Legislative Update: Ohio Governor Signs House Bill No. 197 into Law

On Friday, March 27, Ohio Governor Mike DeWine signed Amended Substitute House Bill Number 197 (“House Bill 197”), passed by the 133rd General Assembly of the State of Ohio. The purpose of House Bill Number 197 is to provide emergency relief to Ohioans during the COVID-19 pandemic, in part by confirming that “essential operations of state government” will continue during the declared state of emergency, which began in Ohio on March 9, 2020.

Section 21 of House Bill 197 is of particular import to the oil and gas industry. Section 21 requires the title offices of all courts of common pleas, as well as the county map office of each county, to remain open and operational, and to allow land professionals physical access to the offices as necessary to search the records. It is intended to maintain title searchers’ access to documents that either have not been digitized or are otherwise unavailable for viewing online. Section 21 provides that each county office may impose limitations on this access, such as operating during limited hours or permitting only visits of a limited duration, and further stipulates that title searchers may be subject to “requirements and restrictions in the interest of public health.” In addition, the Bill requires all “essential services to effectuate a property transfer” (i.e., deed recording and similar services) to remain open and available across all county offices.

Section 22 extends tolling periods for various statutes of limitation, including the period of limitation for an administrative action or proceeding. It provides that any statutes of limitation set to expire between March 9, 2020 and July 30, 2020, shall be tolled for the duration of the state of emergency. This section is retroactive and relates back to March 9, 2020, the date the emergency was declared, and expires on the date the period of emergency ends or July 30, 2020, whichever is sooner.

For additional information, please contact Meredith Calfe or Scott McKernan.

Legislative Update: West Virginia Governor Signs House Bill No. 4091 into Law

On February 17, 2020, West Virginia Governor Jim Justice signed into law House Bill 4091, allowing for expedited oil and gas well permitting for horizontal wells. Under the bill, which amends W. Va. Code § 22-6A-7, operators may pay an additional fee to enter into an expedited permit application process for drilling certain horizontal wells.  The additional expedited permit fee is $20,000 for the initial horizontal well and $10,000 for each additional well drilled on a single well pad at the same location.  Within 45 days of the applicant’s submission of the permit application, the Secretary of Environmental Protection must issue or deny the permit. If there is no decision within 45 days, the Secretary is required to refund the applicant a pro-rated amount of the expedited application fee for each day with no decision, up to the 60th day, at which point the expedited fee would be fully refunded.

The bill also provides for an expedited permit modification process, allowing the operator to pay an expedited application fee of $5,000 for a modification to an existing permit. The Secretary must issue a decision on the modification within 20 days or refund the applicant a daily, pro-rated amount.

Half of the funds collected from the expedited applications will be used by the Department of Environmental Protection to cover the administrative costs of processing the applications. The remaining balance will be used for reclamation and plugging of orphaned oil and gas wells throughout the State.

The expedited permitting processes under the law do not apply to deep wells, so operators could only utilize these expedited processes for horizontal wells with target formations of the Marcellus Shale or shallower formations. The bill is effective ninety days from passage, on May 5, 2020.

Ohio’s Statutory Unitization Amended to Clarify Inclusion of Partially Leased Tracts

Ohio recently passed HB 166, effective October 17, 2019, amending Section §1509.28 of Ohio’s statutory unitization statute.  The prior version of Section §1509.28 did not specify whether all mineral owners in a tract must be leased to be included in the accounting for the minimum 65% operator ownership interest, which is the threshold required in order to apply for statutory unitization.  The Section also did not address whether an operator could count partial net-acreage interests in a tract.  For example, under the prior version of Section §1509.28, if a 10 acre tract was owned jointly by five owners, two of which had leased their oil and gas interests, it was unclear whether the operator was required to represent the leased interest as only four net acres or whether the operator was required to represent the tract as wholly unleased until all owners in the tract had entered into oil and gas leases.  The new amendment added the following clarification to the Code: “In calculating the sixty-five per cent, an owner’s entire interest in each tract in the proposed unit area, including any divided, undivided, partial, fee, or other interest in the tract, shall be included to the fullest extent of that interest.”  The amendment makes clear that for tracts with multiple owners, any type of interest held by the applicant-operator in a unitized tract counts towards the minimum 65% threshold required to apply for an order permitting forced unitization from the chief of the division of oil and gas resources management.

Newly Amended Ohio Law Exempts Landmen From Real Estate Broker’s License Requirement

On Wednesday, December 19, 2018, Governor Kasich signed SB 263 into law, which amends O.R.C. §4735 to specifically exclude oil and gas land professionals (landmen) from having to be a licensed real estate broker to negotiate oil and gas leases in Ohio. Following the Ohio Supreme Court’s decision in Dundics v. Eric Petroleum Corporation, Slip Opinion No. 2018-Ohio-3826 (September 25, 2018), independent oil and gas landmen faced civil and criminal penalties if they continued to negotiate oil and gas leases without first acquiring a real estate broker’s license. With the passing of SB 263, which goes into effect on March 19, 2019, independent landmen may continue negotiating oil and gas leases without a real estate broker’s license provided they follow the new disclosure requirements set forth in the amendment.

