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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 …

Ohio EPA Accepting Comments on Revisions to Model General Air Permits

Ohio law authorizes the Ohio Environmental Protection Agency (Ohio EPA) to “develop a model general permit for any category of air contaminant sources, or specific portions of any category of air contaminant sources,” subject to certain specified conditions. Ohio law also permits certain categories of air pollution sources to avoid the Permit-To-Install and Operate (“PTIO”) process and, instead, effectively obtain a permit-by-rule, if they meet certain rule-based “criteria, emission limitations, conditions for operation and [record-keeping and reporting] requirements.” 

On Feb. 15, 2013, the Ohio EPA announced proposed revisions to the existing general permit for oil and gas well-site production operations that incorporate the requirements of the New Source Performance Standards (NSPS) for the Oil and Natural Gas Sector (Subpart OOOO), published by the United States EPA in August 2012.

On Feb. 15, 2013, the Ohio EPA also announced a proposed new alternative general permit for oil and gas well sites. The Ohio EPA explained that the new general permit would “allow[ ] the owner/operator to install a larger flare/combustion device if they are willing to live with a tighter limit on total horsepower of the natural gas engines.”

Finally, on Feb. 15, 2013, the Ohio EPA announced proposed revisions to the general permit for unpaved roadways and parking areas with a maximum of 120,000 vehicle miles traveled per year and a new permit-by-rule for well flow back operations. 

Interested parties may submit comments on the proposed changes through March 22. Additional information about the proposed rule changes and …

ODNR’s Preemption of Oil & Gas Regulation Upheld

As we discussed in an earlier post about regulatory structures, the question of who is authorized to regulate oil and gas operations in Ohio pits local governments against the state government. The state won the first round earlier this week — and it may have landed a knock-out punch.

In State ex rel. Morrison v. Beck Energy Corp., 2013-Ohio-356 (Ninth Dist.) Beck obtained a permit from the Ohio Department of Natural Resources (ODNR) to drill an oil and gas well on property located within the city of Munroe Falls, Summit County, Ohio. When Beck began drilling, the city issued a stop work order and filed a lawsuit. The city claimed that Beck’s activities were illegal because Beck did not comply with city ordinances that required Beck to obtain a city drilling permit (and pay the associated application fee), a zoning certificate, rights-of-way construction permits, post a performance bond and attend a public hearing. The trial court agreed with the city and issued an injunction. Beck appealed.

The appellate court framed the issue on appeal as, “whether the City of Munroe Falls can enforce its ordinances governing oil and gas drilling and related zoning and rights-of-way issues despite the state’s comprehensive statutory scheme for drilling set forth in R.C. Chapter 1509.” The court added that this was a case of first impression; i.e., the first time the court had considered this question.…

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.…

The Basics of Ohio Prevailing Wage Law

Many employers who infrequently deal with Ohio prevailing wage requirements often ask us how to determine whether Ohio’s prevailing wage will apply to their project. The most practical consideration is to determine whether prevailing wages apply to your project before bidding for work or seeking bids for subcontractors. Oftentimes companies who aren’t thinking about prevailing wages on the front end can have it unexpectedly derail their project budget and/or cause disputes with its subcontractors over the appropriate wages to be paid.

Consistent with this, we thought it helpful to list a few things for employers to think about when they are considering this question.

1. “Public Improvement”
Determine whether your project meets the definition of “public improvement” under Ohio Revised Code Chapter 4115. This includes “all buildings, roads, streets, alleys, sewers, ditches, sewage disposal plants, water works, and all other structures or works” constructed by a public authority or pursuant to a contract with a public authority, such as the state of Ohio, a county, or other political subdivision.…

What Does 2012 Portend for the Oil and Gas Industry in Ohio?

The start of a new year leads to annual reflection, prediction and resolution. Let’s do some of it.

