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Oil and Gas Update for 2015

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The Ohio Supreme Court has made it clear they have a keen interest in resolving legal disputes regarding detached or severed mineral interests, enforceability of oil and gas leases, and the respective rights of property owners and lessees or their assignees who received the right to explore and drill for oil and gas in Ohio.  Most of the cases accepted  by the Ohio Supreme Court deal with the Dormant Mineral Act (R.C. 5301.56), which was originally enacted in 1989 and amended in 2006.

The Ohio Supreme Court has accepted for review five Dormant Mineral Act (“DMA”) cases to determine whether the severed mineral interest can be reattached and become part of the surface owner’s property rights.  The Court has accepted the cases of Phillip Dodd v. John Croskey, Case No. 2013-1730, Chesapeake Exploration LLC vs. Kenneth Buell, Case No. 2014-0067, Corban v. Chesapeake Exploration LLC, Case No. 2014-0804, Walker v. Shondrick-Nau, Case No. 13 NO 402, and Householder v. Swartz, Case No. 2014-1208.  The Supreme Court is being asked to determine what constitutes savings events that allow a party claiming severed mineral interests to retain those rights.  The Court is also being asked to consider what the Ohio Revised Code Sections dealing with the DMA mean when they refer to a title transaction.  That question predominates as does the question of how to apply the 1989 version of Ohio’s DMA, particularly after 2006.

The Court will decide if the 1989 version provides for automatic reattachment of severed mineral interests, without further action taken by the surface owner, if no savings event occurred in the twenty years prior to the adoption of the 1989 version. The Court will also determine whether the 1989 version has a rolling look-back period or a fixed look-back period to determine if a twenty year savings event occurred, based on the effective date of the 1989 DMA.

The Court is also being asked to determine whether the 2006 version of the DMA applies to all cases after its effective date of June 30, 2006, or whether the 1989 version remains applicable to first determine if the 20 year look-back period results in reattachment.

The Supreme Court has also accepted the case of Hupp v. Beck Energy Corp., Case No. 2014-1933, where the trial court ruled that an oil and gas lease which could be maintained indefinitely without developing the property is void as against public policy.  The Supreme Court also accepted another proposition of law to determine if a provision in the lease allows the lessee to postpone development indefinitely and to unilaterally extend in perpetuity the time limits of the lease without development. Finally, the Court will address whether the lease is subject to an implied covenant to develop a property for oil and gas even though there is a general disclaimer of implied covenants in the lease.  The Court of Appeals reversed the Trial Court and the Supreme Court will now consider this case which is being closely followed by oil and gas lawyers in Ohio, since the Beck Energy Lease is similar to thousands of other leases in the State of Ohio.  If the Beck Energy Lease is void, then all the other leases may be void or subject to partial invalidation if an implied covenant was breached.

The Federal Courts have also been busy deciding oil and gas lease rights disputes. Some of these cases overlap with cases that have been decided by the Courts of Appeals in Ohio and are either pending oral argument in the Ohio Supreme Court, or a request to accept jurisdiction is pending in the Ohio Supreme Court.

The United States District Court for the Southern District of Ohio recently issued two companion decisions in Curtis v. Hess Ohio Resources, LLC, Case No.: 2:13-cv-0453 and DeRosa v. Hess Ohio Resources, Case No.: 2:13-cv-0453.  The Court determined that the leases were extended under provisions dealing with drilling-operations and shut-in rights granted to the lessee.  However, the Court held that Hess violated the implied covenant to develop certain acreage subject to the lease, but not yet included in the drilling unit and ordered that acreage be released from the underlying lease.  These cases demonstrate an important issue that is being utilized by landowners to partially invalidate leases.

In a partial victory for landowners, Ohio’s Fifth District Court of Appeals in Yoder v. Artex Oil Company, Case No. 14 CA 4, found that even when an oil and gas lease specifically disclaimed implied covenants, the lease was still subject to a covenant of good faith and fair dealing.  Based on the facts of that case, the Court found that the lessee did not breach the covenant of good faith and fair dealing.  If other Courts in Ohio (very few have decided this issue) find that this implied covenant exists, many old leases in Ohio will be invalidated.

On the environmental front, Ohio is considering changing horizontal well pad construction rules and has issued draft rules.  The rules are lengthy and technical in nature, but are designed to protect large scale shale drilling pads.  USEPA is now seeking input on emission standards for new and modified sources in the oil and natural gas sector in order to reduce emission of greenhouse gases (including methane and volatile organic compounds), by requiring new equipment and processes during hydraulic fracturing of wells.

Finally, U.S. Fish and Wildlife Service has published a proposed rule that will apply in the event U.S. Fish and Wildlife Service lists the Northern Long-Eared Bat as threatened under the Endangered Species Act.  This is important for pipeline operators and landowners subject to pipelines, since the Northern Long-Eared Bat can be found in numerous places in Ohio. When the Northern Log-Eared Bat is present, U.S. Fish and Wildlife Service will limit tree clearing to the months of November through March, which will have a significant impact on the timing of pipeline construction. Pipeline operators may increasingly seek immediate possession of property via court order, in order to put pipelines in service so that they can meet contractual obligations.

If you are a landowner, or a holder of severed mineral interests, please contact us if you have questions or legal issues regarding oil and gas rights, leasing enforceability, pipelines, and eminent domain, all of which are at the forefront of our oil and gas practice at this time.  You may e-mail Dale Markowitz at dmarkowitz@tddlaw.com or call (440) 285-2242.