Oil & Gas Law Report

New Ohio regulations reduce minimum spacing requirements for horizontal oil and gas wells

The Ohio Department of Natural Resources – Division of Oil & Gas Resources Management (DOGRM) recently revised its rules governing spacing of horizontal oil and gas production wells. The new rules, which became effective on Oct. 10, 2019, will bring Ohio’s horizontal well spacing regulations in line with what accepted science and drilling data indicates is a more efficient and productive spacing for horizontal wells in Ohio.

Under the prior version of Ohio Administrative Code §1501:9-1-04, which applied to both conventional and horizontal wells, any oil and gas production well drilled into a pool located at least 4,000 feet in depth must be set back at least 500 feet from the boundary of the leased tract or drilling unit. That prior version of the rule also required a spacing of at least 1,000 feet between wells producing from the same pool. Continue Reading

Reference to oil & gas royalty interest deemed sufficient under the Marketable Title Act

The Ohio Supreme Court recently settled an open question under Ohio’s Marketable Title Act (MTA), determining that a reference to the type of interest created and to whom it was granted is all that is necessary under the MTA to preserve the interest. And interestingly, despite the existence of the Dormant Mineral Act (DMA), the Supreme Court applied the MTA to an oil and gas interest.

In Blackstone v. Moore, landowners filed a lawsuit against the owners of an oil and gas royalty interest underlying the landowners’ property, seeking to extinguish the interest under the MTA (Because the appellees (Kuhn heirs) had filed an affidavit to preserve their mineral interest within sixty days of receiving the Blackstones’ notice of intent to declare the mineral interest abandoned, there was no question that they had preserved their interests under the DMA). Created in 1915, the oil and gas royalty interest arose prior to the “root of title” (the last recorded title transaction before the preceding 40 years from when marketability is being determined) and therefore was subject to extinguishment under the MTA.

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State Legislature exempts oil and gas landmen from real estate license requirements

On Dec.19, 2018, Gov. John Kasich signed SB 263 into law, which amends ORC 4735 to exempt oil and gas land professionals (landmen) from the licensure requirements imposed on real estate agents and brokers. The revisions to sections 4735.01 and 4735.023 introduce the concept of an “oil and gas land professional” (new ORC 4735.01(GG)), and exempts landmen from the definition of “real estate broker,” “real estate salesperson,” “foreign real estate dealer” and “foreign real estate salesperson” through new ORC 4735.01(I)(1)(h) and (i).

SB 263 also introduces a new section 4735.023, requiring ongoing registration requirements for landmen, an annual fee, an obligation for landmen to maintain membership in a national oil and gas land professional group (such as the American Association of Professional Landmen, or AAPL), and specific disclosure requirements to landowners.

The new law will take effect in 90 days, and is a direct response to the Ohio Supreme Court’s decision in Dundics et al. v. Eric Petroleum Corp., 2018-Ohio-286, where the Court held that landmen who negotiate oil and gas leases must be licensed as real estate agents and otherwise comply with the requirements of ORC 4735.  As a result, SB 263 now provides a welcome distinction between landmen and real estate agents, and imposes more appropriate requirements and obligations for oil and gas landmen.

New Ohio tax law clarifies and expands sales and use tax exemptions for the oil and gas industry

Many thanks to Kevin Scott for his assistance in preparing this post.

On June 14, 2018, Governor Kasich signed into law H.B. 430 which will go into effect in September of 2018. The bill clarifies the language covering sales and use tax exemptions for certain oil and gas industry participants. Specifically, the new law modifies the existing statute governing the sales and use tax exemption for property used directly in producing oil or gas. Following recent actions by the Ohio Department of Taxation, H.B. 430 can help to ensure predictability and stability by reaffirming the sales tax exemptions received by Ohio oil and gas operators and service providers. Continue Reading

West Virginia joins majority view on oil and gas leasing with new cotenancy statute

On March 5, 2018, the West Virginia Legislature passed new legislation known as the Cotenancy Modernization and Majority Protection Act, W. Va. Code § 37B-1-1 et seq. (Cotenancy Statute). This new Cotenancy Statute, which became effective June 3, 2018, is intended to facilitate oil and gas development of West Virginia properties that have numerous fractional oil and gas owners. It applies to tracts in which there are seven or more owners of the oil and gas in place, and changes West Virginia law by allowing an operator to produce oil and gas without the consent of all oil and gas owners under certain circumstances.

