Court Decisions in Ohio in re: leases with wells 'in production' - looking for information

I will apologize ahead of time if I am not as on top of this particluar issue as I should be, and if this forum has already covered it at length. My simple searching was limitedly helpful.

Does anyone know if Ohio courts have made any rulings fore or against a landowner who has brought suit challenging an Oil & Gas Co. lease in either or both of these areas?.....

    Area 1 - What does "a well in production" really mean?  Does the well have to be commercially profitable, or will token amounts of product produced validate the lease and keep it active.  Who decides what is commercially profitable?

    Area 2 - My lease was executed by my grandfather in 1981.  At that time NO ONE (as far as I know) gave any thought to deep wells and horizontal drilling.  Has any court ruled on excluding deep well (mineral) rights from existing leases where there is NO mention of specific formations permitted to be explored/tapped/drilled or excluded from exploration/tapping/drilling, NOR, language as to depth limitations/exclusions?

Thanks in advance for any help you can provide in this area.  D.B.

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Permalink Reply by Markus on May 29, 2013 at 11:13pm

Much of this is determined in the lease language itself.

A well in production means just what it says - if it produces oil and/ or gas, it is producing.  

This whole issue of "commercially profitable" is a bit of a red herring.  Wells, particularly old stripper wells, may ebb and flow through periods of profitability depending on market prices for the commodity produced.  Back in the late 1990s when oil was at $9 per barrel, it could have been argued that the said well was not commercially  viable.  Today, that very same well could be very viable.  The same goes for natural gas wells, at $2 per MCF, they might not look very exciting but at $15/ MCF they could be very profitable.

Note that in Ohio, a very large percentage of existing wells (like over 60+%) of Ohio's 60,000 wells fall into the category of a stripper well.  If during the times of lower  prices, owners were forced to plug such wells, it would have taking a huge amount of production off the market which would not have been good for the state or country.

The reality is that the owner/ producer of the well decides how it manages that well.  If the producer possesses many wells, it might be that a small percentage of their wells subsidize the balance.  How the producer manages his/her affairs is up to them.

So, to be sure where you stand, you need to go to the exact terms of the lease.

If there is no pugh clause or clause excluding specific formations, the owner of your well probably has the rights to all strata to the earth's core.

Now, if you believe the producer has failed to honor their commitments per the terms of the lease, you have grounds to take action to have the lease made invalid. 

Start with engaging with the owner of the well first.  They should be willing to answer your questions.  In some cases, they are willing to come to terms with landowners where all can benefit from further development.  Sometimes not.  If they refuse to engage with you, you may need to consider seeking an attorney.

Permalink Reply by John OBrien, landowner advocate on May 30, 2013 at 1:49am

First of all the rules and standards have indeed changed.  It was the big O & Gs that started it when they went to landowners and offered an additional 1/16 royalty.  

And it looks like the courts are going to agree, because the big O & Gs are caving on this.  In Antero's quarterly report they show how much land they thought they had tied up in HBP and then goes on to say that they have a little less than originally thought because some are indeed not HBP.  Don't be afraid to contest it.  Some small operators are just now putting pump jacks on old wells trying to make them HBP.  If this is what is happening to you.  Don't let it happen.  The lease laws are most certainly changing as we speak.  The small operators can and will try to hold ground that they have not been working and try to say it is due to an influx in prices, but this is a thin veil and most judges will see through it.  Greed is a stealthy master.  What these operators really want is to steal your signing bonus and the royalty rider for big profit.  They will assign your lease in a heartbeat and give up those "productive wells" just as soon as they can get you to sign an addendum.  Get yourself a lawyer.  A good one will work for you and charge only if he wins.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on May 30, 2013 at 2:07am

Most leases say that production has to meet the "paying quantities in the judgement of the Lessee" threshold.  The judgement of the Lessee, however, is not an arbitrary number.  If a well costs an operator $3,000/yr. to maintain and it's only making $1,200/yr. in production a landowner could argue that it's no longer viable.  

An operator taking a well out of production for a year (say to repair a line) and then putting it back into production would usually not be enough to get it shut down.  Several years of non-production indicate something else and at that point landowners have a strong argument to get the well plugged.  I agree with Mr. O'Brien, call a capable attorney who does this sort of thing (not a guy who just became an oil and gas "expert" last year) and let them look at your situation.

Permalink Reply by J.D on May 30, 2013 at 4:36am

Marcus,

What is an approximate cost of maintaining a shallow well for a Lessee? I have a number of shallow wells that are only producing between $78. to $393. annual income for the last 12 months to the producer after paying royalty and state taxes. Another has an income of $890.00 for the last 12 months and the best well has paid $2,800. lessee income. 2 of the least producing wells have 0 production 6 of the last 12 royalty payments. Are these producing in paying quantities?

Regarding John's comment, I know personally that Triad/Magnum doesn't have all the hbp acreage they claim, in my case their estimate is off by around 100 acres of the 300 or so we have. The small producers who have assigned their leaseholds to larger companies have done literally no title/deed research and the bigs are just starting to find out what they really have.

