by James Yskamp, Supervising Attorney
The Ohio Fifth District Court of Appeals issued a ruling on August 13, 2018 that could provide some protections for lessors that have leases with clauses that contain limitations on pooling or units.
The case, American Energy – Utica, LLC et al. v. Ronald Fuller, involved a lease that had included a handwritten clause that read “UNITIZATION BY WRITTEN AGREEMENT ONLY!”[1] The lease was originally signed in 1981 by the landowners and D.B. Shaffer & Associates, Inc., and the rights of the lessee were assigned to EnerVest in 2009, and then to American-Energy-Utica (“AEU”) in 2013.[2] AEU then requested that the landowners agree to amend the lease in order to allow unitization of the leasehold, but the parties could not reach an agreement.[3] Rather than continue to negotiate, AEU filed an application with the Ohio Division of Oil and Gas pursuant to Ohio’s mandatory unitization statute, Ohio Revised Code Section 1509.28, in order to force the landowners’ property into the proposed unit, against the landowner’s will and in direct conflict the lease itself.[4]
On this particular issue, the Court held that using the mandatory unitization law at Section 1509.28 to circumvent the clear language in the lease violated the Section 28, Article II of the Ohio Constitution because it was “used to retroactively impair the obligation of the contract.”[5] The Court also found that this constituted a breach of the lease and remanded to the trial court with instructions to determine the remedy.[6] While the ultimate remedy remains to be seen, the constitutional finding by the Court is important because it suggests that the unitization statute can’t be used to force lands subject to leases with similar unitization restrictions into units.
For context, a “pool” is defined as an underground reservoir containing a common accumulation of oil or gas, or both.[7] A “unit” is simply a formal designation of contiguous land outlining the boundaries of development of a pool of oil and/or gas resources. With the recent development of technologies to horizontally drill and fracture deep shale formations in order to extract oil and gas resources, the concept of a “pool” in which to develop a unit has broadened greatly to include large geological formations of shale in an area. However, in 1965, when Ohio’s mandatory pooling and unitization statutes were enacted, a “pool” of oil or gas was more limited to a relatively free flowing reservoir in a geological formation. The drafters of the statutory sections outlining “mandatory pooling” and “mandatory unitization” could not have contemplated “pools” from which to form units would grow to the many hundreds of acres that we see today in the Utica and Marcellus shale development.
In general, the purpose of “mandatory pooling” is designed to force just enough land into a unit to meet the state’s minimum spacing requirements. In this way, mandatory pooling laws are passed to prevent one landowner from preventing other landowners’ ability to develop their property, because they cannot meet the state’s minimum spacing requirements without at least some of the non-consenting landowner’s land in the unit. The Chief of the Division of Oil and Gas can issue these forced pooling orders if he finds that the mandatory pooling is “necessary to protect correlative rights and to provide effective development, use, and conservation of oil and gas.”[8]
If you are a fan of private property rights, you might find forced pooling troubling, but you will almost certainly find forced unitization far more nefarious in the context of today’s shale gas development. Unitization in principle is closely related to mandatory pooling, because it compels non-consenting landowners to include their land in a unit for ultimate oil and gas development. However, where mandatory pooling is only allowed to the extent necessary to meet minimum spacing requirements, forced unitization can capture vast amounts of land, up to hundreds of acres in size. The requirements under the forced unitization statutory section are that the applicant have 65% of the proposed unit through consent or ownership, and be “reasonably necessary to increase substantially the ultimate recovery of oil and gas, and the value of the estimated additional recovery of oil and gas exceeds the estimated additional cost” of the unit.[9] In other words, the Ohio statute may allow private oil and gas companies to take of up to 35% of property within a proposed unit (which the companies come up with) as long as they can show it would be profitable. Since units for shale gas development can be upwards of 1,000 acres or more in size, this statute as its applied today can allow hundreds of acres at a time to be forced into development without agreement or consent of Ohio property owners.
Saving discussion on the constitutionality of the general application of Ohio’s forced unitization law to current shale gas development for another day, The Fifth District Court of Appeals’ ruling in Fuller appears to offer protections to landowners who have contracted limits on unitization from Ohio’s intrusive forced unitization law. Even landowners that are open to negotiating a lease often tell us that they feel like they can’t negotiate on equal footing with an a oil and gas company when company representatives threaten or initiate forced unitization proceedings if their standard lease terms aren’t met. Some older oil and gas leases contain size limits on units to 40 acres or less, and horizontal drilling in the Utica shale in Ohio often requires units of far greater than 40 acres, so the Fifth District’s decision could give landowners with such lease restrictions a lot of leverage in negotiations when approached to amend their lease.
Property rights issues, and oil and gas rights issues in particular, are often complex, and it is always advisable to speak to an experienced attorney about your rights when approached to sign or amend an oil and gas lease.
[1] Am. Energy - Utica, LLC v. Fuller, 5th Dist. Guernsey No. 17 CA 000028, 2018-Ohio-3250, ¶ 7.
[2] Id. at ¶ 10.
[3] Id. at ¶ 11.
[4] Id. at ¶ 15.
[5] Am. Energy - Utica, LLC v. Fuller, 5th Dist. Guernsey No. 17 CA 000028, 2018-Ohio-3250, ¶ 40.
[6] Id.
[7] O.R.C. § 1509.01(E).
[8] O.R.C. § 1509.27.
[9] O.R.C. § 1509.28.
