As reported by Oil and Gas Investor, Rice Midstream Holdings, LLC, a subsidiary of Rice Energy Inc., and Gulfport Energy Corporation have teamed up to build a pipeline gathering and water line system in Ohio’s Utica Shale. Over the next six years, the companies plan to spend a combined $640 million on 165 miles of pipeline that will connect Gulfport’s Utica shale wells in Belmont and Monroe Counties to interstate pipelines. Speaking of the joint venture, Rice’s CEO, Daniel J. Rice IV, stated: “This joint venture will be one of the premier midstream systems in the prolific dry gas core of the Utica…” Gulfport will dedicate about 77,000 leasehold acres and an existing 11-mile pipeline to the joint venture, and Rice will be responsible for constructing and operating the assets. The parties have further agreed that Rice will own 75% of the joint venture and Gulfport will own the remaining 25%. Each partner will be responsible for its proportionate share of costs.
The Medina County Court of Common Pleas issued a decision allowing surveys to be completed on tracts of land along the proposed NEXUS pipeline route. In Nexus Gas Transmission, LLC v. Houston, the Court ruled that the plain language of Chapter 163 of the Ohio Revised Code provides a right to access private property for the purpose of taking surveys for the pipeline project. The ruling will allow the NEXUS pipeline owners to move ahead with obtaining approval for the project from the Federal Energy Regulatory Commission.
The Ohio Oil and Gas Commission issued its first decision under R.C. 1509.28 to provide for the compulsory pooling of property for oil and gas unit operations. In Gary L. Teeter Revocable Trust v. Division of Oil & Gas Resources Management, the Ohio Oil and Gas Commission ruled that a 69-acre farm must be included in unit operations occurring under the property. While the Commission ruled that the property would be “forced” into a unit against the will of the owner of the property, it specifically noted that the owner “benefits from from the statutory protections enacted to ensure that he will be fairly compensated for any resources that might be drawn from beneath his property as a result of the operation of a well, which the majority of his neighbors wish to have drilled.”
On August 14, 2015, the Ohio Fifth District Court of Appeals issued a decision in Armstrong v. Chesapeake Exploration, L.L.C., deciding that the plaintiffs may not pursue an action seeking lease forfeiture based on the nonpayment of oil and natural gas royalties absent an explicit lease provision allowing them to do so. The plaintiffs alleged that Chesapeake failed to pay royalties owed on oil and natural gas production after the plaintiffs notified the company of their acquisition of the property from the former lessors. The court found, however, that absent a clause in the lease allowing the lessor to declare a forfeiture for the nonpayment of royalties, nonpayment merely gives rise to an action for damages and not cancellation.
The Ohio Oil and Gas Commission rendered a decision on August 12, 2015, affirming two orders of the Chief of the Division of Oil and Gas Resources Management that suspended operation of an injection well operated by American Water Management Services in Trumbull County, Ohio. The orders, issued in September, 2014, were based upon two seismic events near the well that were not felt on the surface and caused no property damage. American Water argued on appeal that the orders exceeded the Chief’s authority to suspend permits in the absence of regulatory violations and were unreasonable given the low magnitude of the events and American Water’s proposal to resume operations under a comprehensive plan to monitor seismic events and cease operations if seismic events occur at specified levels. The Commission rejected those contentions, finding that the Chief has inherent authority to suspend permits to protect public health and safety even where the permit holder has not violated applicable regulatory requirements. The Commission also found that the Chief acted reasonably due to a justifiable concern that the two low-level seismic events may be predictive of larger events that may jeopardize public health and safety.
The Ohio Department of Natural Resources (ODNR), Division of Oil and Gas Resources Management has adopted rules requiring the approval of plans for horizontal well sites prior to the construction or material modification of the sites. The rules, codified at OAC 1501:9-2-01, 1501:9-2-02, and 1501:9-12-01, became effective on July 16, 2015.
