Oil & Gas Law Report

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Ownership Theory of Oil and Gas Influences Bankruptcy Law in Ohio

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.…

ODNR Issues Two More Unitization Orders for Horizontal Utica Shale Wells

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.…

Be Careful Drafting Contracts and Deeds When the Ownership of Minerals Is at Stake

A recent decision by the Court of Appeals of Ohio highlights several errors by a seller of property who may have intended to reserve mineral rights. (See Mong v. Kovach Holdings LLC, 2013 Ohio 882, Court of Appeals of Ohio, Eleventh Appellate District, Lake County, March 11, 2013.)

Facts
In August 2009, McMenamin conveyed real estate in Trumbull County to Mong. The deed contained a reservation:

“Grantor [McMenamin] herein reserves the oil and gas royalties for the duration of her natural life, but for a term not to exceed 10 years from the date hereof [August 4, 2009].”

The minerals were subject to an oil and gas lease. So at this point, McMenamin had a life estate in the royalty interest. Mong had a future interest in the royalties and a present ownership interest of the minerals.…

What Goes Up … A Quick Glance at Ohio Oil and Gas Leases in Bankruptcy

As Ohio enjoys its latest boom in oil and gas exploration, it is important to understand how oil and gas leases are treated in bankruptcy. Unsettled Ohio law regarding whether a debtor owns unextracted oil and gas as part of the debtor’s real property can make this a difficult issue. 

In In re Loveday, No. 10-64110, 2012 WL 1565479 (Bankr. N.D. Ohio May 2, 2012), the Northern District of Ohio examined whether a Chapter 13 debtor had properly included in his bankruptcy schedules his interest in unextracted oil and gas relating to the debtor’s real property. Whether the debtor’s oil and gas rights were properly scheduled was a significant factor in determining whether the debtor could retain the proceeds of the sale of his oil and gas rights. But more importantly, for the companies who sought to purchase the debtor’s oil and gas rights, knowing whether such rights were properly scheduled was necessary to determine whether the debtor had unfettered authority to sell his oil and gas rights without court approval.…

When Is an Assignment of a Lease not an Assignment of Obligations?

When oil companies transfer oil property among themselves, they frequently do so by an assignment of lease rights. Sometimes they assign all their interest under a lease, but they often assign just a portion of the lease, or reserve some interest in the property. In the event of multiple assignments — such as when party A assigns to party B, who assigns to party C, and so on — there can be confusion about what was assigned, and who is obligated to do what.

This kind of controversy set the stage for the recent decision by the North Dakota Supreme Court captioned Golden v. SM Energy Co., 2013 ND 17, Feb. 1, 2013. The Golden decision presents an interesting discussion about royalty payments, division orders and assigned obligations. Does this case portend what can happen in Ohio? Only for companies that do not learn from mistakes made in other states.…

Mandatory Pooling and Unitization in Ohio, Part I: History and Constitutionality

Landowners, in certain situations, can be compelled by the state to combine their mineral interest with their neighbors for the purpose of producing oil and gas. In Part I of a multi-part series, I explain the history and constitutionality of this practice.

What is Compelled Participation?

“Compelled participation” is the term I will use throughout this blog series to refer collectively to mandatory pooling and unitization. Mandatory pooling and unitization are variations of similar state action — forcing mineral owners to include their mineral interests with other owners in a pool or unit. In later posts the two concepts will be distinguished and discussed separately, but because they have the same legal and historical origins, it also makes sense to discuss them collectively. Admittedly, this term is imperfect, but is preferable to untangling the Gordian knot of terminology in this area of oil and gas law (see our earlier blog discussing these confusing terms).

Compelled participation occurs when an operator cannot negotiate an agreement (usually in the form of an oil and gas lease) with enough landowners to legally or efficiently develop oil and gas resources. In those situations the operator can apply for an order from a state agency forcing the recalcitrant landowners to nevertheless participate.…

Who Owns the Mineral Rights on My Property?

As oil and gas companies flock to eastern Ohio to take advantage of the Utica shale play, trying to figure out “who owns the mineral rights” continues to be a difficult and increasingly important question.

