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Legal Alert: Ohio House Bill No. 152 - Ohio's Oil & Gas Unitization Process

Krugliak, Wilkins, Griffiths & Dougherty Co., L.P.A.

On February 23, 2021, the Ohio House introduced House Bill No. 152 which would make several significant changes to Ohio’s unitization process.

Under Ohio law, an oil and gas operator can seek an order from the State of Ohio (through the Ohio Department of Natural Resources) forcing landowners into oil and gas well units, even if the landowners do not wish to be parties to the unit. If an application is granted, landowners without a lease have their oil and gas rights forced into the unit. As compensation for those rights being forced into the unit, the unleased landowners receive primarily two things: (1) a twelve and a half (12.5%) gross landowner’s royalty and (2) a working interest in the amount of eighty-seven and a half (87.5%) based on pro-rata % of their acreage to the total acreage in the unit. However, the landowner does not begin receiving payments on its working interest until the oil and gas operator receives back the costs of drilling and equipping the well unit times a certain number, oftentimes two times the costs (200% return on the costs). Given today’s economics, the landowner likely will not receive payments for the working interest.

House Bill No. 152 seeks to make significant changes to the unitization process, some of which may harm unleased landowners:

  • Creates a minimum charge against nonconsenting landowners in the amount of 300%, meaning the unleased landowner will not get payments on its 87.5% working interest until the oil and gas operator recovers 300% of the drilling and equipping costs.
  • Within 30 days of the Chief’s unitization order, the unleased mineral owner must choose one of the following options:
    • Enter into a lease with the operator for the unleased acreage in the unit, with a 12.5% net royalty and a lease bonus in the amount of 75% of market value of lease bonus rate for the acreage within the proposed unit times the amount of the landowner’s acreage in the unit. This means a landowner who owns 100 acres could be paid on a single acre included within the unit and then run the risk of never being paid for the 99 acres remaining outside the unit but tied up as leased.
    • Consent to including the acreage in the unit and follow all terms of the proposed operating agreement.
    • Fail to consent and then be subject to the 300% charge on drilling and equipping costs.
    • Failure to elect within the time frame results in a lease at a 1/8th net royalty.
  • Permits the Chief to keep trade secret, research, development, or commercial information of the operator secret, meaning not being disclosed to the public, including at the public hearing.
  • Says that operating under a unitization order will fulfill all of the lessee’s express or implied obligations under its oil and gas leases, including terms or limitations on the size of the unit. This means an operator could willingly breach its lease terms with impunity under a unitization order.  This would appear to reverse recent case law holding an operator responsible for breaches of a lease through operating under a unit order.
  • Permits hearings to be conducted remotely.
  • Requires hearings on unitization applications to be held within 30 to 60 days of an application for unitization.
  • Requires the issuance of the unit order within 30 days of the hearing unless it has been denied within that 30 days.

This bill seeks to make significant changes to the unitization process. These changes would lessen the landowners’ rights and would significantly reduce the economic value landowners receive from this process. It would subject unleased landowners to net royalties and entitle them to significantly less than market payments for their leased minerals.

If you disagree with this proposed legislation, you should contact your local state representative and the following members of the General Assembly:

Chair of the House Energy and Natural Resources Committee: Representative Jason Stephens - District 93 | Ohio House of Representatives; 77 South High Street, 13th Floor, Columbus, OH 43215; Phone: (614) 466-1366; Fax: (614) 719-6987

Vice-Chair of the House Energy and Natural Resources Committee: Representative Brian Stewart - District 78 | Ohio House of Representatives; 77 South High Street, 12th Floor, Columbus, OH 43215; Phone: (614) 466-1464; Fax: (614) 719-3961

Other members of the House Energy and Natural Resources Committee: Energy and Natural Resources Committee | Ohio House of Representatives (https://ohiohouse.gov/committees/energy-and-natural-resources

NOTE:  This general summary of the law should not be used to solve individual claims since slight changes in the fact situation may require a material variance in the applicable legal advice.

 
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