Practical Considerations Regarding Ohio Landowners' Oil and Gas Rights
As a landowner, the law affords you certain property rights, but do you know the extent of these rights as they relate to oil and gas beneath your land? If your answer is "yes", congratulations, you are one of the few. But, if your answer is "no", well, don't worry, I hope to add at least some clarity to this confusing area of property law.
In the past decade, there has been a resurgence of oil and gas drilling in Ohio as new horizontal drilling technology has enabled drilling companies to tap into oil and gas deposits that were previously inaccessible. While this resurgence has not affected most landowners in the state, it has affected many in the eastern third of the state where portions of the Marcellus and Utica shale formations are located. Not surprisingly, the presence of oil and gas deposits presents Ohio landowners with a ripe opportunity to earn additional income by leasing the rights to drill and extract these minerals from their property. However, as with any endeavor involving legally binding documents, maximizing this potential benefit requires due diligence on the part of the landowner. Furthermore, for those landowners who think they may be able to successfully remove themselves from the reach of oil and gas companies altogether by refusing to enter into lease negotiations, Ohio's mandatory pooling laws provide a harsh reality check. That said, let's discuss what these laws mean and how Ohio landowners can best protect their property rights and financial interests by carefully negotiating an oil and gas lease.
Under Ohio's mandatory pooling law (Ohio Revised Code 1509.27), a drilling company may request mandatory pooling when it has been unable to acquire a sufficient number of leases to meet drilling permit requirements (i.e. baseline acreage and distance requirements for drilling a well). However, before a drilling company can file an application for mandatory pooling, it must show that: (1) it has assembled a majority of the unit (i.e. a majority of the land overlaying the pool has already been leased to the company - 90% or higher is recommended); (2) despite just and equitable offer negotiations with the minority holdout landowners, they continue to holdout; and (3) use of the holdout owner's land is necessary to complete the unit. While there is a review and appeal process for all such applications, granted applications often result in holdout landowners facing repercussions that they may have been able to mitigate had they carefully negotiated the terms of an oil and gas lease. Although the list below is not exhaustive, here are a few things every Ohio landowner should consider when negotiating an oil and gas lease:
- property use restrictions - how your use of the property may be affected by the drilling company's operations;
- financial benefit - oil and gas leases typically provide for royalty payments in the amount of 1/8th of the value of the specific mineral extracted from the property, but you are free to negotiate a higher amount. Additionally, beware of deductions as drilling companies often attempt to pro-rate royalty payments according to the costs they expended to process the oil and/or gas to get it to market;
- drilling company's access to your property and location of the well site - determine whether you are able to limit the drilling company's access to your property, including the location of where it intends to drill a well;
- renewals/extensions - although oil and gas leases have a fixed primary term (i.e. 10 years), they also have what is called a habendum (i.e. "so long thereafter") clause which could potentially extend the lease for an indefinite duration if you are not careful. Here are two common examples: "If there is a producing oil or gas well on the leased premises when the primary term expires, this Lease is extended for so long as (1) oil or gas is produced in paying quantities"; or (2) "there is a well capable of producing oil or gas in paying quantities.";
- assignments - it is advisable to require a drilling company to notify you in the event it assigns its interest in the lease to a third party; and
- mandatory arbitration clauses - invariably, a drilling company will try to get you to agree to mandatory arbitration which limits the remedies typically available to you at law.
As mentioned above, refusing to cooperate with a drilling company is likely not in the best interests of an Ohio landowner. Accordingly, by agreeing to voluntary pooling (i.e. entering into an oil and gas lease), an Ohio landowner at least has some room for negotiation that will allow him or her to potentially restrict the drilling company’s use of your property while maximizing the financial benefit flowing (no pun intended) from the royalty payments. However, as with all leases, please read each provision carefully to determine how your rights may be affected and the extent of obligations the drilling company owes to you. When in doubt, it is encouraged to consult an attorney because everyone knows that "an ounce of prevention is worth a pound of cure."