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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 …

Ohio Oil and Gas Association Joins Ranks of Those Opposed to New Air Quality Regulations on the Oil and Gas Industry

As we reported in the Oil & Gas Law Report on August 29, the U.S. Environmental Protection Agency issued new air regulations for the oil and gas industry on April 17, 2012. 
As summarized by the EPA:

The newly established NSPS for the Crude Oil and Natural Gas Production source category regulate volatile organic compound (VOC) emissions from gas wells, centrifugal compressors, reciprocating compressors, pneumatic controllers, storage vessels and leaking components at onshore natural gas processing plants, as well as sulfur dioxide (SO2) emissions from onshore natural gas processing plants.  . . .  [The rulemaking] also revises the NESHAP for glycol dehydration unit process vents and leak detection and repair (LDAR) requirements.

A somewhat lengthier overview of the rulemaking can be found on the EPA website.

EPA was required to issue the new rules under a consent decree issued by the United States District Court for the District of Columbia in a case called WildEarth Guardians v. Jackson. Now, numerous parties are suing to overturn the revised regulations.  The American Petroleum Institute, Gas Processors Association, Domestic Energy Producers Alliance, Independent Petroleum Association of America, Western Energy Alliance, and the State of Texas have all filed petitions for review, along with the Ohio Oil and Gas Association (OOGA) and the oil and gas associations of Indiana, Illinois, Kentucky, Pennsylvania, Texas, and West Virginia.  The Virginia Oil & Gas Association has moved to intervene in the proceedings as well.  According to the oil and gas associations’ …

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? 

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 …

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. …

The sale of oil and gas working interests is the sale of a security

It is unfortunately commonplace for many participants in the oil and gas industry, particularly in the sale of interests in oil and gas production activities, to ignore the requirements of federal and state securities laws applicable to these activities.  However, the sale of an oil & gas working interest is the sale of a “security” under the securities laws, and the disclosure requirements of these laws apply just the same as the would in the sale of stock or an interest in a limited liability company.

Non-operating working interests in oil and gas leases are “securities” under the Securities Act of 1933 (the “Securities Act”), the Securities Exchange Act of 1934 (“Exchange Act”), and the Ohio Securities Act (“OSA”) because (i) working interests are “fractional undivided interest[s] in oil, gas or other mineral rights” [1] or “interests in or under oil, gas or mining leases” [2] and (ii) working interests coupled with an operating agreement and a promotional scheme are “investment contracts” under thes provisions.  A non-operating working interest owner in an oil and gas lease (“NWI”) is an undivided co-owner and tenant in common with the other working interest owners in an oil and gas lease. By definition, a NWI owns (i) a “fractional undivided interest in oil, gas, or other mineral rights” under the Securities Act, (ii) a “participation in . . . any oil, gas, or other mineral royalty or lease” under the Exchange Act, and (iii) an “interest[ ] in or under oil, gas or mining …

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. 

 …

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:…

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.…

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 …

Waterless Alternatives to Fracking Attract Attention

As public concern about hydraulic fracturing (“fracking” or “fracing”) grows and historic drought conditions parch most of the country, the limelight is focused on technologies that offer alternatives to traditional hydraulic fracturing, which uses large volumes of water. 

One of the more established technologies in this emerging market is a process that uses liquid petroleum gas (or “LPG”) gel to replace water in traditional fracking operations.  The LPG gel is composed primarily of propane or butane gas.  GasFrac Energy Services, Inc. has used its proprietary LPG gel fracking process on more than 1,000 wells in Canada and the United States.  GasFrac is expected to dramatically expand its operations in the Utica and Marcellus shale plays in the coming months and years. 

Another alternative to traditional hydraulic fracturing that operators have been testing uses carbon dioxide or nitrogen foam instead of water.  This technology, being marketed by Baker Hughes under the trade name “VaporFrac,” uses merely 10% of the water needed for traditional fracking.  Earlier this year Chesapeake reported that it fracked a well in Portage County, Ohio using carbon dioxide foam.

Finally, Chimera Energy Corporation is pioneering a new process it describes as a “revolutionary exothermic non-hydraulic extraction process.”  Although Chimera has not disclosed the details of the process, its website explains that the process relies on a chemical reaction among various metal oxides to create extreme heat and pressure to force open shale fractures and release trapped oil and gas.  The process is apparently completely waterless but …

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 …

New ODNR well construction standards expected to be effective August 1, 2012

Said to be environmentally safe and business-friendly, the new ODNR well construction standards, are slated to be effective the beginning of August.
ODNR’s new well construction standards will ensure that the nationally-recognized standards for steel, cement and operations are used to promote safety, generally, and to protect groundwater, specifically – with plenty of ODNR supervision to be sure.

 

 

Some highlights include:

  •  An owner shall set and cement sufficient surface casing at least fifty feet below the base of the deepest underground source of drinking water (USDW), or at least fifty feet into competent bedrock, whichever is deeper, and as specified by the permit, unless otherwise approved by the chief. Surface casing shall be cemented before drilling though hydrocarbon bearing flow zones or zones that contain concentrations of total dissolved solids exceeding ten thousand milligrams per liter unless otherwise approved by the chief.
  •  All casing installed in a well shall be steel alloy casing that has been manufactured and tested consistent with standards established by the American Petroleum Institute (API).
  •  In order to verify casing integrity and proper cement displacement, the owner shall pressure test each cemented casing string greater than two hundred feet long in accordance with specified testing procedures.
  •  Before drilling below the first casing string, the owner shall either crown the location around the wellbore to divert fluids to a flow ditch, or construct a liquid-tight cellar at least three feet in diameter to prevent surface infiltration of fluids adjacent to the wellbore.
  • All cement placed
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