The rules require the electronic submission of an application for approval of the well site (consisting of the well pad, access roads, areas altered to install ponds and other water control components, storage facilities, and other areas altered for drilling and production operations), and provide that construction or material modification of the site may not commence without first obtaining a permit from the Chief of the Division. The rules prescribe the information to be provided in the application, including detailed drawings of all features within the well site boundary prepared and certified by a professional engineer, a sediment and erosion control plan, a dust control plan, a geotechnical report, and a stormwater hydraulic report.
The applicant and a representative of the Chief must meet at the site within 15 days of notification by the Chief that the application is complete. The applicant must submit certification by a professional engineer after completion of the well site that the site has been constructed in conformity with the approved application. The text of the rules, a discussion of the rules’ contents, and forms prescribed by the Chief are available on the Division’s website.
Ohio’s biennial budget legislation, House Bill 64, signed by the Governor on June 30, 2015, includes changes and additions to Ohio’s oil and gas regulatory program appearing in Chapter 1509 of the Revised Code. The changes and additions take effect on September 29, 2015. The more significant enactments are the following:
- A new section requiring the Chief of the Division of Oil and Gas Resources Management to create a program for the electronic submission of EPCRA reports to the Chief; state and local agencies required by EPCRA to receive the reports will have access to that database (Section 1509.231);
- A new section requiring the reporting of fires and explosions and certain releases of oil, gas, brine, or other substances to the Chief by telephone within thirty minutes of the event, unless such reporting is “impractical” (Section 1509.232);
- New language authorizing the Chief to include land owned by the Ohio Department of Transportation in drilling units approved by the Chief under Section 1509.28;
- An increase in the maximum civil penalty that may be imposed for certain regulatory violations from $4000 per day of violation to $10,000 per day of violation (Section 1509.33(A)); and,
- A significant expansion in the scope of regulatory violations for which the violator is liable to persons affected by the violation for the payment of damages and “the actual cost of rectifying the violation and conditions caused by the violation” (Section 1509.33(G)).
In a unanimous decision, the Ohio Supreme Court held that under the 2006 Dormant Mineral Act (“DMA”), the filing of a claim to preserve a mineral interest from being deemed abandoned is sufficient to preserve the mineral interest if it was recorded within 60 days following the notice of abandonment. Under this guidance, even if there are no otherwise qualifying savings events during the 20-year period preceding the notice of abandonment, the mineral interest can still be preserved by claim the timely filing of the claim to preserve.
The Ohio Supreme Court specifically noted that the parties to the underlying lawsuit did not dispute whether 1989 or 2006 version of the DMA applied so the court applied the 2006 DMA, as amended. The issue of which version applies will be decided in Corban v. Chesapeake Exploration, L.L.C. and Walker v. Shondrick-Nau, which are pending before the Court. Corban v. Chesapeake Exploration, L.L.C. was argued to the Court on May 6, 2015 and Walker v. Shondrick-Nau is scheduled for oral argument on June 23, 2015.
As reported by the Wheeling Intelligencer, the Ohio Department of Natural Resources (“ODNR”) recently released production data for the first quarter of 2015 for oil and gas wells drilled in Ohio’s Utica Shale formation. The report found that natural gas production during the first three months of the year, which totaled 183.5 billion cubic feet, nearly tripled from the first quarter of 2014, when Utica Shale wells produced only 67.3 billion cubic feet. The state’s most productive natural gas wells are Rice Energy’s “Blue Thunder” wells drilled in Belmont County, which produced a combined 1.41 billion cubic feet during the first quarter. The ODNR’s first quarter data also shows that oil production in the Utica Shale, which totaled more than 4.4 million barrels, is up from the 1.95 million barrels reported during the first quarter of 2014. The state’s most productive oil well is American Energy Partners’ “Shugert Daddy” well drilled in Guernsey County, which produced 40,683 barrels during the first quarter.
Despite the increase in both oil and gas production from the Utica Shale, Ohio has experienced a slowdown in new drilling operations and many existing wells have been shut-in due to a lack of pipeline infrastructure. Shawn Bennett, Senior Vice President of the Ohio Oil and Gas Association, stated that “[m]ore pipelines are integral to the success of the Utica” and suggested that Ohio is still a few years away from having all necessary pipelines in place.
