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Ohio H.B. 59 — The Final Report: No New Severance Taxes But Operators May Have to Test for Radiation

Whether oil and gas drilling poses a legitimate risk for exposure to radiation has been a hot topic of recent debate. Though we occasionally hear anecdotal evidence reported in the newspapers about radioactive drilling waste being rejected by landfills, there seems to be scant evidence that radiation is a common or serious oil and gas industry problem in Ohio. Nonetheless, the Ohio Legislature and Gov. Kasich recently passed new law that all horizontal well operators should understand.

On June 30, 2013, Gov. Kasich signed H.B. 59, the budget bill, into law. The bill created a new section of the Ohio Revised Code — R.C. 1509.074 — which imposes requirements for testing, transporting and disposing “material that results from the construction, operation or plugging of a horizontal well” that might contain unusual levels of radioactivity.

The new law generally requires operators to sample and test such material for Radium-226 and Radium-228, and to dispose of radioactive material “in accordance with all applicable laws.” However, the new law has several important exceptions. An operator of an oil and gas well is not required to perform sampling and testing if:…

Who owns the minerals under Ohio Township Section 16?

Oil and gas law is, at its core, real estate law that has been shaped by a thousand years of common law and, more recently, statutory law. Ohio is no exception, and one area that has been impacted significantly by shifting legal policies and statutes is the ownership of minerals beneath “school lands” in Section 16 of Ohio’s Townships.

In the Federal Land Ordinance of 1785, Ohio was required to reserve one section of land (i.e., one square mile, usually section 16), in every Ohio township for the support of public education. Extending that federal mandate, in 1917, the Ohio Legislature passed a law that, among other provisions, provided, “It is declared to be the policy of the state to conserve … mineral resources of the [school lands held in trust] … and to this end the state reserves all gas, oil, coal, iron and other minerals that may be upon or under the said school lands… .” H.B. No. 192, passed March, 20, 1917 (107 Ohio Laws 357). Realizing the magnitude of this reservation and the fact that the Ohio Dormant Minerals Act cannot be used against government interests, my interest was tweaked and I decided to dig a little deeper.…

Ohio Supreme Court Will Hear Appeal — Do ODNR Regulations Preempt Local Ordinances?

The City of Munroe Falls filed an appeal from a decision of the Ninth District Court of Appeals, which held that some of the Munroe Falls ordinances were preempted by state legislation that vests authority to regulate oil and gas production in ODNR. We discussed the issue of preemption generally here, and summarized the earlier decision here.

Today, responding to jurisdictional briefs filed by the City of Munroe Falls and Beck Energy, the Ohio Supreme Court agreed to hear the appeal.

The parties will next file briefs, and we will keep you posted.

Readers who may wish to add their perspective to the issues pending before the Supreme Court in this appeal as “friends of the court” can refer to Rule 16.06 of the Supreme Court’s Rules of Practice, which addresses the filing of briefs of amici curiae.…

ODNR Issues New Rules for Unitization Applications

Responding to a surge in applications, the Ohio Department of Natural Resources (ODNR) has issued rules for new applications. After being relatively unused for decades, the unitization statute (R.C. 1509.28) has found new life in the current shale play and the state agency overseeing the process decided it was time to lay down some groundrules.

The new rules mostly serve to clarify the statutory requirements, but there are few substantive additions that aren’t required by statute:

  • Affidavit of attempts to lease. Most notably, the new rules require applicants to describe their efforts to lease the remaining acres in a proposed unit. The operator must identify specific details of each attempt to lease the mineral rights, including the dates of the attempts and the names of people contacted. This has long been an aspect of mandatory pooling, and has been a part of recent unitization orders, but until now was not a prerequisite to apply for unitization.
  • Visual depictions of the proposed unit. The rules describe specific dimensions and content requirement for maps and aerial photographs of proposed units.
  • Description of geological formations. The rules require a gamma-ray density log depicting the geological formations to be drilled in the proposed unit.
  • Large exhibits at hearings. As the audiences grow at unitization hearings, the new rules require applicants to bring large visual exhibits depicting many parts of the application (including the maps and aerial photographs of the proposed unit, and depictions of the geological formation).

Check out the new rules at the …

SEC Issues Investor Alert for Private Oil and Gas Offerings

We previously blogged about securities regulation of interests in oil and gas exploration and development. Industry participants, state and federal securities regulators have recently cautioned investors regarding investing in oil and gas ventures.

At the federal level, the U.S. Securities and Exchange Commission (SEC) issued an investor alert aimed at private oil and gas offerings. In addition to the usual cautions to investors to do their homework on these deals, the SEC encouraged investors to verify that the person offering the investment is licensed as a broker-dealer. The SEC recently stepped up its efforts to pursue “finders” and other unlicensed persons compensated by issuers to assist in finding investors. Companies raising investment funds need to understand that persons who they engage to assist in selling investments are required to have a securities license. Failure to do so exposes the issuer to civil liability, including rescission claims by investors, and potential criminal liability in cases where material misstatements or omissions are made in the private placement memorandum or other offering material, or other fraudulent activity is present. The investor alert cites several examples of recent enforcement actions where such illegal activity was involved.…

Ownership of Minerals Under Public Roads

This is the second post in a two-part series examining ownership of minerals located under bodies of water and roads. See part I discussing the ownership of minerals under adjoining waters.

Who owns the minerals underneath public roads in Ohio? This is really two questions:

  1. What ownership interest does the state, county, or township have in the land underlying the road? 
  2. What is the rule for abutting landowners in the event the government owns less than a fee simple absolute?

