Placing a rig on a parcel of land in Ohio not included in the drilling unit.

Included in the 4000 page budget bill passed in Ohio in September of 2011 was a law that states that a drilling rig for horizontal drilling can be placed on a parcel of land not included in the drillinlg unit. The following is a link to that law. http://codes.ohio.gov/orc/1509.022 I fail to see who can benefit from this other than the gas and oil companies  It looks to me like those of us with old leases that state that another well can be drilled under the terms of the old lease can get a rig on our property and end up with no spud fee and no royalties. What do others think?

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Permalink Reply by Jack Straw on September 19, 2012 at 9:00am

I can foresee circumstances where the best surface location for the vertical portion of horizontal wells would be outside the swath of subsurface horizontal well bores.

It gets more interesting were the Surface and O&G rights severed and held by separate entities.

If all of the well was cased off and there was no production from beneath the property that hosts the surface location – is the owner of the O&G rights (and any lessor) legally involved (as no production is coming from beneath the property)?

 

I think that this might provide rich fodder for at least two dueling Attorneys.

I know how I would think things should be handled; I do not know how it would end up being handled after likely litigation.

I would expect that the surface owner would need to come to an agreement such that the O&G operator could drill the well. I would envision such an agreement would result in surface damages and additionally either an annual rental or an overriding royalty interest to the surface owner. I think that the drilling of the well would be a matter to be amicably settled between the surface owner and the O&G operator; no involvement with the owner of O&G (should the O&G had been severed). I think of the vertical portion of the well as a virtual vertical pipeline.

Again, I know how I would think things should be handled; I do not know how it would end up being handled after likely litigation.

In any case, it is interesting to contemplate the many novel situations that are arising from the law trying to catchup with new realities.

 

All IMHO,

                  JS

Permalink Reply by Kathi Albertson on September 22, 2012 at 4:31am
But would the land owner have the opportunity to be part of the discussionif the existing lease states that

"The consideration, land rentals, well rentals or royalties paid and to be paid, as herein provided, are and will be accepted by the Lessor as adequate and full consideration for all the rights granted to the Lessee and the further right of drilling or not drilling on the leased premises whether to offset producing wells on adjacent or adjoining lands or otherwise as the Lessee may elect." ?

This is our main concern with the new rule that a rig can be placed without including the parcel in the drilling unit.
It looks like we end up with nothing but a mess.
Permalink Reply by Kathi Albertson on September 22, 2012 at 7:16am
A better question is why should a property owner not in the unit be forced to have the rig?

I am not asking for someone else's royalties. However, neither am I asking for a rig on my land if I am not included in the drilling unit and am not getting paid anything for it under the terms of an old lease. While I am aware that we need to abide by the old lease, I am objecting to the legislature passing new laws that allow me to be taken advantage of under the old lease. I feel certain that I am not the only one that this situation might apply to.
Permalink Reply by Kathi Albertson on September 22, 2012 at 2:35pm
Utica,

I am afraid that you are missing my point. In none of my three posts on this subject have I stated or implied that I am entitled to royalties on gas or oil from land that is not mine. I don't know where you get the idea that I am "demanding" to be paid anything. What I have said is that I am objecting to ORC 1509.022 that changes the rules, thus allowing a rig for horizontal drilling be put on a parcel of land not included in the drilling unit. I don't think the intention under the old lease that allowed for another well to be drilled on the parcel that would have been included in the drilling unit was ever to allow for a well to be drilled that would not include taking gas or oil from the leased parcel and thus including it in the drilling unit. Once again I will say that my issue is not with who gets the royalties but in the change in the rules in the middle of the game.
Permalink Reply by Rick on September 29, 2012 at 2:10am

Utica ...If there is "no requirement for a person witha a non-draining vertical pipe (ie pad) to be included in a Production Unit" ,,,,why do they want to change the law? Also, only to be fair, if that law were in place back then, Kathi and hundreds of other landowners would most likely have not signed a lease like that. Or at least placed an addendum in it stating that was not acceptable. Thats what everyone will now do if the law is passes. They will null the law by writing an addendum that does not permit it. the only ones screwed will be the people who signed before the law is was passed, as I doubt many have put that clause that would prohibit the practice in their lease. Why would you want to give up use of 5 to 10 acres of your property that YOU pay taxes on for a drilling company to build a facility and only your neighbors make money on it? I like my neighbors, but not that much!

Permalink Reply by Rick on September 29, 2012 at 3:49am

ok Utica we shall play semantics.. semantics...  Why is it "they are passing a new law" if, as you say "There is no requirement for a person with a non-draining vertical pipe (ie pad) to be included in a Production Unit." Actually I do believe they have passed that law last year.