As noted in a recent post, Ohio title insurance companies are excepting from title insurance policies the ownership of the subsurface mineral rights, including interests in oil and gas, and the existence of any leases for the minerals on a given property. Apart from whether title insurance is required by a lender or requested by a party on a transaction, it is difficult to find a title company in Ohio that is willing, and qualified, to render a title opinion on the status of a property’s mineral interests.

Though title insurance companies are not providing mineral estate coverage, mineral rights title searches are still possible, but not easy. Here is the “CliffsNotes” summary:…

Is There a Right To Appeal an Oil and Gas Drilling Permit in Ohio? [UPDATE: No]

Ohio Supreme Court Rules Drilling Permits Are Not Appealable to the Oil and Gas Commission

The Ohio Supreme Court this week ruled in the case Chesapeake Exploration, LLC v. Oil and Gas Commission, Slip Opinion No. 2013-Ohio-224, agreeing with Chesapeake and holding that there is no right to appeal a drilling permit in Ohio. In doing so, the Court decided that R.C. 1509.06(F) does exclude drilling permits as appealable orders. This means that once a drilling permit is issued by the Chief, it cannot be appealed to the Oil and Gas Commission. You can read the whole opinion (it’s short). 

To learn more about this topic, read our original post.…

Is Gas a Mineral?

A case pending before the Supreme Court of Pennsylvania considers a question that seemingly has been settled in that state for 130 years: Is gas a mineral? 

In Butler v. Charles Powers Estate, Pennsylvania’s highest court will consider whether rights to natural gas produced from the Marcellus shale should qualify as “mineral” rights under an 1881 deed. The deed at issue contained an exception reserving “one half the minerals and Petroleum Oils to said Charles Powers and his heirs and assigns forever…”

In 2009, the owners of the surface estate filed a complaint to quiet title to the property, including the minerals and petroleum oils. The heirs to Powers’ estate opposed the action and sought a declaratory judgment that the reservation rights in the deed’s exception included Marcellus shale gas. The trial court dismissed the heirs’ declaratory judgment action with prejudice, holding that the heirs failed to state a cognizable cause of action based upon two Pennsylvania Supreme Court decisions — Dunham v. Kirkpatrick, 101 Pa. 36 (1882), and Highland v. Commonwealth, 400 Pa. 261, 161 A.2d 390 (1960).…

Kansas Reverses Course; Royalty Interests Reserved in the Grantor Vest Immediately

The Supreme Court of Kansas recently decided an interesting oil and gas case. The opinion in Rucker v. DeLay, 289 P.3d 1166, (Kansas, Oct. 19, 2012) contains an intriguing analysis of future royalty interests vs. mineral interests. Though the decision has interesting legal implications, it should be a practical lesson for those trying to convey or reserve oil and gas rights.

Summary of Facts

In 1924, Earl and Leah DeLay sold their farm and reserved the following interest:

“The grantor herein reserves 60% of the land owner’s one-eighth interest to the oil, gas or other minerals that may hereafter be developed under any oil and gas lease made by the grantee or by his subsequent grantees.”

Over the following nine decades Mr. and Mrs. Delay or their successors ratified two different oil and gas leases on the property but no oil or gas was ever produced.

In 2008, Mr. and Mrs. Rucker, the current owners of the property, filed a quiet title action against the DeLay heirs alleging that the 1924 deed reservation was a royalty interest that had not vested in the DeLay heirs (because there was no production) and therefore violated the rule against perpetuities (RAP). The DeLay heirs alleged that the reservation created a mineral interest and that the RAP did not apply.…

Life Estates: Oil and Gas Law Implications

Life estates have been recognized as an interest in land at common law since the Middle Ages. Even so, how they relate to the ownership of and payment for oil and gas can result in outcomes that may not be intuitive.

According to common law and statute, there can be no gap in the perpetual ownership of land. For instance, if the owner of a piece of property dies intestate, state statute (in Ohio, R.C. 2105.06) often states to whom the land will be distributed. For this reason and others, land ownership often is divided between a “present” interest and a “future” interest. Frequently, that division takes the form of a life estate and a remainder.

Life Estates Generally
A life estate is an estate that its holder, the “life tenant,” holds only for the duration of a specified person’s (usually the life tenant’s) life. At the death of the life tenant (or, if the life estate is one “for the duration of another person’s life, upon that person’s death), the property passes automatically to one or more individuals or organizations called “remaindermen.” A life estate can be created by deed, by devise in a will, or, if a will is unclear or ambiguous, by judicial implication.