The newly passed legislation specifically exempts landmen from acquiring a real estate license if the transaction involves negotiating an oil and gas lease or pipeline easement. However, the landman must first register annually with the superintendent of real estate and pay a $100 registration fee. Additionally, the landman must provide the superintendent with evidence that the landman is in good standing in a national, state, or local professional organization that has developed ethical performance standards for oil and gas land professionals. When negotiating an oil and gas lease, the landman must now provide the landowner with a disclosure form that discloses their registration information and notifies the landowner that the landman is not a licensed real estate broker. The exemption does not apply to fee simple absolute transactions involving oil and gas rights, which still require the landman to be a licensed real estate broker.

Governor Justice Signs Bill Prohibiting Deduction of Post-Production Costs from Converted Flat-Rate Leases

Governor Jim Justice signed Senate Bill 360 relating to payment of royalties pursuant to flat-rate oil and gas leases on Friday, March 9, 2018. The law is effective on May 31, 2018. Previously, West Virginia law prohibited the issuance of permits for new wells or reworked wells on flat-rate leases unless the owner of the working interest agreed to pay the owner of the oil or gas a set royalty of at least one eighth of the proceeds “at the wellhead.” The Supreme Court of Appeals recently interpreted the statute as allowing the operator to deduct post-production expense when computing royalty. The bill now requires that owners of oil or gas receive not less than one eighth of the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction.

Co-Tenancy Bill Signed by Governor Jim Justice

On Friday, March 9, 2018, Governor Jim Justice signed West Virginia Senate  HB 4268, known as the “Cotenancy Modernization and Majority Protection Act” into law, effective July 1, 2018.  As discussed in our post from last week, the passage of this legislation is the culmination of years of negotiations and compromise between West Virginia elected officials, the industry, landowners and mineral owners.  The bill is designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay, by carving out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own undivided interests in the same tract of land).

Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages.  The new law states that development of oil and gas under certain conditions will not constitute waste. The bill states that any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants.  However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law.

Non-consenting co-tenants can either accept royalties equal to the highest percentage royalties paid to one of the consenting parties, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee.  Unknown or unlocatable owners will be limited to receiving royalties equal to the highest percentage royalties paid to one of the consenting parties.  The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.

The bill strikes a delicate balance between all stakeholders by protecting land and minerals owners while updating the law for the horizontal drilling era.

WV Senate and House Pass Co-Tenancy Bill, Awaits Governor’s Signature

Today, the West Virginia Senate passed HB 4268, popularly known as the “co-tenancy” bill.  Formally titled as the Co-tenancy Modernization and Majority Protection Act, the bill was designed to streamline the oil and gas leasing process and facilitate further development without unnecessary delay.  The bill passed the House of Delegates on February 15, 2018.

If accepted by the governor, HB 4268 would carve out an exception to the West Virginia statute governing waste between certain co-tenants (individuals that all own an undivided interests in the same tract of land).  Under the existing law (W. Va. Code § 37-7-2) development of oil and gas from a tract of land without the consent of all the owners, or co-tenants, of the same will result in waste, with any party committing such waste being subject to their operations being enjoined and/or treble damages.  The new law states that development of oil and gas under certain conditions will not constitute waste.

Upon final passage of the bill, any tract held by seven or more co-tenants can be developed upon the consent of 75% of such co-tenants.  However, the proposed operator must make reasonable efforts to negotiate leases with all of the oil and gas owners before they can find protection under the proposed new law.  Non-consenting co-tenants can either accept royalties equal to 12.5% of the oil or gas produced, proportionally reduced to their respective fractional interest, or elect to participate in the development and bear equal development and other costs with the lessee.  Unknown or unlocatable owners will be limited to receiving the 12.5% royalty.  The statute also allows surface owners to reclaim the oil and gas title held by any unknown or unlocatable owners after seven years.

Governor Justice of West Virginia said earlier this week that he would veto the co-tenancy bill if it found his desk, but has purportedly changed his mind.  The bill must obtain the concurrence of the West Virginia House of Delegates before being sent to the Governor’s desk.

Pennsylvania legislature attempts to inject new life into expired oil and gas leases

On October 30, Governor Tom Wolf signed House Bill 74, which amended the Pennsylvania Fiscal Code. The 90-page bill included Section 1610-E, entitled “Temporary Cessation of Oil and Gas Wells,” which codified certain rights of oil and gas lessors and lessees to extend leases during periods of temporary cessation of production. This article explores how traditional savings clauses found in leases and existing legal precedent may be impacted by Section 1610-E, and provides an analysis of potential challenges arising out of the application of this new law. Click here to read this article from the January issue of The PIOGA Press.