Utica ...If there is "no requirement for a person witha a non-draining vertical pipe (ie pad) to be included in a Production Unit" ,,,,why do they want to change the law?(see my post to you just above) Also, only to be fair, if that law were in place back then, Kathi and hundreds of other landowners would most likely have not signed a lease like that. Or at least placed an addendum in it stating that was not acceptable. Thats what everyone will now do if the law is passes. They will null the law by writing an addendum that does not permit it. the only ones screwed will be the people who signed before the law is was passed, as I doubt many have put that clause that would prohibit the practice in their lease. Why would you want to give up use of 5 to 10 acres of your property that YOU pay taxes on for a drilling company to build a facility and only your neighbors make money on it? I like my neighbors, but not that much!

Permalink Reply by Rick on September 29, 2012 at 5:06am

Ummm... Mr Utica, People do get royalties "that are being generated from the Gas and Oil that is being extracted from your neighbor's property" ( you said this earlier) thats the way units work ya know...the lateral that you are recieving royalties from may be far from the property line of your land, and may never have a lateral under your land, or at least for many years, but because there are many acres in the unit, you share in the whole unit's production... therefore you can be recieving royalties "that are being generated from the Gas and Oil that is being extracted from your neighbor's property"....sheesh...

Permalink Reply by mark ayers on September 29, 2012 at 7:23am

How will the land  owner with the pad have his o&g extracted from under that acreage where the pad sits, by another lateral from some distant pad? I dont think that would happen. So the o&g will end up left under the ground for the benefit of a near by unit.  The land owner is getting the shaft in this scenario in more ways then one...   

Permalink Reply by Rick on October 1, 2012 at 3:21am

Utica, let me tell you something about farmers since most of the land involved in these plays are owned by farmers or rural people with strong values and propertiy ownership pride. Now, you may be a farmer yourself (are you?) but here's how I see it from being around "these parts" for a while now. The more you piss off a farmer, the harder he or she will dig their heels in and resist. Take advantage of a farmer or his neighbors, and the more stubborn they become. (Love it) This creatse an adverserial atmosphere for negoiations. If the farmer is tricked or taken advantage of by some "philadelphia" (or in this case) "texas" lawyer language included in a lease when neither party could possibly know about what technological advancement was coming, he or she will just shut down and contunue with life as it was for years, doing chores, plowing and planting in the spring and harvesting in the fall as was their plan and dream for many years... (think: screw you!) no biggie. Anyway, to negotiate from this adverserial position, to deal with the land owner that is not HBP, or if lease adjustments are needed,  (think Kathleen) the O&G company will have to grease the machine more and more with what? Money and terms... landowners come to know that O&G needs us more than we need them. You can lead a farmer to a lease, but you can't make 'em sign it! O&G is making a big mistake by hanging on every if, ands, buts, mays, shalls, wills, cans, etc, commas, and periods that are strategically or unintentionally placed in lease language. Do yourself a favor and go hang out at the local redneck bar for a few friday nights... I've seen many a farmer go from being polite and nice as can be good ol'boy to asshole in 3.2 seconds!  

Permalink Reply by Jack Straw on September 29, 2012 at 10:03am

I think that you are reading too much sinister intent into the simple law.

Let’s look at what the law states:

“1509.022 Location of wells using directional drilling.

Except as provided in section 1509.021 of the Revised Code, the surface location of a new well that will be drilled using directional drilling may be located on a parcel of land that is not in the drilling unit of the well.

Added by 129th General Assembly File No. 28, HB 153, § 101.01, eff. 9/29/2011.”

 

It states: “the surface location of a new well that will be drilled using directional drilling may be located on a parcel of land that is not in the drilling unit of the well.

It does not state that land can be taken by “eminent domain”, there is no provision for locating a well on property neighboring a unit by forcible means.

 

I can envision circumstances by which the only possible surface location for a drilling pad might lie on property adjacent to the drilling unit. Under these circumstances I can see an O&G Operator approach a landowner and negotiate for the right to locate the drilling pad on their property (and yet the pad be outside of the production unit).

It would be up to the surface owner to decide whether he was willing to accommodate and it is up to the surface owner to decide what would constitute acceptable compensation.

 

Hypothetical:

Company A approaches Jack and explains that they need 5 acres of his property for a drilling pad and an access road. They warrant that the producing horizontal portions of the wells will all be outside Jack’s property and that Jack will not be in the production unit.

