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.

Federal Court Upholds Constitutionality of Ohio’s Unitization Statute

A federal district court in Ohio recently upheld the constitutionality of Ohio’s forced pooling statute (R.C. § 1509.28) in Kerns v. Chesapeake Exploration, LLC, et al., N.D. Ohio No. 5:18 CV 389 (June 13, 2018). R.C. § 1509.28 establishes the procedure for owners to combine contiguous acreage and interests to efficiently and effectively develop the oil and gas resources underlying that land. Additionally, the statute grants the chief of the division of oil and gas resources management the authority to compel landowners unwilling to lease their land to join in drilling operations. The constitutional challenge in Kerns involved the same group of landowners whose writ of mandamus was rejected by the Ohio Supreme Court in January. Following their unsuccessful challenge at the Ohio Supreme Court, the landowners alleged that R.C. § 1509.28 violated their constitutional rights under the Fifth and Fourteenth Amendments by authorizing an impermissible taking of their property. In rejecting the constitutional challenge, the federal district court relied on previous decisions from the United States Supreme Court holding that the statute was a legitimate exercise of Ohio’s police powers to protect correlative rights and reduce waste. In deeming R.C. § 1509.28 constitutional, Ohio courts join the well-settled national consensus that unitization procedures do not constitute an impermissible taking of property.

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.

Employment & Labor Alert: Wage Hour Division Announces PAID Program to Assist with FLSA Compliance

On March 6, 2018, the Wage and Hour Division of the U.S. Department of Labor (WHD) announced a new pilot program, the Payroll Audit Independent Determination (PAID) program, which is intended to encourage employers to identify and correct potentially non-compliant practices.

According to DOL’s Q&A page on the PAID program (https://www.dol.gov/whd/PAID/#4) “The PAID program provides a framework for proactive resolution of potential overtime and minimum wage violations under the FLSA. The program’s primary objectives are to resolve such claims expeditiously and without litigation, to improve employers’ compliance with overtime and minimum wage obligations, and to ensure that more employees receive the back wages they are owed—faster.”  To read more: click here.

Challenge to Constitutionality of Ohio’s Forced Pooling Statute Rejected on Procedural Grounds

The Ohio Supreme Court recently rejected a constitutional challenge to Ohio’s forced pooling statute in State ex rel. Kerns v. Simmers, Slip Opinion No. 2018-Ohio-256. A group of landowners (the “Landowners”) sought a writ of mandamus compelling the Chief of the Ohio Department of Natural Resources (ODNR) to commence appropriation proceedings to compensate landowners with interests included in an oil and gas drilling unit through a unitization order. The Landowners alleged that the Chief’s order issued pursuant to R.C. 1509.28 was “unlawful or unreasonable” and constituted an unconstitutional taking of their property without compensation. Under R.C. 1509.36, the Landowners appealed the Chief’s order to the Ohio Oil and Gas Commission (the “Commission”). The Commission, concluding that it lacked jurisdiction to determine the constitutionality of the order, dismissed the appeal. Instead of appealing the Commission’s decision to the Franklin County Court of Common Pleas within 30 days as permitted by R.C. 1509.37, the Landowners filed a petition for a writ of mandamus to the Ohio Supreme Court.

The Ohio Supreme Court denied the writ and dismissed the Landowners’ case, reasoning that the Landowners failed to utilize the adequate legal remedy available. To be entitled to a writ of mandamus, the Landowners needed to show (1) that they had a clear legal right to appropriation proceedings, (2) that the ODNR had a clear legal duty to commence the proceedings, and (3) that the Landowners had no plain and adequate legal remedy. Under R.C. 1509.37, the Landowners could have appealed the Commission’s decision to the Franklin County Court of Common Pleas to determine the constitutionality of the unitization statute. In denying the writ, the court determined that the Landowners had a complete, beneficial and speedy remedy at law by way of an appeal to the Franklin County Court of Common Pleas as provided in R.C. Chapter 1509 and should have pursued their appeal there. While dismissing this challenge on procedural grounds, it appears inevitable that the Ohio Supreme Court will ultimately have to determine the constitutionality of Ohio’s forced pooling statute.

Ohio Appeals Court Rules on Forced Pooling Issue

The Tenth District Court of Appeals issued a ruling in Simmers v. City of North Royalton, affirming the decision of the Oil and Gas Commission which overturned a mandatory pooling order of the Chief of the Division of Oil & Gas Resources Management. The case was decided under R.C. 1509.27 — the statute utilized by conventional oil and gas operators to apply for a mandatory pooling orders. R.C. 1509.27 allows the Chief to issue a mandatory pooling order on a “just and equitable” basis to property owners that do not voluntarily enter a lease to participate in a drilling unit.