Public Relations

The oil business finds itself in a public relations battle because, after all, perception is reality. This is remarkably reminiscent of the impact of nascent environmental laws on the business in the early 1980s.  Fracking, pipeline construction, brine disposal, water usage, increased severance taxes — all face resistance at every turn. While these topics are certainly deserving of discussion, our sense is that much of the resistance is fueled by mis-information or just plain NIMBYism. But unlike the 1980s, in our opinion, this time the oil business  is determined to educate the public. The movie “Gasland” was followed by the movie “Truthland.” Now Hollywood enters the fray with the movie “Promised Land.” Energy In Depth does an excellent job of promulgating information on behalf of the industry. The Ohio Oil and Gas Association  also deserves credit for trying to add balance. Hardly a day goes by that there isn’t something in the news about the promise or the threat posed by the on-coming oil and gas boom and certainly the trend will continue through 2013.

How Ohio Stacks up on Taxation of Oil and Gas Operations

This is the first in a series of blog entries regarding Ohio state and local taxes imposed on oil and gas operations.

Oil and gas operators in Ohio currently pay a variety of state and local taxes:

  • Commercial activity tax (CAT) which is a 0.26% excise tax on all Ohio-based gross receipts. The tax is paid by the recipient of the gross receipt—e.g., landowners on rent, drillers on drilling fees, and operators on mineral production. No deductions are permitted for costs. Some related-party exceptions apply.
  • Property (ad valorem) taxes. All real property in Ohio is subject to the real property tax administered by counties for the benefit of public schools, counties, cities, libraries, and other local governmental entities. In general, Ohio real property taxes average 2.25 to 2.75% of fair market value per year. Ohio counties do not use a consistent method for assessing oil and gas properties. In the future we expect to see some standardization for taxing severed mineral estates—for example, separate parcel numbers used and/or more efforts to tax minerals even if not being actively produced. We expect to provide a more detailed discussion about ad valorem property taxes and severed mineral interests in the near future.
  • State unemployment and workers’ compensation taxes like other employers.
  • State sales and use taxes on taxable purchases of goods and services.
  • Municipal income taxes on company’s taxable income in some locales.
  • Drillers’ and operators’ employees pay state and local income taxes like other employees.
  • Ohio severance taxes:
    – 20 cents

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 …

‘Tis the Season For Holiday Workplace Issues

As much as everyone loves them, the holidays create increased risk of employer liability and can result in a long list of legal problems for an unprepared employer. Our colleagues over at Employer Law Report have provided their top five holiday headaches for employers and compiled their posts into an eBook with a bonus stocking stuffer FMLA-holiday Q&A.

Check out their post which covers:

  • Avoiding Holiday Party Liability When the Office Santa Tries to Teach His Employees a Few “Reindeer Games”;
  • Being Inclusive Without Being A Grinch;
  • “Holiday Attire” Does Not Include “Beer Goggles”;
  • Holiday Pay and How Not to Get Scrooged by The FLSA;
  • What if Santa Was the One Who Got Run Over By a Reindeer?; and
  • Three FMLA Stocking Stuffers: How to Avoid a Big Lump of Coal (bonus).

Ohio Attorney General Issues Guidance on Road Use Maintenance Agreements (RUMA’s)

In response to questions posed by the Richland County Prosecuting Attorney, the Ohio Attorney General recently provided guidance to public authorities about entering into Road Use Maintenance Agreements (“RUMA’s”) with oil and gas operators.  This is a distillation of the 20-page Attorney General Opinion No. 2012-029, which addressed three primary questions.

I.          May a county enter into an agreement with a private oil and gas drilling company to have the company improve and repair the county roads it uses at no cost to the county?

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 …

Is There a Right To Appeal an Oil and Gas Drilling Permit in Ohio? [UPDATE]

Surface owners, neighbors and others indirectly affected by the issuance of an oil and gas well drilling permit might be surprised to learn that they do not have a clear right to challenge the terms contained in that permit.  But, recent cases in Ohio and West Virginia have forced courts to more clearly define who can appeal the issuance of an oil and gas well drilling permit.

In most States, when an operator wants to drill a new well, it has to obtain a drilling permit from the State agency charged with regulating those activities.  Those permits affect other parties, namely landowners, neighbors, and other oil companies. In both Ohio and West Virginia, landowners are asking courts to recognize a right of appeal to challenge the issuance of an oil and gas well drilling permit.  The laws in both States will inevitably be litigated and that process has begun.