Background

Prior to passage of the Cotenancy Statute, West Virginia law mandated consent of 100 percent of the oil and gas owners before an operator could lawfully develop the oil and gas estate. If any oil and gas owner refused to sign a lease, regardless of how small that non-consenting owner’s fractional interest, the operator was compelled to either forego development or file a partition action under W. Va. Code § 37-4-3. Through partition, an operator could acquire the non-consenting owner’s interest at fair market value, as appraised by three special commissioners appointed by the court. Continue Reading

Ohio Supreme Court rejects implied covenant to explore further

The Ohio Supreme Court’s latest oil and gas decision is good news for the industry. On Jan. 3, 2018, the Court decided Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, which held that under Ohio law, “there is no implied covenant to explore further separate and apart from the implied covenant of reasonable development.” Id. at ¶25.

The facts are straight forward and did not seem to make much difference in the decision. The Plaintiff-appellant filed suit in 2015 in Washington County against Defendant, a conventional oil and gas operator who had continuously operated a conventional Gordon Sand well on Plaintiff-appellant’s 74 acre parcel since 1981.   Continue Reading

Federal district court finds that Ohio allows deduction of post-production costs from royalty payments required to be calculated “at the well”

Last week the Ohio Northern District Court, Eastern Division issued a decision in Lutz v. Chesapeake Appalachia, LLC, N.D. Ohio No. 4:09-cv-2256, 2017 U.S. Dist. LEXIS 176898 (Oct. 25, 2017), which involved a dispute about whether Ohio follows the “at the well” rule (which allows oil and gas royalty payments to be downward adjusted to account for a lessor’s pro rata share of post-production costs) or the “marketable product” rule (which does not allow producers to adjust royalty payments to account for post-production costs).

The case has an interesting history. In 2015 District Judge Lioi certified a question of law regarding post-production costs to the Ohio Supreme Court. The Ohio Supreme Court accepted briefing and heard oral argument before returning the issue to the Judge Lioi with instructions to interpret the disputed leases according to their plain language. The Ohio Supreme Court held, “[u]nder 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 decertify the question of law submitted by the United States District Court for the Northern District of Ohio, Eastern Division.”
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Ohio Supreme Court to hear appeal on expansion of implied covenants to encompass deep rights

On March 15th, 2017, the Ohio Supreme Court accepted a discretionary appeal in Alford v. Collins-McGregor Operating Company, Washington App. No. 16CA9, 2016-Ohio-5082. The Alford appeal arises from the Washington County Court of Appeals, Ohio’s 4th Appellate District. In Alford, the 4th District declined to expand Ohio’s implied covenant of reasonable development to encompass unexplored, deep formations.

The plaintiffs in Alford sought to forfeit their 1980 oil and gas lease as to all depths below the Gordon Sand formation. The plaintiffs own approximately 74 acres that are held by production from one well – a well that has undisputedly produced in paying quantities from 1981 through the time of the case. However, the plaintiffs asserted that the defendant-operators did not have the equipment or capital to explore or produce from depths below the Gordon Sand formation; specifically, they were unable to drill a horizontal well to produce from the Marcellus and Utica shales.

The court of appeals, in applying its recent decision in Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1 (4th Dist.), refused to expand the implied covenant to reasonably develop to allow for the forfeiture of a lease as a remedy for undeveloped deep rights. However, the Alford court left the door open for the Supreme Court in saying that “this is a complex, evolving issue with no easy answer.”

Although the determination of whether an operator breached an implied covenant is an issue often dependent on specific lease language, and thus one to be addressed on a lease-by-lease basis, the Supreme Court’s decision in Alford could have statewide ramifications in litigation concerning implied covenants.

You can keep an eye on how the appeal progresses here.

Ohio appeals court requires landmen to be licensed as real estate brokers to negotiate oil and gas leases

On Feb. 17, 2017, the 7th District Court of Appeals upheld a Mahoning County Court of Common Pleas decision that ruled landmen must be licensed as real estate brokers to be compensated for negotiating oil and gas leases.

In Dundics v. Eric Petroleum Corp., 2017-Ohio-640, the plaintiffs were landmen who had negotiated leases on behalf of the defendant operator. The landmen were promised $10 per leased acre and a 1 percent working interest in any wells placed on the leased acreage. In the landmen’s suit for failure of payment, the operator successfully moved to dismiss the case on the basis that the landmen were not entitled to compensation since they were not licensed real estate brokers. The operator pointed to Ohio Revised Code Section 4735.21 in support of its motion to dismiss, which states in part:

“[n]o real estate salesperson … shall collect any money in connection with any real estate or foreign real estate brokerage transaction, whether as a commission, deposit, payment, rental, or otherwise, except in the name of and with the consent of the licensed real estate broker or licensed foreign real estate dealer under whom the salesperson is licensed at the time the sales person earned the commission.”

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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.

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