The chief of the Ohio Department of Natural Resources' (ODNR) Division of Oil and Gas Resources Management (DOGRM) has issued a unitization order for Chesapeake Energy Corp. in Carroll County, putting forced pooling into effect for a second time in the emerging Utica Shale.
According to the ODNR, DOGRM Chief Rick Simmers issued an order (No. 2013-06) on March 7, establishing a 549.4-acre unit -- officially known as the Colescott South Unit -- on 30 separate tracts in Carroll County's Loudon Township. Before filing its application, Chesapeake held 88.8% of the oil and natural gas leasing rights in the proposed unit, well above the 65% required by state statute.
ODNR records show that 61.6 acres, or 11.2% of the unit -- five parcels owned by Our Lady of Kilgore -- were the non-consenting acres. DOGRM held a hearing to discuss the forced pooling on Oct. 12, 2012, but no unleased mineral owners attended.
"Based on the application submitted by Chesapeake, and subsequent testimony by its employees, [we find] that the operation of the Colescott South Unit is reasonably necessary to increase substantially the ultimate recovery of oil and gas," the DOGRM said, later adding that Simmers believes "the value of the estimated additional recovery of oil or gas...exceeds the estimated additional cost incident to conducting the operation of the Colescott South Unit."
Under the terms of Simmers' order, the mineral owners who have not signed a lease with Chesapeake will receive a one-eighth royalty interest and a seven-eighth share of net production revenue, which is to be allocated according to the prorate share of their acreage in the unit. The unlicensed owners will receive payments only after Chesapeake has recovered 200% of the cost of drilling, testing, completing and producing the initial well, and 150% of the costs from any subsequent wells. The company is also prohibited from conducting any surface activity on unleased acres.
Chesapeake has proposed drilling three wells from one centralized well pad on the Colescott South Unit within the next 12 months, the ODNR said, and two additional wells within the next three years, after the initial well is completed for production.
"The unitization statute has become an increasingly important legal tool for oil and gas operators," Andrew Trafford, a Columbus, OH-based associate of the law firm Porter Wright Morris & Arthur LLP, wrote in a March 13 blog. "We are seeing a new body of law take shape in Ohio, and [Simmers'] order doubled its volume."
According to ODNR records, Simmers issued the state's first unitization order on July 10, 2012. That order (No. 2012-13) established the Rufener Unit for Chesapeake on about 958.5 acres in Portage and Stark counties. The Rufener Unit comprised 146 separate tracts, of which 24 were unleased mineral owners.
Trafford said his firm took note that Simmers did not require Chesapeake to extend a bonus payment to the unleased mineral owners in the Colescott South Unit. He had ordered the company to pay unleased mineral owners in the Rufener Unit a $1,250/acre signing bonus.
"It is not clear if the omission of this requirement signals a shift in the chief's position or if such a requirement was omitted because the evidence presented by Chesapeake established that a fair offer, including signing bonus, was already extended to the unleased owners," Trafford wrote. "We are still in the early stages of development of Ohio's shale resources, but as the play continues to develop we expect to see many more unitization orders."
The ODNR said mandatory pooling is permitted under Section 1509.27 of the Ohio Revised Code and has been in effect since October 1965. Unitization order applications are reviewed by a DOGRM geologist for completeness and are then presented to the Technical Advisory Council (TAC), which meets quarterly. Affected landowners may attend and testify at the TAC hearing. TAC then makes a recommendation to the DOGRM chief to either approve or deny the application, a decision that can be appealed to the state Oil and Gas Commission within 30 days.
According to the ODNR, there has been a "dramatic increase" in the number of unitization order applications since September 2004, when the state legislature passed bills HB 278 and HB 299. Both bills opened urbanized areas of the state to oil and gas drilling. Urbanized areas now account for 25% of ODNR drilling permits.