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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 …

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 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 …

Lawsuits Over “Fraudulent” Oil & Gas Leases Often Lack Merit

The Ohio shale boom started slowly when a few small companies quietly began acquiring mineral leases for as little as $25 per acre.  This soon gave way to a full blown land rush in the fall of 2010.  But as lease prices skyrocketed through the Fall of 2011, disillusioned lessors who signed before the peak of the market were the ones rushing – to the courthouse to file lawsuits to cancel their leases.

In order to gain leverage and legitimize their lawsuit, lessors frequently allege that their lease is “unconscionable” or they were fraudulently induced to sign it.  “Exhibit A” to these lawsuits is often a technical error in the lease signing or a “fraudulent” statement made by a landman.  There are exceptions, but many of these kinds of lawsuits have no legal basis.…

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 …

Protecting (or Defeating) Mechanics’ Liens on Oil and Gas Projects

Anyone familiar with the construction industry is aware that contractors and suppliers can protect their right to obtain payment on the project by filing a mechanics’ lien on the property.  Those same protections are also available for companies working on the construction of oil and gas wells and pipelines.  However, oil and gas projects are treated differently than other construction projects under Ohio’s mechanics’ lien statute, and there are several traps for the unwary.  This post sets out the basic guidelines for preserving lien rights on oil and gas well and pipeline projects – with a particular emphasis on how the procedures differ from those on other construction projects.  This post also explains how an owner of an oil and gas project can protect itself from “hidden liens” and the risk of double payment.

 What is Covered?

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

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 …

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. …

Ownership of Oil and Gas in Ohio

“The basic underlying theme of oil and gas law is still undeniably rooted in property concepts developed over the past 1000 years.”

Bruce Kramer, “The Mangling of Common Law Property Concepts”,
33 Washburn Law Journal 540, 568 (1994)

If you own land in Ohio, do you own the oil and gas under your feet?
We expect that most landowners would say, “Yes.” It would seem to follow, as our concept of land ownership is that one’s property includes, as they say, everything to the heavens and to the center of the earth. That concept has served us well in many aspects of real property law, but it has its limits. If a plane flies over your property is it trespassing? Closer to the point, if there is a wild raccoon on your land, do you own it? Is oil and gas like coal and trees or more like moving water? If you do own the oil and gas under your property, your property is more valuable, isn’t it? Can you be taxed for that value?
Can you
 

  • use it as security and grant a mortgage in it?
  • leave it to your children in your will?
  • sever your rights from the ownership of the surface?
  • lease your rights to it like an apartment?

On the other hand, if the landowner cannot own oil and gas in place (which is apparently the case in Ohio, like other “non-ownership” states), what is being bought and sold in that oil and gas lease? If

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 …

My Sister is a Fractivist and Won’t Sign an Oil & Gas Lease. What Can We Do?

When something is owned by more than one person at the same time, there can be problems.

Background (and we mean far back!)

Since the Statute of Westminster II, c. 22 (1285), a co-tenant has been subject to the law of waste. This rule of liability is found in the law of all states in one form or another. Therefore, as a general proposition, a cotenant may not remove minerals from concurrently owned land without the consent of the other cotenants. Williams and Meyers, Oil and Gas Law, § 502.

But waste goes both ways. Given the fugitive nature of oil, which may be drained from the land by a well on adjoining property, if the cotenant owning a small interest in the land was required to give his consent before the others could  produce the oil, he could arbitrarily destroy the valuable quality of the land.

Most states, therefore, strike a balance and allow “unilateral” production by a cotenant subject to an accounting to the other cotenant, i.e., a sharing of net proceeds.

Hypothetical

A Bonus Payment is Not Relevant to the Validity of an Oil & Gas Lease.

In Eastern Ohio, before 2010, a customary signing bonus for an oil and gas lease was usually less than $25 per acre, as it had been for years.  By the fall of 2011, after the shale boom hit, lease bonus prices had risen in leaps and bounds to their peak (so far) of about $6,000 per acre before pulling back significantly in the spring of 2012.

Naturally, everyone who did not have the foresight or nerve to hold out for $6,000 per acre was left feeling more than a little miffed.  After all, a typical bonus check on a 100 acre parcel in 2009 or early 2010 would have been $2,500 but that bonus may have swelled to $600,000 in less than two years!

Courts Do Not Decide What is “Enough”

Fortunately for our economy and legal system, a party to a contract cannot later adjust the contract price when they finally realize the value of a transaction.  In fact, it is the imbalance of information, risk tolerance, and vision among different people that is the driving force of business in the United States.

But even reasonable lessors were overwhelmed by the incredible disparity between lease bonuses paid during the shale boom.  That disparity, combined with the belief that the oil and gas companies have bottomless bank accounts, spawned lawsuits by lessors to try to break leases with the hope of signing for more.

Of course, breaking contracts requires more than just a lot of hard feelings about not getting …

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