil and gas resources underlying that land. Units can be formed by order of the Ohio Department of Natural Resources (ODNR), on application from an operator. Units also can be formed voluntarily by consent of interest owners, usually owners of the leasehold. Inevitably, the land sought to be unitized — really the geologic formation below the surface — is subject to a patchwork of different ownership interests. The operator attempts to negotiate lease rights with all such land or mineral rights owners, but it is often the case that the operator cannot reach an agreement with all of them. When an operator has the consent of all but a small portion of the land for a unit, Ohio law allows the operator to apply for ODNR to compel the non-consenting interest owners to join the unit. Continue Reading

Financing in the Energy Sector: A Primer for Lenders

By Brett Thornton on Posted in Contracts and Leases, Ohio, Real Estate

Our colleagues at the Banking & Finance Law Report recently ran a four-part series on energy financing. They compiled those articles into a resource that’s relevant to anyone involved with lending or borrowing in the energy sector. We encourage you to download the Energy Financing eBook to enhance your understanding of lending in the oil and gas industry.

ODNR Issues Two More Unitization Orders for Horizontal Utica Shale Wells

By Andrew Trafford on Posted in Exploration & Production, Mineral Interest, Ohio, Regulatory

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. Continue Reading

Drilling Deep into Ohio Regulatory and Environmental Matters

By Brett Thornton on Posted in Ohio, Regulatory

eBook: Regulatory and Environmental MattersThrough the past year, we’ve written numerous articles covering regulatory and environmental issues that affect the Ohio oil and gas industry. We compiled those articles into an eBook so businesses involved in the industry have a go-to resource on topics such as drilling permit appeals, prevailing wage law, RUMAs, waste management, emissions standards and more. Download the Regulatory and Environmental Matters eBook.

Oil and Gas Rights — Reserved? A Litigator’s Perspective On The Mong Case

By David Shouvlin on Posted in Contracts and Leases, Ohio, Real Estate

A decision out of the Eleventh District Court of Appeals of Ohio, Mong v. Kovach Holdings, LLC, 2013-Ohio-882 (Ohio 11th Dist. March 11, 2013), represents a cautionary reminder that parties should carefully review the language of contracts they enter, especially the essential terms of the document, and especially contracts that convey away property rights. That is particularly true when a party parts with property rights set forth in warranty deeds. My colleague Jeff Fort blogged about this recently and asked me to add my thoughts.

In Mong v. Kovach Holdings, the plaintiff, Joseph Mong, sold approximately 70 acres of land near Warren, Ohio, he had recently acquired from Alice McMenamin to Defendant Kovach Holdings at auction. Mr. Mong apparently intended to reserve to himself the oil and gas rights associated with the property. According to Mr. Mong, the auctioneer informed the prospective purchasers of that reservation immediately preceding and subsequent to the auction. The auctioneer confirmed that he did so in a following affidavit. The purchaser of the property, Kovach Holdings, denied that that the auctioneer described any such limitations or reservations. The property sold for $245,300.

The parties shortly thereafter executed a standard purchase agreement, but which included the following handwritten language: “Gas + oil Royalty Reserved by Present owner.” Mr. Mong argued this language revealed that the oil and gas rights were not a part of the sale to Kovach Holdings. The problem, for Mr. Mong at least, was that the subsequent warranty deed by which Mr. Mong conveyed the property included no comparable language. It did, however, include merger language. Continue Reading

Exploring the Disposal of Fracking Waste Water — UIC Class II Wells in Ohio

By Jeff Fort on Posted in Exploration & Production, Ohio, Regulatory

As discussed in an earlier post about the management of oil field wastes, most exploration and production waste is not regulated as a hazardous waste. Instead, it is regulated as a solid waste. Even so, as discussed in a recent article by Stephen Ellis:

“One of the biggest problems in the oil and gas industry today is water management. Solving the technical and economic challenges around managing the millions of gallons of water used to properly fracture tight oil and gas wells has been called the holy grail of the industry by Southwestern Energy CEO Steve Mueller. He estimates that water transportation (primarily trucking) costs around $1.5 million (25%) of the $6 million that an average Marcellus well costs.”

See: Stephen Ellis, “Oilfield Water Management: The Oil And Gas Industry’s Holy Grail,” Seeking Alpha, March 31, 2013.

Water Used in Operations

Water is used in the drilling of the well. It is also used in the stimulation — i.e., fracking — of the well. According to the Ohio Department of Natural Resources (ODNR), most of the water used in fracturing remains thousands of feet underground in the formation. However, about 15-20 percent returns to the surface through a steel-cased well bore and is temporarily stored in steel tanks or lined pits. The wastewater that returns to the surface after hydraulic fracturing is called flowback. Later, as the well is producing hydrocarbons, it also produces water named, appropriately enough, “produced water.” Continue Reading

Top 5 Construction Cases of 2012

By Ryan Sherman on Posted in Ohio, Pipelines

2012 saw several major cases decided by Ohio courts that impact Ohio construction law and the way companies do business. Given the industry connection, oil and gas project owners, contractors, and suppliers could be affected by some of these rulings. Here are what we believe to be the Top 5 construction cases of 2012:

#1 Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476
(Oct. 16, 2012).

Key Holding — Ohio construction companies may not be able to rely on their commercial general liability policies to cover claims for alleged defective work.

This case brought to the Ohio Supreme Court the much debated question of whether a standard commercial general liability insurance policy covers claims against a contractor for alleged defective and improper work. The court held that the policy does not cover such claims. The court based its ruling on its determination that the claims did not arise from an “occurrence,” which is defined in the policy to mean an “accident.” Because the work itself was not an “accident,” there was no coverage under the policy.

Takeaway: Meet with your insurance professionals to review your coverage and address this crucial issue. Do you have coverage for defective workmanship claims? Continue Reading

Due Diligence in Lending to the Oil and Gas Industry

By Chris Baronzzi on Posted in Other Articles

Lenders venturing into Ohio’s oil and gas industry need to be aware of unique features of the industry and how to conduct due diligence to properly evaluate risk. Successful lenders understand how the maturity of an oil and gas play, unique features of oil and gas assets, and a borrower’s experience can impact risk. Unique lending arrangements can help mitigate risk for all parties. My guest post on Porter Wright’s Banking and Finance Law Report helps lenders appreciate these basic concepts.

Management of Oil Field Wastes

By Jeff Fort on Posted in Exploration & Production, Ohio, Regulatory, Shale

The disposal of wastes associated with oil and gas production continues to draw the attention of regulators and concerned citizens. In a series of articles we will examine the waste issue from the characterization of these wastes (discussed below) and their ultimate disposal in underground injection wells.

A Brief History of Waste Management and RCRA

By the 1960s it was becoming clear that the country had a waste management problem. The only modern environmental law on the books at the time was the Clean Air Act. So the Solid Waste Disposal Act of 1965 was enacted as an amendment to the air law. This initial foray into comprehensive waste regulation proved inadequate in many respects.  The treatment, storage and disposal of waste — even defining what a waste is — is complicated, especially when recycling is considered.

The modern regulation of solid and hazardous waste can be traced to 1976 with the enactment of the Resource Conservation and Recovery Act (RCRA). Generally, when looking at the world through the lens of RCRA, all material is either a product or a solid waste. A subcategory of solid waste is hazardous waste that is regulated under Subtitle C of RCRA. Continue Reading