The Ohio Supreme Court accepted jurisdiction over Hupp v. Beck Energy, an important Ohio case involving the interpretation of oil and gas leases. The case involves a challenge by landowners in Monroe County to a standard form oil and gas lease. The landowners argued that the leases could be maintained indefinitely without development of the oil and gas and, as a result, were void against public policy. The Monroe County trial court agreed and granted the landowner’s Motion for Summary Judgment finding the leases were void ab initio. On appeal, the Seventh District Court of Appeals reversed the trial court finding that the leases have two distinct terms – a primary term and secondary term – and were not “no term” or perpetual leases. The Seventh District also ruled that the leases’ delay rental provision did not allow the lessee to extend the lease indefinitely by the payment of delay rentals.
The Propositions of Law to be reviewed by the Ohio Supreme Court are (1) whether an oil and gas lease which can be maintained indefinitely without development is a perpetual lease that is void against public policy and (2) whether the leases are subject to an implied covenant of reasonable development notwithstanding a general disclaimer of all implied covenants.
Shale Energy Law Blog will continue to post updates to the case including the scheduling of oral argument.
The Fourth District Court of Appeals held in Marshall v. Beekay Company that continuous production from shallow wells pursuant to two oil and gas leases holds the deep rights to the property. The landowners in the case claimed that an assignment of the shallow rights of the oil and gas leases split the oil and gas estate into two different pieces — shallow and deep. Although there was continuous production from the shallow wells, there was no production from the deeper oil and gas formations. The landowners argued that reservation of the deep rights created an obligation of reasonable development of the deep rights. The court disagreed holding that the assignment does not sever the lease because it granted all of the oil and gas rights under the acreage at issue for so long as oil and gas was producted in paying quantities. The court concluded that the granting clause of the lease included all oil and gas at all depths and the deep rights to the property were held by the production from the shallow wells.
The Oil & Gas Financial Journal reported on January 14, 2015 that Jeffrey A. Fisher has been named CEO of newly created American Energy Appalachia Holdings, LLC (“AEA”). AEA was recently created through the combination of American Energy Partners’ (“AEP”) affiliates, American Energy-Utica LLC and American Energy – Marcellus LLC. Fisher was previously COO of AEP and Executive Vice President of Production for Chesapeake Energy Corporation, which AEA’s Chairman of the Board, Aubrey K. McClendon co-founded. Fisher also served in a number of other engineering management positions at Chesapeake, BP and Vastar Resources. In addition to adding Fisher to the management team, AEA also named John K. Reinhart and Jeffrey A. Agosta as the COO and CFO, respectively. Similar to Fisher, Reinhart held several operational leadership positions at Chesapeake Energy in the Anadarko, Marcellus and Utica areas. Agosta previously served as CFO of Oklahoma City based Devon Energy, as well as a manager at D. R. Payne & Associates, a financial consulting firm. The executive team will oversee the management and operation of AEA’s estimated proven reserves of 1.5 trillion cubic feet equivalent of oil and gas (77% of which is gas) and the operation of seven drilling rigs in eastern Ohio and northern West Virginia.
Ohio landowners are opposing the use of eminent domain in the construction of a 76 mile pipeline between Columbiana County and Monroe County. The OPEN pipeline would connect to the Texas Eastern Pipeline and was recently approved by the Federal Energy Regulatory Commission (FERC). After receiving approval for FERC, the pipeline owner began issuing eminent domain notices to landowners who did not grant easements across their property. Two landowners, Roger and Lana Barack, are teaming with an advocacy group called the Ohio 1851 Center for Constitutional Law to oppose the eminent domain proceedings. The groups claims recent federal court decisions state that Congress may not delegate its power, including the power to seize property, to purely private companies.
The Ohio legislature has clarified that oil and gas leases create an interest in real property. Ohio’s Substitute House Bill 9 includes a provision amending Ohio’s lease recording statute (R.C. 5301.09) as follows:
In recognition that such leases and licenses create an interest in real estate, all leases, licenses, and assignments thereof, or of any interest therein, given or made concerning lands or tenements in this state, by which any right is granted to operate or to sink or drill wells thereon for natural gas and petroleum or either, or pertaining thereto, shall be filed for record and recorded in such lease record without delay, and shall not be removed until recorded.