Who Has The Right To Appeal The Issuance Of A Drilling Permit Under Ohio Law? 

Reserving Fractional Mineral Interests – A Trap for the Unwary

“Pipeline lawyers” represent the crude oil purchaser (the company that typically owns the pipeline where the oil is delivered).  They are called upon to interpret deeds, wills, assignments, and other documents whereby a grantor purported to convey or reserve some interest in oil and gas. They also ascertain legal title to the oil delivered to the pipeline  and prepare a “Division Order Title Opinion.” The Division Order Title Opinion was the foundation for a Division Order that specified how the payments for the oil and gas were apportioned. It can be more difficult than it sounds, especially when people who don’t know what they are doing have drafted the instrument.

More Money, More Problems

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 …

Employment Relations Seminar – Columbus

Porter Wright’s Labor and Employment Practice will host their Fall Employment Relations Seminar in Columbus on Tuesday, October 30.    As some of the topics may be of interest, we wanted to share the information with you.

“What Lurks In the Shadows? Facing What Haunts Your Workplace” will focus on the following topics:  

  • Trick or Treat?   The Shadowy Problems of  Prescription Drug Use in the Workplace 
  • Who’s Really Under that Mask?   How Far Can Employers Go to Vet Applicants
  • Re-Vamping Your Evaluation Process   Developing and Managing an  Effective Feedback Process
  • Finding Your Way Out of the Darkness:  Crafting “Exit Strategies” for Problem Employees

For more information,  click here.

 

 …

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 …

Fracking (Fracing) Fluid Not Allowed on Ohio Roads

A common misunderstanding of Ohio oil and gas law is that it allows oil and gas operators to spread drilling fluid on Ohio roads.

The Ohio Revised Code authorizes local governments to spread “brine” produced from oil and gas wells on roads.  Ohio law does not allow drilling fluid (aka “frac” or “frack” fluid) to be spread on roads under any circumstances and does not even allow brine to be spread without authorization from a local government.

Brine ≠ Frack Fluid

The distinction between brine and drilling fluid in the oil and gas industry is critical, even if those terms are sometimes used interchangeably by the public.

The Ohio Revised Code defines brine as “all saline geological formation water resulting from, obtained from, or produced in connection with exploration, drilling, well stimulation, or production of oil or gas, or plugging of a well.”  ORC §1509.01(U).

In layman terms, brine is a naturally occurring liquid that flows from deep in the earth when an oil and gas well is drilled.  It is essentially very salty water that may also contain some dissolved minerals and other elements.  Brine is not the carefully engineered drilling fluid that oil and gas companies use to drill and hydraulically fracture oil and gas wells.…

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.…

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. …

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.…

Broker Broke on Mineral Rights Commissions

As the demand for oil and gas rights along with other mineral rights continues to grow in Ohio, more disputes will almost certainly arise and end up in the courts.  It is therefore important to keep an eye on such cases as the law governing such rights takes further shape.  As a case in point, the Northern District of Ohio recently issued an interesting ruling in Binder v. Trinity OG Land Development and Exploration, LLC, No. 4:11-cv-02621, 2012 WL 1970239 (ND May 31, 2012), regarding commissions for the leasing of mineral rights, which may have impact oil and gas leasing practices.

Background

The plaintiff in that case, Binder, alleged that he was a deal maker.  In 2009, he entered into an oral agreement with the defendants to identify property owners in Northeast Ohio and Western Pennsylvania who might be willing to sell mineral rights.  This agreement purportedly provided that Binder would receive from $50 to $200 for every acre of mineral rights the defendants leased or purchased from land owners whom Binder referred to them.  According to Binder, the defendants obtained mineral rights to over 10,000 acres through his efforts.  Binder calculated that, as a result, the defendants owed him at least $500,000.

Rather than pay Binder anywhere near that amount, the defendants sent him a check for $22,012.94. With it, the defendants included language stating that the check was full and final payment for any money they owed, suggesting that if  Binder accepted and cashed the check, he …

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