Historical Ownership Interest of the State, Counties and Municipalities

Over time, the interest acquired in the land underlying roads has changed for states, counties, and townships. Ownership interests are transaction specific, but there is a general trend. Municipal roads were usually taken in fee, while roads outside municipalities are likely to be easements unless they were granted in the past 30 years, in which case they are likely to be held in fee.…

ODNR Releases 2012 Utica Shale Production Results

Ohio law requires oil and gas operators to report prior year production from oil and gas wells on an annual basis — by March 31 of the following year. The Ohio Department of Natural Resources (ODNR) recently unveiled the 2012 production results from Ohio’s Utica shale play. These figures have been much anticipated by investors, land owners and the oil and gas industry, who are all trying to glean insights about the most productive areas and the overall potential of the play.

First, a Look Back at 2011

The first production from Ohio’s Utica Shale was realized in 2011 and reported on March 31, 2012. That data showed that merely nine Utica wells were in production during some part of 2011 — all drilled by Chesapeake Appalachian, LLC. Six of those wells were located in Carroll County. The remaining data came from wells in Portage, Harrison and Mahoning counties.

Though none of those nine wells were in production for all of 2011 (all but two were in production for less than six months), combined they still produced 2.56 billion cubic feet of natural gas and 46,326 barrels of oil, which amounted to 3.5% of the state’s overall gas production and 1% of oil production for that year. These are impressive statistics considering that Ohio had more than 50,000 conventional (vertical) wells reporting production in 2011.…

Common Oil and Gas Lease Conundrums

Understanding rights and obligations associated with oil and gas leases can be challenging. Imprecise lease language, implied legal duties, formulaic statutes and evolving case law all affect oil and gas leases in different ways. We’ve written several articles on these topics during the past several months and have compiled them into an eBook to help bring clarity to some of these issues. Download our Common Oil and Gas Lease Conundrums eBook.…

Ownership of Minerals Under Adjoining Waters

This post is the first of two articles examining ownership of minerals located under bodies of water and roads.

Who owns the minerals under bodies of water? When oil and gas were being produced in meager quantities, not many people cared. But the story is different when lease bonuses are thousands of dollars per acre and royalties could be worth millions. Now, every acre in eastern Ohio is cast in a different light and suddenly there is enormous interest in figuring out who owns the minerals beneath Ohio’s lakes, rivers, ponds, streams and reservoirs. The following press release helps drive home the point about what is at stake:…

Gaining Perspective on Ohio’s Oil and Gas Laws

Ohio’s oil and gas industry has been around for more than 120 years. That means there is plenty of perspective, and precedent, to consider when applying Ohio oil and gas law to the Utica and Marcellus shale plays. We’ve compiled a few Oil & Gas Law Report articles into an eBook to help you build a better understanding of the how the industry and the law has evolved, and where it could be heading. Download our eBook — Ohio Oil & Gas Laws: History and Perspective.…

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.…

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

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 …

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.…

Drilling Deep into Ohio Regulatory and Environmental Matters

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

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 …

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

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.”…

Top 5 Construction Cases of 2012

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?

Management of Oil Field Wastes

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.…

Life Estates: More Oil and Gas Law Implications

We recently received a question regarding our earlier post Life Estates: Oil and Gas Law Implications, wondering: “What happens to a mineral lease which the life tenant entered into and received renewal payments each year that was never ratified by the remaindermen upon the termination of the life estate and complete possession is realized by the remaindermen?”

The Noble County, Ohio Court of Common Pleas recently addressed this issue in Dickson v. Chesapeake AEC Acquisition, LLC, Case No. 212-0051. In Dickson, a life tenant entered into an oil and gas lease with an exploration company. Just before the original term of the lease expired, the lessee’s successor sent the life tenant a check, as was required to extend the primary term of the lease. The plaintiffs (the remaindermen of the life estate) returned the check and notified the lessee that the lessor owned only a life estate in the property, that the plaintiffs owned the remainder interest in the property, and that the life tenant had no right to lease mineral rights. When the dispute could not be resolved, the remaindermen sued the lessee. The remaindermen then moved for summary judgment, asking the court to declare the lease between the life tenant and the exploration company void.…

ODNR Issues Second Unitization Order for Horizontal Utica Shale Wells

The chief of the Division of Oil and Gas Resources Management (DOGRM) recently issued a new unitization order pursuant to R.C. §1509.28. This is only the second such order since the beginning of Ohio’s shale drilling boom. The unitization statute has become an increasingly important legal tool for oil and gas operators. We are seeing a new body of law take shape in Ohio, and last week’s order doubled its volume.

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 the large tracts of land — often comprising hundreds of acres — that are necessary to profitably and efficiently produce hydrocarbons from shale formations while protecting each owner’s correlative rights.…

A Tool of Last Resort: Mandatory Pooling in Ohio

This is the second in a multi-part series on the practice of compelled participation – forcing unwilling mineral rights owners to participate in oil and gas production from their property. Part I discussed the history and constitutionality of this practice in the U.S.

Every day, crowds of title researchers and landmen pack county offices in Eastern Ohio looking for the owners of unleased property. They are discovering a quilt of landowners with varying degrees of interest in leasing their land for oil and gas drilling. But even after attempting to negotiate with landowners, oil and gas companies often cannot lease enough land to comply with Ohio’s minimum spacing laws. As a result of those laws, uncooperative landowners threaten to interfere with landowners who have leased and want to have oil produced from their land.

Fortunately, under the right circumstances, an operator or the consenting landowners may be able to invoke Ohio’s mandatory pooling laws, the most common form of compelled participation. Mandatory pooling laws force hold-out landowners to submit their mineral rights to oil and gas operations when their recalcitrance prevents an operator from meeting state spacing requirements. Read more about these and other industry terms in a previous post.…

House Bills 59 and 72 Propose Changes to Ohio Oil and Gas Law

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 …

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