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‘Nuisance Oil’ Term in Contract Annoys Belmont County Landowner

April 4, 2015
Shale Play

BELLAIRE - Curtis Wallner is not sure what "nuisance oil" extracted via fracking is.

Neither is a spokesman for the Ohio Department of Natural Resources, which oversees mineral extraction in the Buckeye State.

Because of that uncertainty, Wallner - who owns more than 26 mineral acres outside Bellaire along Sand Hill Road in an area that already features multiple wells in various stages of drilling and fracking - said he has declined to sign a lease with any drilling company.

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The wording of the latest offer he received calls for paying $8,000 per acre with 20 percent worth of production royalties. Although this would land him a check for $211,145.60, in addition to future royalties, Wallner refuses to sign, largely because of the nuisance oil term.

"I told them I am not going to sign. So they said, 'We'll just take it then because we've got your government behind us,'" Wallner said. "This is all a big joke to me. It isn't right what they are doing to me, and it isn't right what they are doing to a lot of people."

Wallner objects to the Jan. 23 contract he declines to sign because it states he would receive royalties for material removed from his property, with the exception of "non-commercial nuisance oil."

"I think that is the condensate oil stuff they turn around and sell," Wallner said. "We are sitting on billions of dollars worth of oil and natural gas."

Under Ohio law, condensate refers to liquid hydrocarbons separated at or near the well pad prior to gas processing. The U.S. Energy Information Administration considers it light liquid hydrocarbons recovered from field facilities.

"I am honestly unfamiliar with the term 'nuisance oil,'" ODNR spokesman Eric Heis said.

Tim Greene, owner of Land and Mineral Management of Appalachia and a former West Virginia Department of Environmental Protection inspector, said he does not believe nuisance energy exists.

"It all has value," he said. "It might be condensate, but it could really be whatever the company wants it to be because only they would know what it is. My recommendation would be to not sign that."

Wallner's documents show an XTO representative included the term "nuisance oil" in the contract. The firm is drilling several wells in Belmont County, as there is now an active rig grinding into the ground behind the former Key Ridge School, outside Bellaire along Ohio 147.

"It is our policy to not publicly discuss these issues," XTO spokeswoman Amy Dobkin said when asked about nuisance oil and any relations the company may have with Wallner.

Even though he is receiving pressure from others to sign the contract, Wallner said he has no intention to.

"These guys laughed at me when I told them I wouldn't sign with that in there," Wallner said. "They said they are already under my house. I told them I will sleep better at night knowing they took it."

Unlike West Virginia, Ohio allows horizontal shale drillers to use forced pooling if they cannot acquire all leases needed for a new well site. The law requires a driller to sign leases for the majority of acreage surrounding the reluctant landowner, while it also states there must be no other obvious location for assembling the drilling unit.

Heis said if Wallner's land is pooled, the company doing so would have to pay him a 12.5 percent royalty on gross oil and natural gas production. However, Heis said current ODNR rules do not require a driller to pay any up front money to the pooled mineral owner, meaning Wallner would forgo the $8,000 per acre XTO is offering under such a scenario.

Still, Wallner said he does not believe the offer is fair.

"I want to see all of us get more. Some people got suckered in to signing for $5 an acre," he said. "It is a rip-off."

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Simple answer is insert a definition of "nuisance oil" into the lease.

To Curtis Wallner,

     Take a look at Ohio Revised Code §1509.28 Ohio Forced Pooled Landowners - Delay In Payment . The producer gets to recovery 200% of the cost of drilling before you get a royalty.

Summary of Revised Code 1509.28:  Operators and the forced-in mineral owners pay particular attention to one part of the order — the money/payment provisions. Because the mineral owner never agreed to a lease, ODNR determines the terms by which the mineral owner is included in the unit operations, including the royalty interest, working interest and risk penalty. The terms of the order will differ as the situation dictates. In two orders issued to Chesapeake, each forced-in mineral owner received a 1/8 royalty interest, which commences upon production, and a 7/8 net production revenue interest that begins to pay out only after the operator recovers 200% of the cost of drilling and operation for the first well and 150% of the costs of any subsequent wells.

As I understand it (as it would work and / or has worked in Ohio) the forced pooling and associated penalties are imposed only if the adverse landowners have been presented and have refused the lease offer already accepted by 80% of the other lessors in the proposed pool.

The way I see it, the real catch would be if 80% of the lessors included in the proposed pool have signed on to a sub-standard pre-Utica, perhaps 'tailgate class' type of a lease.

Considering having read about many acres of lands already leased / 'held by production' by pre-Utica sub-standard leasehold agreements I see a genuine possibility (if not a probability) of that scenario playing out many times.

Have to say an $8k per acre sign on bonus accompanying a good landowner cognizant leasehold agreement (minus the devils in the details) would probably be enough to turn our heads.

Under those circumstances being paid (EVEN) a 12.5% royalty with no deductions on all production wouldn't be considered a rip off by us.

You are absolutely right. If they are gonna have it in the lease wording, it should also be explained ,or defined in some way. According to Jack Young, it's a small amount of oil that they dispose of instead of selling. At $8000. bonus and 20% royalties, I'd get it done asap!

What is ‘Nuisance Oil’?

I think it is like "nuisance money" or "nuisance fun".......

Nuisance oil is an old concept in the business - it describes quantities of oil too small to justify the expense of separation, heating and sale. If you set up a small tank to hold any oil a well produces and after 5 years you've collected 12 bbls (which we've had happen) you typically don't worry about measuring the oil or paying any royalty on it when it gets disposed of. (Generally you pay to get rid of it or sell it at a steep discount.) This doesn't happen much these days, but it does happen on occasion.  

To me, the words 'nuisance oil' are just another couple of worrisome words that apparently may show up in a leasehold agreement and which are new to me (used in this context).

If the 'E & P' / 'Producer' / 'Developer' would 'Control' the 'Flow' / amount of oil 'Production' by 'Throttling' / 'Choking Back' the well (and from what I read, it happens frequently for many reasons including marketing); what prohibits the 'E & P' / 'Producer' / 'Developer' from labeling the resultant oil 'Production' as 'nuisance oil' and if for no other reason than to maintain the leasehold as 'Held By Production' / 'HBP' (even if massive amounts of recoverable oil exist) ?

To me, more worrisome words to contemplate as perhaps only being used to the advantage of the lessee and of course perhaps only being used to the disadvantage of the lessor.

Go ahead, call me a 'cynic' / 'cynical' - feeling like it's actually a compliment in these matters these days.

There's no connection - you only have nuisance oil in a gas well, and they would be held by gas production or some other lease term anyway. I've never seen this be an issue in 35 years in the business. But you are still free to worry if that's what you like!

Thanks for your encouragement Jack.

I try not to worry but a troublesome thought or so pops into mind every so often.

I'm thinking it's on the account of the stuff that I've been reading and trying to understand (on this site and elsewhere) - and not because of some character flaw / inability to understand things in general.

Thanks again man.

J-O

Jack, thank you for the explanation.

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