While oil and gas leases are traditionally thought to create an interest in real property, one recent federal court case called the status of oil and gas leases into question. In Wellington Resource Group v. Beck Energy Corp., a district court for the Southern District of Ohio ruled that oil and gas leases merely constitute the right to search for oil and gas on a property and are not an interest in the real property. The amendment in House Bill 9 would appear to supersede the court’s decision and conclusively establish the status of oil and gas leases in Ohio real property law. The bill is set to go into effect on March 20, 2015.
The Fifth District Court of Appeals issued a ruling addressing several issues concerning the interpretation of oil and gas leases. The lessee of several oil and gas leases created a 145-acre drilling unit utilizing a small portion of one of the leases. The lessor of the lease claimed that this violated the implied covenant of reasonable development. The court analyzed the oil and gas lease and enforced a provision that generally waived any implied covenants under the lease. The decision noted that Ohio courts have consistently enforced express provisions in leases that disclaim implied covenants. The court also held that the “reasonable prudent operator” standard applies to a claim of bad faith inclusion of the portion of the leasehold in the unit. As applied to the lessee the inclusion of the small portion of the leasehold in the unit was necessary to comply with set-back requirements imposed by the State and therefore a prudent operator would include the leasehold acreage in the unit.
The court also held that the lessors’ acceptance of royalty payments did not preclude them from asserting claims that the lessee had breached the lease in other respects.
Ohio EPA, the Ohio Division of Oil and Gas Resources Management, and the Ohio Department of Health, on November 17, 2014, jointly issued a four-page guidance letter on how Ohio regulates the landfill disposal of oil and gas production waste. The letter addresses what waste is defined as solid waste that must be disposed in landfills, classification of certain drill cuttings as not constituting regulated solid waste, and substances classified as TENORM that must be analyzed for radioactivity prior to landfill disposal. The letter can be accessed on Ohio EPA’s website at http://epa.ohio.gov/Portals/0/Drilling%20Waste%20Ltr.pdf.
Ohio’s Fifth District Court of Appeals recently held that the 1989 version of Ohio’s Dormant Mineral Act applies to current disputes concerning ownership of severed mineral estates. The court in Wendt v. Dickerson followed previous rulings from the Seventh District Court of Appeals to find that the 1989 DMA is self-executing in nature and automatically vests ownership of a severed mineral estate in the surface owner after a 20-year period of non-use. The Ohio Supreme Court is expected to provide the definitive ruling on whether the 1989 or 2006 version of the DMA applies in early 2015.
The Seventh District Court of Appeals decided two additional legal issues concerning application of the 1989 version of the Ohio Dormant Mineral Act (“DMA”) in Tribett v. Shepard. The two issues were whether application of the 1989 DMA in the lawsuit was barred by Ohio’s 21-year statute of limitations to recover title to real property and whether the 1989 DMA is constitutional. On the first issue, the Court rejected the plaintiff’s argument that the case was not commenced within 21 years of the enactment of the 1989 DMA on March 22, 1989. The Court reasoned that the lawsuit was not time-barred because the 1989 DMA contains a three-year savings clause, which is March 22, 1992. Twenty-one years from March 22, 1992 is March 22, 2013. Plaintiff’s lawsuit was filed in April of 2012 and was therefore not time-barred. In dicta, the court commented that the statute of limitations defense “may have merit” in lawsuits filed after March 22, 2013.
The Court also found that because the 1989 DMA contained a three-year savings clause, application of the statute is not an unconstitutional taking.
The Seventh District Court of Appeals overturned the Monroe County trial court’s decision in Hupp v. Beck Energy Corporation finding that a standard oil and gas lease form was void as against public policy. The appeals court found that the delay rental provision did not allow the lease to be held in perpetuity by making nominal payments, that the phrase “capable of production” means that a well drilled on the leasehold must be capable of producing, and that where a lease allows production in paying quantities to be determined “in the judgment of the lessee” it does not allow a lessee to arbitrarily determine whether a well is capable of production because courts impose a good faith standard on the paying quantities requirement.
The appeals court made additional rulings which will be reported in a future post on Shale Energy Law Blog.
