Judge's ruling limits shale developer's drilling rights

Judge's ruling limits shale developer's drilling rights

CADIZ, Ohio -- Sparsely populated Harrison County, in the rolling foothills of the Appalachians, boasts a rich vein of U.S. history.

The county was a hotbed of abolitionist activity in the years leading up the Civil War. It's where General George Armstrong Custer and Edwin Stanton, President Lincoln's secretary of war, were born. And on Charleston Street, in the county seat of Cadiz, is a two-story, white frame house that is the birthplace of actor Clark Gable.

In recent years though, Harrison County has been out of the spotlight, but a judge's ruling could change that.

Harrison County Common Pleas Judge Michael Nunner has sharply limited Chesapeake Exploration's ability to drill for shale gas and oil from a property where the company has leased the mineral rights. The ruling is rattling an industry that Cleveland State University economists predict could pump $5 billion a year into the state's economy by 2014.

"It could affect Chesapeake and other drill companies across Ohio," said David Hudson, who represents the Jewett Sportsmen and Farmers Club, the landowner that sued Chesapeake.

Nunner said while Chesapeake can vertically extract gas and oil from underneath the hunt club's 187 acres of woods and fields, the energy company can't use the land to drill sideways to get at reserves from adjacent land.

He ordered Chesapeake, a dominant player in Ohio's shale production, to stop horizontal drilling that extends beyond Jewett's property line unless it gets the club's permission to go ahead.

Extracting natural gas and oil from shale formations depends on lateral drilling to carry millions of gallons of water under intense pressure to fracture surrounding rock. Horizontal bores can extend up to 10,000 feet, or almost two miles, from the drill hole. Chesapeake already had poured a 12-acre concrete pad for rigs but has sunk no wells.

"They don't have a right to come in and destroy our surface without fair compensation," said Jewett club president John Harris.

A spokesman for the Oklahoma-based Chesapeake declined comment. So did North American Coal Co., which owns the mineral rights and leased them to Chesapeake.

The coal company, in a motion earlier this month, asked Nunner to reconsider his order that effectively halted Chesapeake's ability to profitably plumb the shale rock some 8,000 feet below ground.

North American Coal, in its motion, said that the order directly conflicts with Ohio public policy to encourage development of natural resources "by halting any oil and gas production through the use of contemporary horizontal drilling methods on this property."

By creating an "erroneous new law, it would impede or prevent the development of oil and gas elsewhere in Ohio, with significant adverse effects for the state's economy," the company said.

Harris said the club's 190 members are about evenly divided between those looking for a good settlement from Chesapeake in exchange for their approval on drilling and those wanting the company to go away.

The club, in the center of Harrison County, about seven miles north of Cadiz, dates back to 1959 when its 12 founders took out a bank loan to buy a chunk of land they were leasing to hunt white-tailed deer, jackrabbits and wild turkey.

"It makes us a unique piece of property because there's no houses around," Harris said. "We're sitting right there in the middle of nowhere."

Members today raise money by renting out a lodge for wedding and graduation parties, throwing annual corn roasts and raffling off all-terrain four-wheelers. They spend about $1,000 a year stocking three lakes at the club with bass, blue gills and crappies.

After Nunner blocked horizontal drilling, Chesapeake approached Harris about starting from square one and working out a deal.

"We sent our (monetary) demands and have not heard another word since," Harris said. He would not elaborate on the proposed settlement.

North American Coal deeded the land to the club in 1959, said Gregory Brunton, a lawyer for the Cleveland-based Reminger law firm that represents the club.

Coal companies across eastern Ohio often sold off surface real estate when they were done mining. But those companies held on to the underground mineral rights in case they wanted to go back in and take out more coal, or oil and gas.

Ohio law says owners of such "severed" mineral interests have a right to "reasonable" use of the surface to get at the minerals.

Brunton said the club's deed didn't anticipate shale gas extraction -- which requires not only long horizontal wells, but also large well pads with multiple wellheads on each, storage tanks on site, and convoys of trucks hauling in millions of gallons of water.

The Jewett lawsuit is one of the latest legal fights shaping up over shale gas drilling in Ohio.

In a separate lawsuit filed this month, 33 landowners in Columbiana County contend that land men concealed or actively misled them about how much surface and below-ground disruption was involved in shale gas extraction. And in Akron, Chesapeake sued 95 landowners in January for attempting to get out of their leases and sell them to another bidder.

In this latest case, Reminger attorneys representing the sportsmen's club have been fielding calls from other lawyers who wonder about the impact of the Harrison County case on the landowners they represent.

