Ohio's laws addressing old leases and conservation issues could pose some unique challenges to proponents of energy development in the state's portions of the Marcellus and Utica shales, two attorneys with the law firm Steptoe & Johnson LLP said during a presentation Wednesday.
"Ohio does not have a lot of case law and other law on oil and gas with respect to title issues," said Tim McKeen. "A lot of things are quite uncertain under Ohio law, and that can cause a lot of confusion and it can be a little bit scary at times. As things develop here, we will surely see more case law develop and change some of jurisprudence, or at least clarify some of it."
McKeen, who focuses on energy and mineral law and real estate transactions, said that since Ohio has been producing oil and natural gas for more than 150 years, it's inevitable that some landowners will run into old leases. When they do, he said, landowners' are best served by trying to obtain a formal release from the current lessee.
"That's the only fail-safe way to proceed," McKeen said. "It's a 100%, belt-and-suspenders approach to make sure that you're protected against old leases. Unfortunately most of those leases will not be formally released. People now are trying to turn some of their old wells back into production."
McKeen said state law provides landowners with two other options: affidavit of forfeiture and the Ohio Dormant Minerals Act.
Under Ohio Revised Code 5301.332 a landowner can file for an affidavit of forfeiture after going through a statutory process. According to McKeen, the landowner must first give notice to the lessee through certified mail or place a legal ad in a newspaper. If the lessee doesn't respond within 30 or 60 days, the landowner can go to the county recorder's office and have the lease marked as extinguished.
"The interesting thing about this is we don't know exactly how it's going to be treated [by the courts]," McKeen said. "How much diligence does a landowner have to do to find a lessee's successor? What burden is on the landowner? The courts haven't really interpreted this to any specifics [yet]."
McKeen said the Ohio Dormant Minerals Act, also known as Ohio Revised Code 5301.56, gives landowners a chance to have mineral interests -- oil and natural gas, not coal -- automatically reattached to their surface holdings. But McKeen cautioned that the owners of the mineral interests can defeat the process by performing certain actions within a 20-year period.
"If the mineral interest has not been the subject of a title transaction, if there has been no actual production from the land, if there is no underground gas storage, no drilling or mining permit, no recorded claim to preserve an interest, and if there's no separate tax parcel for a mineral interest, then a surface owner could claim that their minerals have reattached under the dormant mineral act," said McKeen.
He added, "if you have any of these things, you don't have to worry. Another cause to not worry as much is that in Ohio, unlike West Virginia and Pennsylvania, we see far less severances of oil and gas. Most of the severances I've seen have been relatively recent as people have understood the new value."
But McKeen also warned that there are two versions of the Ohio Dormant Minerals Act. One was enacted by the General Assembly in 1989, the current version in 2006. He said the latter has the same notification requirements as the affidavit of forfeiture, but the former doesn't.
"So the date July 1, 1986 becomes very important because the new act became effective on June 30, 2006," McKeen said. "This causes a lot of issues for us. We need to make sure we review both chains of title to see if there has been a fee severance. If the severance is before 1986, we need to determine if the oil and gas owner has done something with their minerals that will defeat the claim by the surface owner to have the minerals reattached."
McKeen said the legality of the automatic reversion of mineral interests was also up for debate. "There's some question among legal scholars right now as to whether automatic reversion is even constitutional and whether the Ohio Supreme Court would uphold such an automatic reversion," he said. "There's only been one case in Ohio on the old dormant mineral act, and it was an appellate level case. It didn't really help answer any of these deeper questions.
"I believe we will see a lot more litigation on the dormant mineral act as we move forward. There is a lot of confusion, but I think when we understand exactly how it operates there's going to be relatively few scenarios where the old act will cause us as much consternation as we think it would."
Neal Pierce said several aspects of Ohio's conservation law also apply to Marcellus and Utica shale drilling. He said spacing rules were established in the mid-1960s, but in response to traditional drilling in the Berea and Clinton sandstones, not deep drilling activity.
Pierce -- who also focuses on energy law, as well as conventional oil and gas law -- said the chief of the Ohio Department of Natural Resources' (ODNR) Oil and Gas Division has the authority to set a statewide spacing rule, but there currently isn't one specifically for horizontal wells. For wells that are drilled 4,000 feet or deeper, the current statewide spacing rule requires a 40-acre tract with a 500-foot set off from lease or unit lines and a 1,000-foot set off from another well.
"We currently understand that set off from another well to have two meanings with regard to horizontal wells," Pierce said. "You must have a 1,000-foot set off from a surface location unless you obtain an exception, but also a 1,000-foot set off with regard to horizontal legs from other horizontal legs in the same horizon or formation."
Pierce said the director of ODNR can issue exceptions to the spacing rule for discovery wells or for a conservation exception.
"In both cases, what's required is a showing that the statewide spacing rule needs to be varied in some respect," Pierce said. "Traditionally this would involve some small variation in the size of the unit or where the surface well was located in relation to lease lines or unit lines. But the regulatory staff at ODNR has certainly indicated in public presentations over the last year that they believe that these exceptions are available to establish exception units for horizontal wells."
Pierce said Marcellus and Utica shale drilling units could be substantial in size, and multiple wells probably wouldn't fit neatly into the township-and-range blocks in some parts of the state.
"The implication, then, is that a unit could be requested under one of these regulatory exceptions for a unit-sized substantially in excess of 40 acres and shaped to take into account the general operational realities of the horizontal wells as they're being drilled in this part of the country," Pierce said. "I certainly look to the ODNR to look at a statewide spacing rule at some point, although the indication from ODNR staff and the director is that due to other regulatory issues on their agenda, there's no plan to consider a statewide spacing rule during 2012."
Pierce said there aren't any special field rules currently in effect in Ohio, but "there have been in the past, so the regulators are certainly familiar with the concept. But it's not something that's used frequently in Ohio."
Despite this, Pierce said an operator may decide to seek a special rule through the ODNR if they want to establish mandatory pooling.
"Mandatory pooling is tied to statewide spacing," Pierce said. "The requirement is that mandatory pooling can be used in those circumstances where an operator is unable to put together a unit of sufficient size to meet the statewide spacing minimums. What this really means is that mandatory pooling for deep wells is available to put together units of 40 acres in size, but it's unclear at this point that it's available to put together horizontal units of, say, 120, 160 or 180 acres.
"That being the case, operators are required to either seek an exception to the statewide spacing rules for a single well, or to go to the ODNR and establish an area to be covered by a special field rule. And as a part of that special field rule application, the operator would set up a spacing rule and a unit sized rule consistent with the horizontal drilling that's anticipated."