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Chesapeake Retools Lease Agreements in Ohio

Landowner groups in Ohio say they are battling it out with Chesapeake Energy Corp., the largest leaseholder in the Utica Shale, over the company's attempts to renegotiate leases to expand acreage and increase the size of drilling units. The landowners claim landmen are going door to door, trying to pressure them into signing on for larger drilling units so Chesapeake doesn't have to drill as many wells to hold onto its acreage.

Chesapeake sees it differently. "Many leases are not structured to address issues associated with horizontal drilling," said company spokesman Michael Kehs. "Historically, most landowners have been amenable to amending their leases to allow their minerals to be developed as part of a larger unit that can accommodate the latest horizontal drilling technology."

The Oklahoma City-based producer holds about 1.3 million net acres in the Utica Shale. It is currently operating 10 rigs in the play and plans to average 13 rigs in 2012 and 22 rigs in 2013, according to a July investor relations presentation.

"It's a win-win agreement that benefits royalty owners and facilitates more economically and environmentally efficient resource development," Kehs said.

But Ron Carlton, a board member for the nonprofit group Standing United Really Excels (SURE), disputed Kehs' assertion that modifying the leases is a good deal for the landowners.

"They've been hounding people, trying to get them to increase the drilling units from 160 to 1,280 acres," Carlton told NGI. "They've told people that they need to have these larger drilling units, but that's not true. The only reason they need it is to get the land held by production. They're telling people that if they don't agree, they won't drill on their land, they'll go around and take the gas out from underneath them, and they won't get anything."

Carlton said Chesapeake has been trying to secure larger drilling units since it first entered the Utica, but especially since it entered into a joint venture with EV Energy Partners LP (EVEP) and took over older leases from EVEP and Range Resources Corp. (see NGI, Aug. 29, 2011).

Bob Rea, a board member for another landowners group, Associated Landowners of the Ohio Valley (ALOV), said one major problem working against property owners is that unlike other shale states, Ohio hasn't set a maximum size for a drilling unit.

"Usually the maximum number of acres that are allowed to be in a drilling unit is 640 acres, with a 10% variance," Rea told NGI. "That's a good maximum number, and we followed that pattern when we created the leases for our people. The leases that we negotiated with Chesapeake stipulated that they cannot build a drilling unit larger than 640 acres," (see NGI, Nov. 7, 2011; May 16, 2011). But Rea said Chesapeake and other companies may renegotiate other leases at any time.

"A 160-acre drilling unit could fit on a lot of farms," Rea said. "But they can reshape it so that if they make it 1,280 acres; they don't have to drill another inch. That's why we don't want to see 1,280 acres until 640 acres have been developed, meaning it was developed to at least half of its potential. There is a point in which it does make sense to have a bigger unit, but not until after it's been developed."

According to Section 1501:9-1-04 of the Ohio Administrative Code, wells drilled to a depth of 1,000 feet must have a minimum acreage of one acre per well. The minimum acreage requirement increases to 10 acres for wells drilled between 1,000 and 2,000 feet; 20 acres for wells drilled between 2,000 and 4,000 feet; and 40 acres for wells drilled 4,000 feet or deeper.

Chesapeake officials did not respond as to how successful they have been to date in getting landowners to renegotiate their leases. The producer has announced plans to sell 337,481 net acres in the Utica in a corporate-wide plan to sell up to $11 billion in assets this year to pare its debt (see NGI, June 11).

Carlton said he didn't know how many landowners were agreeing to new lease terms. Last year about 450 SURE landowners signed leases for about 11,000 net acres with Rex Energy Corp. (see NGI, Sept. 12, 2011). The deal came out to an average price of $3,600 per acre, plus 20% royalties with no deductions. "People have already gotten something," Carlton said. "If they came through the SURE group or the ALOV group, they already got a really good signing bonus."

Earlier this month Chesapeake said it would appeal a U.S. District Court decision that ordered the company to pay more than $100 million for reneging on agreements to purchase three natural gas leases in Texas in 2008 (see NGI, July 16). The company is also appealing a $19.7 million judgment in a separate Texas case with plaintiff Peak Energy Corp.

In June a drilling unit of Chesapeake settled with the New York Attorney General's Office and agreed to allow more than 4,400 New York landowners locked into natural gas leases the opportunity to renegotiate their contracts (see NGI, June 18). The settlement followed a 2011 ruling against the producer, which found that despite a de facto moratorium on high-volume hydraulic fracturing in New York, Chesapeake Appalachia LLC was still required to pay property owners to hold the leases (see NGI, April 11, 2011).

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