Both the life tenant and the remaindermen have real interests in the property, but they do not have rights to the property at the same time. Instead, their interests in the property are “stacked in time;” the life tenant has a current, exclusive …

Ohio House Considers Proposed Legislation To Change Ohio’s Oil and Gas Regulations [UPDATE]

This week the Ohio legislature takes on a busy legislative schedule after the holiday break.  Among the many pieces of legislation getting attention are five bills pertaining to the oil and gas industry. These bills, all of them Democrat-sponsored, are up for hearing before the House Agriculture and Natural Resources Committee this week. While no further action is expected before the end of the year, these bills propose significant changes to existing oil and gas regulations and threaten to undermine the regulatory framework in Ohio. 

Here are brief summaries of the bills:

HB 537: Local Government Authority To Regulate Oil and Gas Industry

HB 537 would bring the largest changes to the regulatory landscape. This bill seeks to give political subdivisions (i.e. local governments) authority to enact their own regulations on oil and gas operations. 

The existing law, R.C. 1509.02, gives “sole authority” for oil and gas regulation to the Ohio Department of Natural Resources (“ODNR”), which prevents local governments from creating their own regulations. 

This bill removes the language from the statute that establishes the ODNR as the “sole authority” and authorizes political subdivisions to write their own oil and gas regulations. The bill preserves state regulations as a “floor” and allows political subdivisions to further restrict oil and gas operations. 

This bill would fundamentally alter the regulatory landscape in Ohio. In one of our September posts we already discussed state preemption of local oil and gas regulation through R.C. 1509.02. This bill upsets the current balance of power …

Oil & Gas Terms… Confused? You aren’t the only one

The terms “pooling” and “unitization” are often used interchangeably. To confuse the matter further, in Ohio, there are statutory definitions for a “pool” and a “drilling unit” and neither is related to a “unit.” Hopefully, this will provide some clarification.

Pooling and Unitization, Generally

To “pool” [the verb] is to combine multiples into a common entity or fund. In an unfortunate and confusing coincidence, a “pool” [the noun] is an accumulation of a liquid, including oil. As in other specialized areas of law, common terms can have special meanings – so-called “terms of art.”

In the world of oil and gas, the common understanding of pooling, a pool or a pooled unit is the joining together or a combination of small tracts or portions of tracts for the purpose of having sufficient acreage to receive a well drilling permit under the relevant state spacing laws and regulations, and for the purpose of sharing production by interest owners in such a pooled unit. Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization 1-3 (3d ed. 2006).

In contrast, “unitization” or unit operations refers to the consolidation (don’t use the word “pooling”) of mineral or leasehold interests covering all or part of a common source of supply. Id. at 1-4. That is, “unitization” refers to field or reservoir-wide development, which entails much more to accomplish than a pooled unit around a single well.

The objective of unitization is to provide for the unified development and operation of an …

Conveying Fractional Mineral Interests – The Duhig Rule

 Last month, we posted about issues that can arise when a landowner conveys or reserves a fractional mineral or royalty interest.  In addition to questions about the amount of the interest an imprecisely drafted document conveys or reserves, previously granted or retained fractional interests can create conveyancing issues as well.  Consider the following scenario: 

Suppose Adam, who owns 100% of a piece of land (both the surface estate and the underground mineral rights), sells the property to Brian under a warranty deed but reserves a 1/4 mineral interest for himself.  Brian later sells the property to Carol.  Brian intends to sell Carol the entire surface estate and 3/4 of his interest in the minerals, keeping the other 1/4 of his interest in the minerals (or 3/8 of the total minerals) for himself, so the warranty deed conveying the property includes a 1/4 reservation to Brian.  The deed, however, fails to mention Adams’ prior 1/4 reservation.

Canons Vs. Rules

Oil and Gas Pipeline Companies Can Condemn Private Property in Ohio

In Ohio, private pipeline companies regulated as common carriers or public utilities have the power of eminent domain to “condemn” or “appropriate” private property in certain situations. 