The Landman offers Jack $20,000. for use of 5 acres of Jack’s property for as long as the wells are producing. Jack laughs (hysterically) and counters: “I will accept no less than $80,000. and a 1/32nd ORRI (overriding royalty interest) on all production from the wells”.

The Landman recoils in horror and leaves.

A month later, the Landman returns and offers $80,000. and no ORRI.

Jack counters: “I now want $120,000. and a 1/32nd ORRI.

The Landman rushes off in a huff.

The Oil & Gas Operator needs Jack’s land for his surface pad; otherwise the neighboring land cannot be exploited. There is no provision in the law which would force Jack to relinquish his property. Jack’s 5 acres has suddenly become very valuable to the Oil & Gas Operator (and therefore to Jack). For the wells to proceed the Oil & Gas Operator and Jack will need to reach a mutually beneficial agreement.

A month later, the Landman returns and reluctantly accepts $80,000. damages and a 1/32nd ORRI - all conditional upon Jack signing a confidentiality agreement (so that no one will know how successful Jack was in negotiating over his 5 acres of cow pasture).

 

The granting of ORRI (overriding royalty interest) is common in the O&G business.

The granting of ORRI in no way diminishes the amounts that the royalty holders in the production unit receive. The ORRI comes out of the O&G Operators pocket.

A common example of people receiving ORRI are those lease flippers who jump in and acquire blocks of leases and then market a package of leases to a legitimate O&G Operator; they typically receive a fixed sum of money + an ORRI.

 

All IMHO, 

                  JS

Permalink Reply by Kathi Albertson on September 29, 2012 at 12:36pm
Jack,

You have given a lot of good information. However I am still concerned about the provision in the old lease that was negotiated by the previous owner of a parcel of land that I own. It appears to me to say that a new well can be drilled on that parcel under the provisions of the lease signed by the previous owner. (Please look at my response to your first reply at the beginning of this discussion for the wording on the lease.) So say Chesapeake, or someone else, buys that lease and wants to drill horizontally on the adjacent property without including my parcel in the drilling unit, are they to able to do so under the terms of the old lease?

Thanks for your time and that of other responders to this question.

Kathi
Permalink Reply by Jack Straw on September 29, 2012 at 1:33pm

Kathi, I assume that I am correct in the belief that you are HBP under the terms of an existing lease by virtue of an old shallow well drilled on your property prior to your ownership of the property.

RE the lease clause you are concerned with: “The consideration, land rentals, well rentals or royalties paid and to be paid, as herein provided, are and will be accepted by the Lessor as adequate and full consideration for all the rights granted to the Lessee and the further right of drilling or not drilling on the leased premises whether to offset producing wells on adjacent or adjoining lands or otherwise as the Lessee may elect."

I will first state that nothing I say should substitute for the advice of a qualified Attorney; that stated, I will offer my opinion.

Let’s get to the phrase “offset producing wells on adjacent or adjoining lands”.

This refers to the custom of offsetting a well that had been drilled on a neighboring property.

With the “right of capture” a well can be drilled just across the border from your property (in Ohio, I believe that they can drill as close as 330’ from a boundary).

If the company who has the lease on your property chooses to, they can drill an offsetting well on your property – this would be done to prevent the well on the neighboring property from drawing gas or oil from your property.

The phrase “offset producing wells on adjacent or adjoining lands” allows them to protect their rights (and yours) by drilling a well on you that offsets a well drilled close to you on an adjoining property. It would protect you from a neighbor draining your property.

Adding “or otherwise” to the phrase allows them to also drill anywhere on the property as defined by the lease. I do not see as to how it could ever be construed as to allowing them to directionally drill onto another property and not compensate you.

For the time that the lease was written, the language of the clause was clear and sensible.

I believe that you are reading too much into both the verbiage of the old lease and the intent of the recent law.

It is my opinion that the recent law simply puts in place a mechanism that would allow the state to issue a permit in an uncommon situation where a surface pad would (for logistical reasons) need to be outside of a production unit. There is no mechanism contained within that law that would seem to enable a private entity to confiscate your property for their sole benefit.

The new law makes sense in that it provides a mechanism whereby otherwise stranded gas or oil could be exploited. But, I would expect that this would require an amicable and mutually beneficial settlement between the owner of the surface and the O&G Operator.

The only time that I would expect that it could get sticky is should one entity own the surface and another the subsurface. The person who owns the subsurface might feel that they too have cause for compensation. Since the vertical portion of wells are simply a virtual “pipelines”, it is my opinion that the only way a person who might own the subsurface might have involvement would be in situations such as if the wells interfered with such things as the mining of coal within the vicinity of the wells.

Again, I see no cause for undue concern.

 

All IMHO,

                   JS

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