Oil and gas production increased by 640% from 2012 to 2013 according to a report published by the Ohio Department of Natural Resources. The one year increase was the largest in Ohio history and is the most natural gas that Ohio has produced since 1982. Much of the increase is due to the production of 352 active horizontal wells in Ohio, which have overtaken the production of over 51,000 vertical wells. To date, Ohio has approved 1,386 permits for horizontal drilling with 470 wells in production or capable of production. Officials project that another 700 wells will be drilled in 2014 and 800 in 2015.
The State Journal reports that American Energy – Marcellus LLC, a subsidiary of Oklahoma City based American Energy Partners LP, has agreed to acquire 48,000 leasehold acres in Doddridge, Harrison, Marion, Tyler and Wetzel Counties in West Virginia from East Resources, Inc. and an unnamed third party. The deal to acquire West Virginia leasehold properties is part of a larger $4 billion effort by American Energy Partners to enter the Southern Marcellus and Permian Basin plays in West Virginia and West Texas and to expand its holdings in the Utica Shale in Ohio. The companies plan to operate four to six rigs on the newest West Virginia and Ohio acquisitions by the end of 2014. American Energy – Marcellus LLC expects the West Virginia property to produce 135 million cubic feet of natural gas equivalent per day by the time the deal closes.
The Sixth Circuit recently affirmed summary judgment granted to Chesapeake Appalachia, L.L.C. by the Southern District of Ohio court, holding that Chesapeake could extend its oil and gas lease with the plaintiffs on the same terms in the original lease. In Eastman v. Chesapeake Appalachia, L.L.C., the plaintiffs had argued that a provision providing Chesapeake with an option to “extend or renew under similar terms a like lease” required renegotiation of the lease’s terms. The court held that the lease could be unilaterally extended by Chesapeake, and that they would also have had the right to renegotiate a renewed lease.
“The 2014 Babst Calland Report – Appalachian Shale Industry in Transition: Evolving Challenges for Producers and Midstream Operators” comments on key issues facing producers and midstream operators from a legal and regulatory perspective, including:
- Governments and politics are playing a major role in shale energy. State elections will shape how the industry operates. In Ohio and Pennsylvania, the tax debate is still very much alive. In West Virginia, a gas severance tax has been in effect and has remained unchanged despite attempts to raise it. The industry faces increased budgetary and operational challenges from legislative sessions in all three states. Politically-driven developments continue to impact the prospects for new and existing underground injection wells, ranging from new seismic testing requirements to public objections to pending permit applications.
- Regulatory issues remain fluid for the Appalachian shale gas industry. There is no shortage of regulation for the burgeoning shale gas industry, particularly given the degree of transparency, public scrutiny and political influence for and against the extractive industries. A large number of regulatory issues remain, requiring constant attention to developments and details across a spectrum of subjects including: reporting, permitting, well site construction, impacts to species, and unique standards for water and air quality.
- Local government regulation of the industry is expanding. The line between state and local control is still being tested in the state of Ohio, while the implications of Post-Robinson Twp. (Act 13) local regulation in Pennsylvania will not be evident until later in 2014.
- Property rights and land use present more challenges than ever before. Myriad unresolved property rights, royalty disputes and land-related issues are pending in the courts. Producers in Ohio, West Virginia and Pennsylvania are facing a continuously evolving environment concerning property rights and land use.
- Safety and labor remain priorities. The industry’s workforce and supply chain partners are keys to productivity gains and maintaining the all-important license to operate. As the oil and gas industry must protect its workers 24/7, it must remain vigilant on safety compliance and labor matters.
- Next step in the transition: we are at the threshold of a manufacturing renaissance. The Appalachian Basin is playing a leading role in the United States’ production of record amounts of oil, gas and natural gas liquids. New business opportunities are rapidly developing, and the Appalachian Basin has the potential to evolve from our vastly successful resource extraction activities to reclaim its historic reputation as a manufacturing juggernaut.
To request a copy of “The 2014 Babst Calland Report,” contact info@babstcalland.com.
The Seventh District Court of Appeals issued a decision concerning the automatic termination of an oil and gas lease. The case involved an oil and gas lease which required two wells to be put into production by November of 1989 or the lease would automatically terminate. The second well was not put into production until 1995. Despite the fact that the property owner received free gas and accepted certain de minimus royalty checks, the court held that no waiver or ratification occurred and the lease automatically terminated.
On May 9, 2014, the Ohio Division of Oil and Gas Resources Management announced changes in the procedure for obtaining orders approving drilling units. The procedure, established by R.C. 1509.28, authorizes the Division to approve drilling units that contain unleased properties and properties leased to operators who decline to agree to inclusion in the proposed drilling unit. The procedure is most often used to assemble units for horizontal drilling. The changes include extending the minimum period of time between the filing of an application and the hearing on the application from 45 to 120 days, requiring the submission of additional information by affidavit in the application, and providing additional notice to the public of the hearing. The changes appear in the Division’s guidelines for administering the unitization statute.