If Jewett Sportsmen and Farmers Club and Chesapeake can't settle their dispute, the case is expected to go to trial on the club's claim that Chesapeake trespassed on its property.

"It may have potentially wide ramifications," said Brunton, who considers the case precedent-setting in Ohio.

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Permalink Reply by Inchworm antenna on March 14, 2012 at 11:30am

Look at it this way.  You have a surface owner, a mineral owner, then comes horizontal drilling.  Since horizontal drilling can extract gas from an adjacent property, why not put the well on the adjacent property?  When it comes to this magnitude I agree with the court.  No ones surface should be disturbed without their own free will to bargain for what that surface destruction is worth. 

Jim ShoosPermalink Reply by Jim Shoos on March 14, 2012 at 11:59am

Then I recommend not buying a piece of property that doesn't have mineral rights accompanying it... because when you do, that's exactly what happens, you have absolutely NO SAY SO over when, how or why the minerals get extracted.  That's the law. 

Jim ShoosPermalink Reply by Jim Shoos on March 14, 2012 at 4:24am

Ridgeman... I have empathy for the sportsman club but when they acquired their property rights they should have done their homework to understand what it means to own the "surface only".  There are countless cases and case law that document the fact that the mineral estate is dominant over the surface and that the surface owner has no ability to prevent the mineral owner from taking what is rightfully his, so long as his use of the surface to do so is reasonable.  Will CHK's use conflict with their deer and turnkey hunting... absolutely.  For those of you seeking to acquire property that doesn't have mineral rights associated with it you should understand what you are stepping into.

Permalink Reply by Cen on March 15, 2012 at 1:57am

I agree. Perfect case where an out of state company didn't do their homework before biting this one off. Should be hiring more local "Ohio" people, that know Ohio's history more!

Permalink Reply by time will tell on March 15, 2012 at 1:59am

well said 4 quarter 

Jim ShoosPermalink Reply by Jim Shoos on March 14, 2012 at 4:13am

Uhhhh, no, Paul Martinelli, that's not what I stated.  I stated that the owner of the mineral rights (the dominant estate) has the rights to utilize the surface estate in a reasonable manner in order to remove the minerals underlying the property in question.  Presumably that is what CHK is attempting to do, remove the gas underlying the property... the issue in this instance is that in addition to extracting minerals underlying this property CHK is also seeking to extract minerals underlying the neighboring property... so in effect there would be a commingling of gas belong to multiple owners.  You cannot segregate molecules and say that these molecules are yours and these are mine.  As long as CHK has secured the rights to extract the gas underlying the neighbors property via the same lateral that is extracting minerals underlying the sportmen's club then there is no trespass.  I fail to see how it could possibly be argued that CHK doesn't have the right to use the surface SO LONG AS THEY ARE DOING SO FOR THE PURPOSE OF EXTRACTING MINERALS UNDERLYING THE SPORTSMEN'S SURFACE... the fact that they coincidentally are also able to remove other minerals owners gas should be irrelevant.   The fact that the lease from the coal company granted pooling and spacing rights allows CHK the right to commingle and produce gas from not only the coal company's property but that of others.  A dominant estate (minerals) trumps the subservient estate (surface) every time.  This decision will be overruled...

Jim ShoosPermalink Reply by Jim Shoos on March 14, 2012 at 5:26am

Gale... I really can't explain it any more succinctly than I have already.  You apparently are missing the entire point of discussion.  To frame this from another perspective:  If CHK were seeking to use the sportsman club surface SOLELY FOR PURPOSES OF EXTRACTING THE NEIGHBORING PROPERTY OWNERS GAS... then the judge's ruling would have been absolutely correct.  But, if along with extracting the neighboring property owners gas CHK was also extracting gas underlying the sportsman's surface (i.e. the coal company's gas) then CHK has a perfectly legitimate right to be there.

Jim ShoosPermalink Reply by Jim Shoos on March 14, 2012 at 5:34am

Important Considerations Involving the Sale or Lease of Subsurface Property Rights

By: Alisa N. Carr, Esq.

With the recent increase of exploration and drilling in the Marcellus and Utica shale formations many land owners have been approached by energy companies offering to purchase or lease their subsurface property interests. Division, or severance, of title between surface and subsurface property is not a new phenomenon. Nonetheless, many land owners are unaware that the lease or sale of subsurface mineral interests can adversely affect surface rights, access and use. Land owners considering selling their subsurface property rights should be aware of several important issues.

