Budget bill details could mean big problems for oil and gas lessors

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COLUMBUS — Buried deep within the 2,700-plus pages of House Bill 64, Ohio’s “main operating budget” introduced Feb. 11, is wording that some landowners feel could significantly impact existing gas and oil leases.

Currently, Ohio Revised Code 1509.28 permits the Ohio Department of Natural Resources to grant unitization by owners of drilling rights on land overlying a defined pull of oil and gas — essentially granting authority to force unleased landowners to participate in a unit with majority working interest owners.

Youngstown attorney Alan D. Wenger, of the law firm of Harrington, Hoppe and Mitchell, said the existing unitization law is ambiguous, with regard to property owners who have existing leases.

The newly proposed language in H.B. 64, he said, attempts to clear that up, but not necessarily in an equitable manner.

“The new provision says that if an applicant for unitization has not reached a voluntary agreement with a mineral rights owner as to the proposed unit, the rights owner — apparently under lease or not — ‘shall be considered an unleased mineral rights owner’,” Wenger wrote in a March 8 blog post.

Wenger told Farm and Dairy that recent cases involving landowners he has represented in court have increased his concern.

“What I don’t want to see is leases ultimately being amended and the (property owner) not being able to do anything about it,” Wenger said.

During a court case the law firm had late last year with Gulfport, the director of the Ohio Department of Natural Resources put in an order that reflected each unit be treated as unleased — and said nothing about the leased landowners. “We are appealing that.”

Old law

Ohio’s unitization statute went into effect in 1965. Similar to forced pooling, where a single well is being drilled, unitization instead involves a large pool of oil and gas, oftentimes over several hundred acres.

“Unitization is an old law, but it was only used two times between 1965 and 2011,” Wenger said. “When unitization came about, there were fewer deep wells and most were on around 40 acres. Now it is not uncommon to have 1,200 acres.”

Wenger said the current unitization statute does not address situations in which an existing lease restricts a drilling unit size, in conflict with the unitization being applied for.

Wenger said there are a number of rules with forced pooling, which is addressed in ORC 1509.27 — “it gives the recalcitrant owner a 12.5 percent royalty, they get a working interest after (the oil and gas company’s) full investment, and there is language stating the surface cannot be touched.”

“But unitization always has been a question mark. Up until now, the company had to come to the lessor, hat in hand, and re-negotiate.”

If H.B. 64 is passed as is, Wenger said, all non-conforming leases would be treated like a whole new lease, which creates “a question of the legality of ignoring a valid lease,” he said.

Good concept

Wenger said unitization is a “good, prudent concept,” but landowners’ rights must not be overlooked.

“I represent a number of landowners and most don’t have a problem with (unitization),” he said. “But they want at least the same royalty as others are getting. That lease was negotiated in good faith and should not be arbitrarily changed by the ODNR.

“Property owners with existing leases should be given due process and, for example, get the same benefits new leases are getting in terms of royalty levels and up front bonuses.”

Companion bill

Other components of the state’s unitization statute are being addressed in H.B. 8, which was passed by the House and is now headed to a Senate vote.

H.B. 8 establishes a timetable by which the ODNR must make a decision on unitization applications. A hearing must be held within 45 days of an application, and a decision rendered within 30 days after the hearing.

The bill also gives the ODNR authority to grant unit rights on Ohio Department of Transportation-owned properties.

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Brian Lisik lives in Canton, Ohio. A Suburban Newspapers of America and Ohio Newspaper Association award winner for column writing and series writing.

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