It is well known that the power of eminent domain is available to government authorities.  But, the reality of modern America is that carefully regulated private companies, not government entities, furnish much of the energy resources and utilities we enjoy everyday.  Pipeline companies that transport oil and gas to market are classic examples of private companies that do a job that serves the public welfare.  Accordingly, under certain circumstances pipeline companies have the power of eminent domain under both Ohio and federal law. 

Federal Law Allows Condemnation for Gas Pipelines in the “Public Interest.”

Currently, control of interstate natural gas pipeline construction is preempted by the federal Natural Gas Act, which assigns regulatory responsibility for almost all aspects of natural gas pipelines to the Federal Energy Regulatory Commission (“FERC”). 

Under the Natural Gas Act, natural gas companies have the right to condemn property for natural gas pipelines as long as FERC determines that the project is in the public interest and issues a certificate of public convenience and necessity to the company. 15 USC §717f.  Once that determination is made, a natural gas company may condemn property in federal district court where the property is located.  But despite federal jurisdiction, the Natural Gas Act requires the federal condemnation action to “conform” as closely as possible “with the practice and procedure in a similar …

USGS Confirms Potential of the Utica Shale; Finds Ohio Shale Oil “Sweet Spot”

Part of the mission of the Energy Resources Program of the United States Geological Survey (“USGS”) is to determine the location, quantity, and quality of U.S. mineral and energy resources.  In pursuit of that mission, the USGS recently conducted a survey of the potential of the Utica shale across the Appalachian Basin. 

The results of the USGS survey are summarized in its report, Assessment of Undiscovered Oil and Gas Resources of the Ordovician Utica Shale of the Appalachian Basin Province, 2012, recently published on the USGS website

The USGS concluded that Maryland, New York, Ohio, Pennsylvania, Virginia, and West Virginia are all in the Utica shale play.  The survey also makes some rather eye-popping findings about the potential of the Utica shale in Ohio.  The survey found that based on certain observed characteristics of the Utica shale and assumptions grounded in observations in other shale plays, Ohio is in an oil “sweet spot.”  The USGS actually defined both an oil sweet spot and a gas sweet spot in the Utica shale play as shown on the following map*: 

*Kirschbaum, M.A., Schenk, C.J., Cook, T.A., Ryder, R.T., Charpentier, R.R., Klett, T.R., Gaswirth, S.B., Tennyson, M.E., and Whidden, K.J., 2012, Assessment of undiscovered oil and gas resources of the Ordovician Utica Shale of the Appalachian Basin Province, 2012: U.S. Geological Survey Fact Sheet 2012–3116, 6 p., Figure 4.

The USGS survey projected the mean “technically recoverable continu­ous (unconventional) oil and gas resources” from the Utica and Point Pleasant shale …

Who Should Regulate Oil and Gas Operations, National, State or Local Government?

Laws and regulations are adopted at all levels of government. The scope of coverage and the need for uniformity normally dictate the  jurisdictional level of regulation. But, when the objectives of federal, state, and local governments conflict, legal battles erupt under the rally cries of “federalism,” “states rights,” “home rule,” “preemption,” and “constitutional rights.”

Some issues, such as interstate pipelines and air quality, are clearly better regulated at a federal level, while others are more suited to the state or local level. For example, uniform federal Clean Air Act regulations prevent states from creating “pollution havens” to attract business.

Similar concerns exist between state and local regulation. The state, as a whole, may want to encourage development of some kind, but communities and local authorities may have a different perspective. Such is the case for oil and gas production, fracking and brine disposal.…

Oil and Gas Surge Impacts Title Searches and Policies of Title Insurance – Part Two of a Two Part Series

As I  touched on in a recent post, the surge in oil and gas exploration and the accompanying concern with mineral rights and interests have created significant challenges for county recorders and title insurance companies across the state.  The strong demand on county offices (often in counties still feeling effects from the recession) for time to search the official record often exceeds the office’s resources and hours. The results range from interested parties banking on uncertain alternative search companies to underwriters denying mineral interests in their loan policies. 

Read on after the jump.…

Contradiction In The Ohio Dormant Minerals Act

Inconsistencies and ambiguities in the Ohio Dormant Minerals Act, Ohio Revised Code § 5301.56 (the “ODMA”), set the stage for legal battles that are just beginning.  Oil and gas operators may get caught in the crossfire.