After title is severed, the owner of the subsurface property will have the right to access the surface and occupy as much of the land as is necessary to extract the mineral (coal, oil, gas, etc.) to which he has title. The owner of the subsurface property obtains this right upon purchasing the subsurface property; regardless of whether it is expressly stated in a contract of sale (1). A fundamental concern of surface owners is to what extent a subsurface property owner may impinge upon the surface rights in the recovery of the minerals and, how much of the surface he may occupy, alter, or destroy in order to extract minerals. Pennsylvania case law holds that the subsurface mineral estate is dominant over the surface estate, although the subsurface owner’s right to enter the surface property is not limitless (2). The easement is restricted to reasonable use justifiable to related activities which are essential to the orderly removal of the mineral property (3). 

Unfortunately, neither the courts, nor the legislature, have clearly defined or explained reasonableness in the context of easements or rights of way for mineral extraction. Reasonable use must be addressed in leases or other documents of conveyance, otherwise, a subsurface owner can encroach on the surface property until such time as the surface owner takes action in court by suing to curtail activity, allowing a Judge or jury to decide whether or not the encroachment is a reasonable means of accessing the subsurface matter. The burden is on the surface owner to seek legal redress to prevent or restrain the subsurface owner’s exercise of his rights (4). For this reason, the sale or lease of subsurface interests, without a well-defined right of way for surface access, can result in costly litigation and unpredictable results.

There are two important rights, however, that surface owners retain. First, subsurface owners have a duty to ensure that the surface continues to be supported (5). If the removal of subsurface minerals damages or weakens the support of the surface, the subsurface owner must take remedial steps to restore the support precisely as it was prior to the removal. Second, the subsurface owner must exercise his right to obtain his property “with due regard to the owner of the surface.” (6) Again, though, where the subsurface owner does not fulfill his obligation to show due regard for the surface property, the surface owner is left to seek redress in court—a solution that could be costly, time-consuming and unpredictable.

In order to protect your property rights, Leech Tishman recommends that all land owners considering the sale, assignment or lease of their subsurface mineral rights execute written documents that clearly define the rights and obligations of the parties in conjunction with the exploration and removal of subsurface minerals. Additionally, Leech Tishman recommends consulting a lawyer regarding all such negotiations and document preparation.

Jim ShoosPermalink Reply by Jim Shoos on March 15, 2012 at 3:19am

Gale,

Clearly we will just have to agree to disagree and when this gets overruled on appeal I will circle back to say I told you so!  If you will read your own statements, you yourself state that the property owner bought the surface knowing that they would endure a specific number of water trucks, i.e. drilling activity.  So clearly the operator has a right to be there... the landowner knew it when he bought the land.  The fact that there are perhaps more water trucks than he envisioned is merely a quantitative issue not a lack of rights issue.  The right exists, the extent to which it might possibly entitle the surface owner to additional compensation is the only issue. 

Jim ShoosPermalink Reply by Jim Shoos on March 15, 2012 at 3:34am

Gale,

Perhaps it might help you to think of the issue in this context.  What if CHK moved on to the site with the sole intention of drilling a vertical test well to produce only gas underlying the sportsman's surface.  They build a pad and construct everything that goes along with drilling.  No argument from you that CHK, at this point, has the "right to be there"... correct??  So along the way CHK likes what they see when they core the vertical section, they re-permit for a horizontal lateral and plug back and kick off a horizontal lateral to produce not only the gas underlying the sportsman land but also one of their neighbors.  Instantly that existing right to occupy the surface of the sportsman property dissipates into thin air and CHK is a trespasser... I think not. 

Jim ShoosPermalink Reply by Jim Shoos on March 15, 2012 at 9:25am

Gale,

Don't bring a knife to a gun fight... you'll lose.  Again, I will state that the mineral estate is the dominant estate.  When the mineral owner signs a lease (which he unquestionably has the right to do) conferring upon an operator the right to extract those minerals... and that lease contains a pooling/spacing provision (which virtually every modern lease contains) which serves, in effect, to erase property boundary lines and treat all the mineral owners in the unit as having common ownership of the minerals extracted and provides that they shall all proportionately share in the proceeds derived from the sale of those extracted minerals... there is no longer any segregated identifiable mineral ownership from a landowner perspective.  Horizontal drilling from a historical perspective is a relatively modern concept.  Existing property law evolved with no concept of the unique issues that horizontal drilling brings into existence, therefore common sense and equity will apply.  The issues in this case, properly framed on appeal, will result in this case being overturned. 

Permalink Reply by Paul Martinelli on March 15, 2012 at 9:30am

Jim....do we know what the pooling terms are for the lease on the club's land?

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