In Hoop v. Kimble, the Seventh District Court of Appeals upheld a trial court ruling that forfeiture was not an appropriate remedy for the breach of an anti-assignment provision in an oil and gas lease. In the case, the original lessee of the lease died and left his entire estate, including the family business, to his wife. She in turn assigned the subject oil and gas lease to herself and then formed a new legal entity. The lease contained a “trade-sale clause” which provided that the lease shall not be traded or sold without the permission of the lessor.
The property owners sought forfeiture and cancellation of the lease and argued that the assignment of the lease breached the trade-sale clause. The trial court found that the trade-sale clause was breached by the assignment, but did not order forfeiture. The appeals’ court agreed and noted that forfeiture is an appropriate remedy only in certain, limited circumstances. To establish that forfeiture is appropriate the lease must specifically so provide and the legal damages resulting from the breach must be inadequate. Neither of these elements were present in the case, so the appeals court did not order forfeiture of the lease.
The City of Broadview Heights will not appeal the ruling of the Cuyahoga County Common Pleas Court overturning the city’s voter-approved ban on new oil and gas drilling. The trial court relied on a recent decision from the Ohio Supreme Court in State ex rel. Morrison v. Beck Energy Corp. to hold that the prohibition on new oil and gas drilling was in conflict with Ohio’s comprehensive statutes regulating oil and gas drilling. The city says that on advice of their legal counsel, it determined that any appeal of the devision would be futile.
The Seventh District Court of Appeals has reaffirmed its prior decision in Hupp v. Beck Energy Corp. In Belmont Hills Country Club v. Beck Energy Corp. and Bentley v. Beck Energy Corp., the appeals court relied on Hupp in holding that a conditional secondary term does not make a lease perpetual in nature and that the lease at issue contained an express waiver of implied covenants of reasonable development. Further, a lease that allows production in paying quantities to be determined “in the judgment of the lessee” does not create a perpetual because courts impose a good faith standard on the paying quantities determination. The court also held that the delay rental provision did not allow the lease to be held in perpetuity by making nominal payments.
Relying on the recent authority in State ex rel. Morrison v. Beck Energy Corp., the Cuyahoga County Common Pleas Court struck down a local Ohio drilling ban. In Bass Energy, Inc. v. City of Broadview Heights, the court held that a charter amendment prohibiting new oil and gas drilling was in conflict with Ohio’s comprehensive statutes regulating oil and gas drilling. Because the local ban conflicted with the statewide regulatory scheme, it did not meet the requirements of Ohio’s Home Rule Amendment and was ruled to be unenforceable. The court specifically stated that the charter amendment was an invalid exercise of Broadview Heights’ home rule authority.
The Ohio Supreme Court issued a ruling in favor of Beck Energy, holding that Ohio Constitution’s home rule amendment does not allow a municipality to enforce its own oil and gas permitting scheme on top of the state system. In the case, the city of Munroe Falls adopted an ordinance prohibiting the drilling of an oil and gas well until a conditional zoning certificate had been obtained. The ordinance also required payment of additional application fees and the posting of a performance bond. The Ohio General Assembly had adopted a uniform statewide regulation of all oil and gas operations in Revised Code Chapter 1509. The Court held that the Ohio Constitution vests the General Assembly with the power to to pass laws providing for the “regulation of methods of mining, weighing, measuring and marketing coal, oil, gas and all other minerals” and the comprehensive regulatory scheme created by the General Assembly does exactly that. The home rule amendment to the Ohio Constitution does not allow a municipality to discriminate against, unfairly impede, or obstruct oil and gas activities and production operations that the state has permitted under R.C. Chapter 1509.
The Ohio Supreme Court scheduled oral argument in two significant Dormant Mineral Act (“DMA”) cases. Oral argument has been scheduled on Corban v. Chesapeake Exploration, L.L.C. for May 6, 2015. As previously reported on ShaleEnergyLawBlog, the Corban case is likely to decide whether the 1989 or 2006 version of the DMA applies to current cases.
The Court also scheduled oral arguments in Walker v. Shondrick-Nau for June 23, 2015. The Walker case is set to decide similar issues concerning application of the DMA.