Operators need to be aware of at least one glaring inconsistency in the current version[1] of the ODMA that sometimes makes it difficult to determine who owns a mineral interest that has been severed from the surface estate.  This inconsistency could render a lease meaningless, and make a lessee a trespasser, if the lease is not signed by the right party. …

SEC Adopts Final Rules Requiring Payment Disclosures by Resource Extraction Issuers

The Securities and Exchange Commission (“SEC”) recently adopted a final rule pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requiring resource extraction issuers (companies engaged in the development of oil, natural gas, or minerals) to disclose in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the U.S. government for the purpose of the commercial development of oil, natural gas, or minerals. Section 1504 added Section 13(q) to the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the SEC to promulgate rules requiring disclosure to be made by resource extraction issuers annually by filing a Form SD with the SEC. 

Bob Tannous, Editor of  the Federal Securities Law blog, has a post focused on the rule; as this may be of interest to many in the industry, we wanted to share it with you. 

 …

Oil and Gas Surge Impacts Title Searches and Policies of Title Insurance – Part One of a Two Part Series

Given the surge in oil and gas exploration, mineral rights and interests have taken center stage in the offices of county recorders and title insurance companies throughout Ohio.  The demand for time to search the official record in Ohio counties, as well as the uncertainty posed by purported mineral severances, oil & gas leases and/or their accompanying appurtenant rights have combined to hamper efforts in performing title searches and have caused title insurance companies to refuse to provide any sort of insurance with respect to mineral interests and their appurtenant rights.

Log Jam Outside the Recorder’s Office

EPA’s Clean Air Act New Source Performance Standards for the Oil and Gas Sector Finally Appear in the Federal Register

On April 17, 2012, the United States Environmental Protection Agency (EPA) issued final revised New Source Performance Standards (NSPS) and National Emission Standards for Hazardous Air Pollutants (NESHAPs) for the oil and natural gas industry.  Four months later, EPA published those rules in the Federal Register.

EPA’s website provides summaries of the new rules’ requirements for natural gas well sites, natural gas gathering and boosting stations, gas processing plants, natural gas transmission compressor stations, and the oil industryIn short, the rules:…

Ohio’s Oil Boom – Why It Will Be Different This Time

This is not Ohio’s first oil and gas boom. There has been a series of them. I think it is fair to say that in the past the oil and gas business had a freer rein (some would say reign). But this time things are likely to be different. With the internet, higher land prices, higher cost wells, financially-strapped governments, more laws and regulations, and environmental awareness — fundamentally, people’s expectations are different. As a result, the relationships between oil companies, mineral owners and regulators, who represent the public in general, are changing.

As in the past, the cost and availability of energy will have a major impact on Ohio. Energy independence is apparently within our grasp and Ohio needs the economic development that comes with energy resources more than ever. Do we have the will to realize it? Surely, as any “fracktivist” will tell you, whatever is realized will be the product of a new and different process.…

Gas Plant and Gas Wells Are Not Collectively a “Major Source” Due to Being “Functionally Related,” Absent Physical “Adjacency”

On August 7, 2012, the U.S. Court of Appeals for the Sixth Circuit in Cincinnati vacated a USEPA determination that a natural gas sweetening plant and gas wells supplying it constituted a single “major source” for Title V permitting purposes. The decision focuses solely on the meaning of “adjacent” in the 3-part “major source” definition, which requires:

  • common control;
  • contiguous or adjacent property; and
  • SIC code commonality.

The case involved approximately 100 sour gas production wells spread over a 43 square mile area on separate parcels located 500 feet to eight miles from a natural gas processing plant.  All of the output of the wells is pipelined to the plant. Neither the wells alone nor the plant alone have enough emissions to be classified as a Title V “major source.”  However, the combined emissions of both the wells and the plant together exceed the “major source” threshold (100 tons per year of actual or potential emissions of a regulated air pollutant, such as nitrogen oxides, sulfur dioxide, or carbon monoxide).  There was no dispute that the wells and the plant had common ownership and control, that they belonged to the same two-digit SIC code major industrial grouping, and that they were not on “contiguous” property.  The only disagreement was whether the term “adjacent” in the Title V definition of a “major source” refers to physical proximity, or to functional relationship.

The Court’s 2-judge majority relied upon the dictionary definition, etymology, and case law meanings of “adjacent” to conclude that “adjacency …

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