As part of his off-year budget bill, Ohio governor, John Kasich, has proposed a top severance tax rate increase on horizontal drilling to 2.5% as part of a tax package designed to lower income-tax rates. The bill, which is expected to be supported by the Ohio Oil and Gas Association, will allow for a broader exemption for drillers from the commercial activity tax, and it would implement a gross-receipts tax at the first point of sale, after deductions for costs such as gas transportation and processing.
Since early 2012, Kasich has been pushing to increase Ohio’s severance tax on horizontal hydraulic fracturing, but has met with unwillingness by Republican legislators. His latest attempt is set to be introduced in committee today and Kasich hopes to see a full House vote on May 14, 2014. Under Kasich’s plan, Ohio would still have the lowest effective tax rate in the United States, 63% below the average tax rates of other states that have significant drilling activity.
The Ohio Department of Jobs and Family Services released its quarterly report on the shale industry last Friday. The report shows a 79% increase in core shale-related industry employment in Ohio over the last two years, with an additional 1.5% increase in ancillary jobs, such as trucking services and geophysical surveying. Areas of particularly significant growth include pipeline construction and fossil fuel electric power generation. An accompanying analysis of wage growth shows that the average wage for core industry employees was $27,003 greater than the average wage for industry jobs across Ohio. The number of businesses providing core shale services has also increased, from 610 core businesses in 2011 to 737 in 2013. A pdf of the full report can be viewed here.
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The Belmont County Court of Common Pleas ruled that a recorded will is a title transaction for purposes of Ohio’s Dormant Mineral Act. In Albanese v. Batman the trial court held that a will recorded in the county recorder’s office qualifies as title transaction and savings event even where no certificate of transfer relating to the real estate was filed. The court cited Ohio appellate courts that have held that title to real estate passes by testate succession at the time of the property owner’s death. The certificate of transfer is not that actual conveyance document, but rather the recorded will is the vehicle that transfers the property.
A Harrison County trial court issued a decision in a Dormant Mineral Act case addressing the issue of whether a release of an oil and gas lease is a title transaction affecting and preserving a severed mineral interest from being abandoned. The trial court in Schucht v. Bedway Land and Minerals ruled that a release of an oil and gas lease constitutes a title transaction under the Dormant Mineral Act. The court found that given the nature of the interest conveyed by an oil and gas lease, the release of an oil and gas lease affects title to the mineral interest as well. This conclusion was further supported by Ohio’s lease forfeiture statute (R.C. 5301.332), which provides a mechanism for oil and gas leases to be cancelled of record.
An Ohio trial court issued a decision in Marshall v. Beekay Company. The case involved an action seeking declaratory judgment as to leasehold rights for formations below the Germantown Sand Formation. The court ruled that there was no breach of the implied covenant to reasonably develop, or actual abandonment, of the rights to deeper geological formations when production was only found in “paying quantities” for formations located above the Germantown Sand Formation. The ruling is important for oil and gas producers against landowners seeking to terminate those portions of oil and gas leases covering the rights to deeper geological formations because of an alleged breach of the implied covenant to reasonably develop them when only shallower formations are being explored and produced.
The Fifth District Court of Appeals affirmed the trial court’s decision in Trico Land Company, LLC v. Kenoil Producing LLC, upholding the right to have and enforce a change of ownership clause in an oil and gas lease. The case involved a property subject to a 2008 oil and gas lease that was transferred to a new owner, who did not notify the lessee of the change in ownership. No well was drilled nor were the annual delay rental payments made until 2011 when the lessee paid all delay rental payments due under the lease. The court, quoting the Ohio Supreme Court in Harris v. Ohio Oil Co., stated that an oil and gas lease is a contract and the parties should be held to the written terms in the agreement. Because the lessor failed to comply with the condition precedent requiring written notice of a change of ownership, the lessee was relieved of its obligation to pay delay rentals annually and the lease was determined to be valid upon the lessee’s payment of the past due delay rentals.
The Ohio Department of Natural Resources has changed permitting requirements after finding a probable connection between horizontal drilling activity near a previously unknown microfault and recent seismic activity in the Mahoning County area. Moving forward, any new permits for horizontal drilling located within 3 miles of a known fault or area of seismic activity would require companies to install sensitive seismic monitors. If those monitors detect a seismic event in excess of 1.0 magnitude, activities must cease while the cause is investigated. If the investigation reveals a probable connection to the hydraulic fracturing process, all well completion operations will be suspended. ODNR will also review previously issued permits that have not been drilled.
Ohio House Bill 490, which would strengthen penalties for violating Ohio’s oil and gas regulations, is now pending before the Ohio House agriculture committee. The bill was introduced in response to illegal dumping of oil field waste. Industry officials have so far indicated support for the bill.
The Seventh District Court of Appeals issued a ruling concerning application of the Ohio Dormant Mineral Act. In Walker v. Noon, the appeals court upheld the ruling of a Noble County trial court finding that the 1989 version of the Dormant Mineral Act applied and that a severed mineral estate became vested with the owner of the surface by operation of the statute.