The Ohio 130th General Assembly is considering two new bills, House Bills 59 and 72. Each bill proposes changes to Ohio’s oil and gas law. Following is a summary of the proposed changes relevant to Ohio’s oil and gas law in each bill.
House Bill 59
On Feb. 12, 2013, Rep. Amstutz (R-Dist 1) introduced House Bill 59, Gov. Kasich’s budget bill. The full Bill Analysis from the Ohio Legislative Service Commission is also available online. The following proposals affect Ohio oil and gas law:
1. New Taxes
The oil and gas tax changes proposed by the Kasich administration have been the most publicized part of H.B. 59. The bill would lower income taxes for all tax brackets by a total of 20% over the next three years, funded by increased oil and gas severance taxes. H.B. 59 also proposes to calculate property taxes from the true value of gas reserves based on the British thermal unit (Btu) content of the gas extracted and the true value of condensate reserves. Other tax provisions in H.B. 59 are differentiated based on whether production is from a horizontal or nonhorizontal well.
A. Nonhorizontal Wells: H.B. 59 would change ORC §5749.02 to adjust the rate of severance tax on gas from the current 2.5 cents per MCF to the lesser of 3 cents per MCF or 1% of spot market value. It would also raise the tax rate on severance of oil from 10 cents per barrel to 20 cents per barrel. It would exempt nonhorizontal wells for paying severance tax on gas if they produce less than 10 MCF per day in a quarter.
B. Horizontal Wells: H.B. 59 would change ORC §5749.02 to levy a severance tax at a rate of 1.5% of the spot market value of oil and condensate produced by horizontal wells for the first five quarters of a well’s production, with the rate jumping to 4% beginning in the fifth quarter. Gas measuring no more than 1,050 Btu would incur a severance tax of 1% of the spot market value of gas. For gas measuring more than 1,050 Btu, the severance tax would be variable, calculated according to the Btu of the gas and the spot price of gas and natural gas liquids (NGLs), with a base rate of 1.5% for the first five quarters and a base rate for gas of 1% and for NGLs of 4% after the first five quarters of production.
2. Definition of “Gas”
The definition of “Gas” under ORC §1509.01 would be changed to all hydrocarbons that exist in a gaseous state at standard temperature and pressure.
3. Horizontal Well Impact Fee
ORC §1509.06 would require operators to pay an impact fee to the County Treasurer in the amount of $25,000 per well.
4. Plugging Time Line
ORC §1509.062 would require horizontal wells to be plugged or the operator to obtain temporary inactive status of the well if no production is reported for eight consecutive reporting periods. (Current law requires annual production reports, but the bill proposes quarterly reporting for horizontal wells, as described below.)
5. TENORM Monitoring and Reporting
ORC §1509.074 is an entirely new proposed section of the Ohio Revised Code. This proposed statute imposes radiation monitoring and disposal requirements for all “material” used in, or resulting from, the construction, operation and plugging of a horizontal well that the owner does not intend to reuse in its horizontal well drilling operations (at that site or another site). The owner would be required to determine if the material is technologically enhanced naturally occurring radioactive material (TENORM) and to sample and test the material for radium-226 and radium-228. All TENORM must be transported and disposed of in accordance with “applicable law.” (Effective April 1, 2012 the Ohio Director of Health promulgated standards for TENORM handling and disposal. See OAC §3701:1-43-01 et. seq.)
6. Quarterly Production Reports
ORC §1509.11 would require horizontal well owners to report production of oil, gas, condensate and brine to the Ohio Department of Natural Resources on a quarterly basis. Reports would also be required to include a measurement of the API gravity of oil and Btu content of gas produced from a well. Finally, all well owners would be required to “retain records substantiating a production report” for seven years from the date of the report.
7. No Earthen Impoundments or Release of Brine or Hydrocarbons
ORC §1509.22 would be changed to prohibit the use of earthen impoundments to contain drilling fluids. Fluid storage pits and tanks would be required to contain a synthetic, liquid-tight liner. This section would also be changed to prohibit any release of gas, crude oil, brine or any other drilling fluids into the land or groundwater, regardless of whether the release causes a violation of the Safe Drinking Water Act, and regardless of possible injury to the environment or health.
8. Lease Assignment Notice
ORC §1509.31would require an assignor to notify the lessor and all royalty owners of any assignment or other transfer of any interest in an oil and gas lease.
House Bill 72
On Feb. 20, 2013, Reps. Brenner (R-Dist 67) and Gerberry (D-Dist 59) introduced House Bill 72, which is intended to modernize the provisions of the various Ohio statutes relating to actions by county recorders. The following proposals affect Ohio oil and gas law:
1. Lease Forfeiture Statute
ORC §5301.332 would no longer require a county recorder to note the margin of a lease that it has been forfeited. Rather, the statute would require the lessor (or the lessor’s successors or assigns) to record a separate instrument to confirm the forfeiture.
2. Mineral Abandonment Statute
ORC §5301.56 would no longer require the county recorder to “memorialize the record” that the reserved mineral interest has been abandoned by the mineral holder. Rather, the surface owner would be required to record a separate instrument to confirm that the severed mineral interest has been abandoned.
Overall, some of the proposals in both bills would bring clarity to Ohio’s oil and gas law. On the other hand, many of the proposals would make cumbersome and costly changes to Ohio law. Operators and other stakeholders in the oil and gas industry should take the opportunity to make their support or concern about these new pieces of legislation known. Porter Wright’s Government and Regulatory Affairs practice group focuses on helping our clients communicate with federal, state and local government.