It is amazing that lease transfers thru assignment require no title documentation to be filed.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on May 30, 2013 at 12:18pm

The cost of having those wells covered by an insurance policy is certainly more than $78/yr. Again, there is no real rule for this and if there was I don't know who would be in charge of enforcing it.  It sounds like the wells you have are dead for all intents and purposes.  Some drillers will let you out of old leases if you split the baby with them.  If you fight them hard enough you may be able to get them to plug the well (which is not cheap) and in return they'll take x% of any bonus money you may get.  That's a scenario that I've seen many times and it can help everyone avoid large legal fees and potential litigation that could take years to clear up.  So maybe you have to give a little bit away to get a deal done.  Some producers will release the whole thing as long as you take over the responsibility of running the wells.  I've seen a number of different outcomes on things like this.  

Permalink Reply by John OBrien, landowner advocate on May 31, 2013 at 12:17am

Marcus,

You are correct about the cost of insuring wells.  In Monroe county Ohio the average cost to insure a shallow well can be around $1500/month.  This being said, I can tell you that most of the wells go uninsured.  If they are insured, they are losing money on most of them.  If they are losers, how could they be considered HBP?  So much for the existing regulations. They are BS and should not even be considered when dealing with the horizontal wells and leases being sought in the "new era" of exploration.

Permalink Reply by David Brooke on May 30, 2013 at 5:10am

   Thank you all for the comments thus far.  HBP?  I should know what this is, but sorry, I don't.  To Marcus, I agree with J.D.'s question.... just what does the average pump jack well cost annually to run/maintain?  Yes, I/we (family) do have an attorney, but attorney fees can explode if you're not careful.  So I thought I would reach out to the forum for thoughts, opinions and information.  J.D. - your comments about commodity price fluctuation is spot on, and as it turns out (John), this is what our O & G co. has told us.  With the price of oil being what it is, it has made the wells 'more profitable' vs the price of gas which has dropped.

    Being familiar with our lease, it is one of those that arguably gives the O & G rights to the earth's core.  I was/am hopeful that a judge somewhere may side with landowners in bifurcating the rights in these older leases.  I will need to look more at the cost to maintain vs. royalties and production amounts.  I would also hope a judge would make some reasonable decision on when has a well arguably reached the end of its life.  Thanks again.  Look forward to more comments....  D.B.

Permalink Reply by John OBrien, landowner advocate on May 30, 2013 at 11:15am

HBP = held by production

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on May 30, 2013 at 12:21pm

A judge shouldn't change the terms of a contract arbitrarily.  And honestly, have you met some of the judges who operate on county levels?  I'm in Mahoning county and I certainly don't want any of our judges making new laws based on their particular interpretations of fairness.  As much as landowners hate it we need to maintain order in our society and sticking to legally binding contracts is an integral part of that.  

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on May 30, 2013 at 6:03pm

"Then why did you vote for them as a judge in the first place?"

To be fair I didn't vote for any of them.  I just happen to live in a hotbed of corruption and nepotism.  

" Furthermore, if leases (or certain provisions) violate Ohio law, they are not binding in the first place and should not been enforced against the landowner by any judge, including those you claim were elected in Mahoning County."

Well I don't claim them to be elected to Mahoning county.  That's sort of the job of the job of the Board of Elections.  And you're making my point for me.  How badly do you want to hand over the power of changing a contract to random judges who were elected because they have the right name in their home county?  This should be a legislative issue where citizens have (what currently passes for) adequate representation.

"Your other post above about a driller demanding part of the landowner's bonus money to plug a non-producing well it is already legally obligated to plug for nothing, is called extortion."

Yup.  It happens every day.  It's not right but it seems to be the last gasp that these lousy producers have.  I've seen guys demand to go to court and drag out cases that were clear losers and I've seen guys fold like a cheap card table.  The point is that without a good lawyer and a strong case this type of thing can be a mess for landowners.    

Permalink Reply by John OBrien, landowner advocate on May 31, 2013 at 12:23am

Marcus,

The laws on these worthless contracts for worthless wells should be changed at the State level by state lawmakers.  Regardless of who changes them they need changed since they do nothing but allow old rules to cheat landowners out of the new found prosperity they should as landowners be entitled to enjoy.  The landowner should always get the signing bonus, not the existing operator.  The increased royalty percentage should always be subject to negotiation and not hogged by the "so called" producer of shallow well formations when HBP is not profitable.  In other words, the landowner should always get his fair share.  The dollar amounts in question are too high to be subjected to laws meant to regulate the paltry dollar figures of yesteryear.  It's wrong, period.  Contract be damned.

Permalink Reply by Paul Martinelli on May 31, 2013 at 1:29am

So what is the State waiting for? I am not one for changing contracts just because one party didn't get a "fair" deal.  But this is an unforeseen, undreampt of, new situation.....and as you stated "dollar amounts are too high",  enough so that all should get a fair deal.

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