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.
American Energy Partners, LP (“AEP”) announced yesterday that its affiliates, American Energy-Utica, LLC (“AEU”) and American Energy – Marcellus, LLC (“AEM”) are combining in an all-stock transaction to form American Energy Appalachian Holdings, LLC (“AEA”). AEP hopes that the “attractive positions [of AEU and AEM] in each of these respective plays and their complementary nature will allow AEA to maximize returns by realizing administrative and operational efficiencies.” The transaction will result in AEA holding a position in over 300,000 net Utica and Marcellus shale acres in eastern Ohio and northern West Virginia. AEP entered the Marcellus shale play in June as part of a larger $4 billion effort to expand its holdings in West Virginia, Ohio and Texas. AEP affiliates also maintain positions in the Woodford Shale in central Oklahoma and the Permian Basin in western Texas.
According to a report published by Pennsylvania Business Daily, Reading-based UGI Utilities, Inc. recently became Pennsylvania’s first natural gas utility to connect one of its pipelines to a Utica Shale well, thereby increasing the supply of natural gas available to customers in Tioga and Potter counties. The expansion required UGI to construct a new meter and regulator station system, but it is estimated that the natural gas resources in the expanded system, which includes one Utica well and two Marcellus wells, can meet the energy needs of more than 50,000 households. According to a statement by Kelly Beaver, UGI’s Vice President of Supply, “[m]ore than 70 percent of the natural gas we deliver through our system is produced in the Marcellus Shale region. We are pleased to add volumes of lower-cost Utica Shale natural gas to our portfolio as another supply source.”
Fox Business reported that Sunoco Logistics Partners will invest $2.5 billion in the Mariner East 2 pipeline, which will carry natural gas liquids from the Marcellus and Utica Shale plays to an East Coast port. Mariner East 2 will connect processing plants in Pennsylvania, West Virginia and eastern Ohio with the Marcus Hook Industrial Complex near Philadelphia, which will distribute liquefied natural gas to domestic and international markets. The pipeline is the second phase of the Mariner East project, the first phase of which is expected to begin transporting gas later this year. Mariner East 2 is scheduled to begin service by the end of 2016.
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.
Southwestern Energy Co. announced that it has signed a deal to acquire 413,000 net acres in West Virginia and Pennsylvania from Chesapeake Energy Corp. for $5.375 billion, reports the Pittsburgh Business Times. This acquisition includes 256 producing and 179 unoperated or nonproducing Marcellus and Utica Shale wells. These assets will complement those Southwestern already has in the Marcellus Shale in northeastern Pennsylvania.
As reported by Columbus Business First and NGI’s Shale Daily, Magnum Hunter Resources Corporation’s first Utica well in West Virginia has reported production of 46.5 million cubic feet of natural gas per day, thereby rendering the Stewart Winland 1300U well in Tyler County the biggest Utica well drilled to date. The well has a true vertical depth of 10,825 feet, and is only the second Utica well that has been drilled in West Virginia. Magnum Hunter’s CEO Gary Evans said, this well “represents the greatest flow rate and one of the highest sustained flowing casing pressures of any Utica well drilled in the entire play of Ohio and West Virginia [and] is one of the highest flow rate gas wells ever reported in any shale play located in the U.S.” The well is positioned in the far southeastern part of the play, and indicates a highly productive area of dry gas Utica in West Virginia. Three additional wells on the Stewart Winland pad have been completed and are expected to be put into production in the coming weeks.
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.
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.
The Pittsburgh Business Times reported that Shell has drilled two producing wells in the Utica Shale formation in Tioga County, Pennsylvania. Shell credited its success to “solid technical work in [its] onshore business.” The two wells are many miles away from the majority of existing Utica wells and illustrate the potential of the Appalachian basin. The wells have demonstrated flowback rates of 11.2 million cubic feet per day and 26.5 million cubic feet per day. Shell is currently awaiting production results on four more recently drilled wells in Tioga County.
Veteran attorneys Timothy Miller from Robinson & McElwee, and Christopher ‘Kip” Power, Mychal Schulz and Robert Stonestreet from the Charleston office of Dinsmore & Shohl have joined forces with Babst Calland in providing senior-level legal counsel in key practice areas including environmental, litigation and employment. The addition of the new attorneys and staff will double the size of Babst Calland’s Charleston office which opened in 2011. For more information, please visit the firm’s website.
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.