In the case, the City of North Royalton did not voluntarily enter into a lease with the oil and gas operator due to purported safety concerns. In addition, the City was required to hold a public hearing before entering the proposed lease. Prior to the public hearing, the oil and gas operator applied for a permit and for a mandatory pooling order both of which were granted by the Chief.

The City appealed the Chief’s orders to the Oil and Gas Commission. The Commission found the Chief limited his consideration of whether negotiations for a lease with the City were conducted on a “just and equitable” basis to the financial considerations of the lease, but not the City’s safety concerns. The Commission found the Chief should had considered the safety concerns of the City in his order granting mandatory pooling.

The Commission’s decision was appealed to the Franklin County Court of Common Pleas and then to the Tenth District Court of Appeals. The Court of Appeals agreed with the decision the Commission under a deferential standard of review. The Court rejected the argument of the Chief that any safety issues are addressed in the permitting stage holding it “may not provide sufficient protection to a municipality concerned about particular safety issues …”

The majority opinion elicited a dissent from Judge Sadler relying on the statutory provisions of R.C. 1509.27. In particular, the dissent focused on the protection of “correlative rights” the mandatory pooling statute afford property owners. Those “correlative rights” relate to the monetary compensation a property owner may receive from oil and gas extracted from his property and that Ohio law only permits the Commission to consider non-economic factors (such as safety) to the extent they may affect the value of the property owner’s correlative rights.

The dissent also expressed its view that the Commission did not have jurisdiction to consider safety issues in the context of an appeal from the order of the Chief granting a mandatory pooling application.

House ERE Committee Moves to Bar Chapter 78/78a Regulatory Package

On May 3, 2016, the Pennsylvania House Environmental Resources and Energy Committee (“ERE Committee”) voted 19-8 to advance a concurrent resolution that would disapprove the Chapter 78/78a regulations that were approved for promulgation by the Environmental Quality Board (“EQB”) in February of this year.  The concurrent resolution states that the regulations:  (1) violate Act 126 of 2014, which requires EQB to promulgate conventional and unconventional regulations separately; (2) disregard the Pennsylvania Supreme Court’s ruling in Robinson Township, which enjoined portions of Section 3215 of the Oil and Gas Act (also known as Act 13 of 2012); and (3) do not comply with the Regulatory Review Act.  The House and Senate have 30 calendar days, or 10 voting session days, whichever is longer, from the date the resolution is reported out of committee to pass the concurrent resolution and present it to the Governor.  If the Governor does not veto the concurrent resolution, or if his veto is overridden by the General Assembly, EQB will be barred from promulgating the regulations.

Pipeline Safety Alert: Five Questions About PHMSA’s Proposed Rules for Gas Transmission and Gathering Lines

On March 17, 2016, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) issued a pre-publication version of its long-awaited notice of proposed rulemaking (NPRM) for gas transmission and gathering lines.  The 549-page NPRM has been issued in response to issues raised in National Transportation Safety Board recommendations, congressional mandates, and Government Accountability Office reports.  PHMSA has provided a short, 60-day comment period, which will be a challenge to those developing comments on a proposed rule of this complexity and length.  For more information, read our Pipeline Safety Alert.

EPA Announces Plan to Regulate Methane from Existing Sources

Today the U.S. Environmental Protection Agency (EPA) announced the next step in its strategy for reducing methane emissions from the oil and natural gas sector: regulating emissions from existing sources.  According to EPA’s fact sheet, the agency will issue an Information Collection Request (ICR) “to require companies operating existing oil and gas sources to provide information to assist in the development of comprehensive regulations to reduce methane emissions.”  EPA plans to reach out to stakeholders about the ICR process in the next few weeks and begin the formal ICR process next month.  A draft ICR will be released for public comment.

EPA Proposes to Revise Greenhouse Gas Reporting Rule to Address Equipment Leaks

On January 29, 2016, the U.S. Environmental Protection Agency (EPA) published in the Federal Register a proposed rule that would amend the Greenhouse Gas Reporting Program for the petroleum and natural gas systems source category at 40 CFR Part 98, Subpart W, which was revised as recently as October 2015.  Specifically, EPA now proposes to add new monitoring methods for detecting leaks from oil and natural gas equipment in order to achieve consistency with the leak detection methods in the agency’s pending New Source Performance Standards rulemaking for the oil and natural gas industry.  In addition, EPA is proposing to add emission factors for leaking equipment for use in the calculation and reporting of greenhouse gas emissions.  Comments regarding the latest Subpart W rulemaking are due February 29, 2016.

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