Oil and Gas Severance Tax Bill Fails to Reach House Floor

Pennsylvania House Bill No. 1401, which would create a severance tax and significantly change oil and gas royalty payments, recently failed to pass an important legislative hurdle.

The bill imposes a 3.2% severance tax, or drilling tax, on unconventional natural gas extraction. This tax would be in addition to the Act 13 impact fees already levied upon natural gas producers. According to drafters of the bill, the severance tax and the impact fees would equal approximately 5% of the value of natural gas sold in Pennsylvania. Additionally, the bill would alter the required minimum royalty payment under and oil and gas leases so that the lessor would not receive less than 12.5% of the gross proceeds received by the lessee on production under the lease. Under the terms of the bill, a deduction or allocation of costs, expenses or other adjustments could not be deducted from the gross proceeds before calculating the amount of royalty due to the lessor. This provision would severely limit, and at times eliminate, an operator’s ability to deduct pro-rata post-production costs from royalty payments.

Late Tuesday night, supporters of House Bill No. 1401 failed to acquire the necessary votes to push the bill to the House floor so that debate on the legislation could resume. The motion, which required 101 votes to succeed, instead received 100 votes in favor. The bill has been subject to numerous amendments which has stalled its progress.

Although this represents a setback for the bill, it is possible that further legislative action may be taken to pass it. At this point, however, it now appears that passage will be more difficult.

 

SB 576: Revised Co-Tenancy and Lease Integration Legislation Introduced in West Virginia

On March 10, 2017, Senate Bill 576 (SB 576) was introduced in the West Virginia Senate to take the place of SB 244, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. Similar to SB 244, SB 576’s stated purpose is “to encourage the efficient and economic development of oil and gas resources[;]” however, it contains a number of provisions that differ from SB 244.

If signed into law, SB 576 would create a new code section, W. Va. Code §37B-1-1, et seq., titled the “Cotenancy and Lease Integration Act,” which, like SB 244, contains both “co-tenancy” and “lease integration” provisions.

SB 576 declares in proposed §37B-1-2 that West Virginia public policy includes both “the maximum recovery of oil and gas” and the “protect[ion] and enforce[ment of] the clear provision of contracts lawfully made.” This section also states that West Virginia public policy is to “safeguard, protect and enforce” both “the rights of surface owners” and “the correlative rights of operators and royalty owners in a pool of oil and gas to the end that each such operator and royalty owner may obtain his or her just and equitable share of production from that pool of oil and gas[.]”

Proposed section §37B-1-4 allows oil and gas production on a piece of property when “two thirds of the ownership interest in the oil and gas mineral property consent to a lawful use [i.e., production] of the mineral property[.]” By contrast, SB 244 only required that a “majority” of ownership interests agree to a “lawful use.”

In addition, SB 576 (like SB 244) states that payment of royalties will be on a pro rata basis, with payments for a mineral owner who cannot be located reserved by the producer.  Unlike SB 244, however, SB 576 would specifically allow surface owners to use W. Va. § 55-12A-1, et seq. (the unknown and missing landowners statute), to lay claim to the interests of the absent or missing owners.  Finally, and importantly, SB 576 would require that a mineral interest owner who opposes oil or natural gas development be paid royalties (1) “free of post-production expenses” and (2) “equal to his or her fractional share of the average royalty of his or her consenting cotenants[,]” but “in no event may the royalty be less than his or her fractional share of one-eight [12.5%].”

SB 576 adds proposed sections §37B-1-5 and -6, which would take the place of the “Joint Development” provision in SB 244. Under proposed §37B-1-5, “[w]here an operator or operators have the right to develop multiple contiguous oil and gas leases, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease or agreement.”  Importantly, an operator may only disturb the surface of property subject to this provision if it “has a surface use agreement” with the owner(s) of the property that will be disturbed.  As with SB 244, under proposed §37B-1-6, royalty payments are based upon “production [that] shall be allocated to each lease in the proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.”  As with dissenting owners under proposed §37B-1-4, however, “[i]n the absence of specific agreement to the contrary or where deductions are authorized by statute, the royalty for all royalty owners of the jointly developed acreage who do not have leases containing express pooling and unitization clauses shall not be reduced for post-production expenses incurred by the operator.”  This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”

While SB 576 keeps the basic goals of SB 244 – development without the approval of all mineral interest owners and development of contiguous property through horizontal drilling – it contains a number of provisions designed to mollify the concerns of surface owner organizations and other property rights groups. The “co-tenancy” provision now requires a 2/3 majority of mineral ownership interests to permit development, and royalty payments to dissenting owners must not take post-production costs into account.  The “lease integration” provisions explicitly allow horizontal drilling of contiguous tracts that are each subject to production leases (provided horizontal drilling is not expressly prohibited), but if a production lease does not explicitly permit pooling or unitization, then royalty payments to the owners under that lease cannot be deducted for post-production costs.  Important to surface owners is the requirement that a surface use agreement be in place before the surface of any property is disturbed by joint development.

Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.

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