The Ohio Department of Natural Resources has opened the comment period on its draft rules for the construction of horizontal well sites. All interested parties may submit comments in writing by the close-of-business on Monday, October 06, 2014 to dogrm.rules@dnr.ohio.gov.
As reported on Bloomberg.com, Spectra Energy Corporation, a Houston-based pipeline operator, and Northeast Utilities, a Connecticut-based utility provider, have partnered in proposing a $3 billion pipeline expansion that will increase natural gas supply to the six New England states. The project, known as “Access Northeast,” will provide fuel for power plants and home heating in an attempt to combat soaring energy prices in the New England region. According to the report, power prices in New England reached a 6-year high last spring due to extreme cold temperatures and a shortfall in pipeline capacity, which restricted gas supply. The proposed Access Northeast project plans to boost the capacity of Spectra’s existing Algonquin and Maritimes pipelines, by as much as 1 billion cubic feet per day and create additional delivery points for local distribution. The project is expected to be in service by November 2018.
According to the report, Access Northeast is not the only pipeline project aimed at connecting the booming Marcellus Shale gas formation with other states: (i) Kinder Morgan Energy Partners LP’s proposed “Northeast Energy Direct” project will also supply natural gas to New England, (ii) Duke Energy Corp., Dominion Resources, Inc., Piedmont Natural Gas Co. and AGL Resources Inc. have partnered to construct a $5 billion pipeline from West Virginia to North Carolina, (iii) NextEra Energy Inc. and EQT have paired up to build a 330-mile pipeline from West Virginia to the southeastern states, and (iv) Spectra is also seeking to expand its Texas Eastern pipeline system in Ohio pursuant to an agreement with American Electric Power Co. and Chesapeake Energy Corp.
Ohio Governor John Kasich increased his rhetoric regarding a new severance tax on shale oil and gas production. So far, the legislature has opposed any additional increase in the severance tax that was passed in House Bill 375 in May of this year. Governor Kasich describes the current 2.5 percent severance tax as “puny” and vows to push harder for an increase if he wins re-election this November. Governor Kasich previously advocated for a 2.75 percent tax with fewer deductions and credits.
A recent decision from the Seventh District Court of Appeals, Eisenbarth v. Reusser, adds a new wrinkle to the ongoing legal battles concerning the applicability and scope of Ohio’s Dormant Mineral Act (“DMA”). The Seventh District previously ruled in Walker v. Shondrick-Nau that the 1989 DMA applies to current disputes over ownership of severed mineral interests and that a mineral interest which was “dormant” for a twenty-year period merges with the surface of the property. In further applying the 1989 DMA, the Court in Eisenbarth decided that the 1989 DMA only applies to the twenty-year period immediately preceding its enactment and that it does not apply on a “rolling” basis to successive twenty-year periods. Under this ruling, the 1989 DMA would not apply if any statutory savings event occurred after March 22, 1969 (twenty-years preceding the 1989 DMA’s enactment) because the person claiming that the mineral interest was abandoned would have to rely on a period of time occurring outside of the prescribed twenty-year period.
The Court also ruled that a recorded oil and gas lease is a title transaction for purposes of the DMA. This issue is currently the subject of an appeal to the Ohio Supreme Court in Chesapeake Exploration, L.L.C. v. Buell.
The Ohio Supreme Court will review a key question of state law concerning application of the Dormant Mineral Act (“DMA”). In Corban v. Chesapeake Exploration, LLC, the United States District Court for the Southern District of Ohio certified the following questions to the Ohio Supreme Court for review:
(1) Does the 2006 version or the 1989 version of the DMA apply to claims asserted after 2006 alleging that the rights to oil, gas, and other minerals automatically vested in the surface land holder prior to the 2006 amendments as a result of abandonment?
(2) Is the payment of a delay rental during the primary term of an oil and gas lease a title transaction and “savings event” under the DMA?
The question of whether the 1989 or 2006 version of the DMA applies to current disputes concerning ownership of mineral rights has been the subject of numerous lawsuits throughout eastern Ohio. Trial courts have reached varying conclusions, but the Seventh District Court of Appeals recently ruled that the 1989 version is self-executing and can still be relied upon. A decision from the Ohio Supreme Court will presumably resolve this unsettled issue of law.