Constitutional Contract Protections Overrides Ohio’s Controversial Oil and Gas Statutory Unitization Powers, Says Ohio Appeals Court

by James Yskamp, Supervising Attorney

The Ohio Fifth District Court of Appeals issued a ruling on August 13, 2018 that could provide some protections for lessors that have leases with clauses that contain limitations on pooling or units.

The case, American Energy – Utica, LLC et al. v. Ronald Fuller, involved a lease that had included a handwritten clause that read “UNITIZATION BY WRITTEN AGREEMENT ONLY!”[1]  The lease was originally signed in 1981 by the landowners and D.B. Shaffer & Associates, Inc., and the rights of the lessee were assigned to EnerVest in 2009, and then to American-Energy-Utica (“AEU”) in 2013.[2] AEU then requested that the landowners agree to amend the lease in order to allow unitization of the leasehold, but the parties could not reach an agreement.[3] Rather than continue to negotiate, AEU filed an application with the Ohio Division of Oil and Gas pursuant to Ohio’s mandatory unitization statute, Ohio Revised Code Section 1509.28, in order to force the landowners’ property into the proposed unit, against the landowner’s will and in direct conflict the lease itself.[4]

On this particular issue, the Court held that using the mandatory unitization law at Section 1509.28 to circumvent the clear language in the lease violated the Section 28, Article II of the Ohio Constitution because it was “used to retroactively impair the obligation of the contract.”[5] The Court also found that this constituted a breach of the lease and remanded to the trial court with instructions to determine the remedy.[6] While the ultimate remedy remains to be seen, the constitutional finding by the Court is important because it suggests that the unitization statute can’t be used to force lands subject to leases with similar unitization restrictions into units.

For context, a “pool” is defined as an underground reservoir containing a common accumulation of oil or gas, or both.[7] A “unit” is simply a formal designation of contiguous land outlining the boundaries of development of a pool of oil and/or gas resources. With the recent development of technologies to horizontally drill and fracture deep shale formations in order to extract oil and gas resources, the concept of a “pool” in which to develop a unit has broadened greatly to include large geological formations of shale in an area. However, in 1965, when Ohio’s mandatory pooling and unitization statutes were enacted, a “pool” of oil or gas was more limited to a relatively free flowing reservoir in a geological formation. The drafters of the statutory sections outlining “mandatory pooling” and “mandatory unitization” could not have contemplated “pools” from which to form units would grow to the many hundreds of acres that we see today in the Utica and Marcellus shale development.

In general, the purpose of “mandatory pooling” is designed to force just enough land into a unit to meet the state’s minimum spacing requirements. In this way, mandatory pooling laws are passed to prevent one landowner from preventing other landowners’ ability to develop their property, because they cannot meet the state’s minimum spacing requirements without at least some of the non-consenting landowner’s land in the unit. The Chief of the Division of Oil and Gas can issue these forced pooling orders if he finds that the mandatory pooling is “necessary to protect correlative rights and to provide effective development, use, and conservation of oil and gas.”[8]

If you are a fan of private property rights, you might find forced pooling troubling, but you will almost certainly find forced unitization far more nefarious in the context of today’s shale gas development. Unitization in principle is closely related to mandatory pooling, because it compels non-consenting landowners to include their land in a unit for ultimate oil and gas development. However, where mandatory pooling is only allowed to the extent necessary to meet minimum spacing requirements, forced unitization can capture vast amounts of land, up to hundreds of acres in size. The requirements under the forced unitization statutory section are that the applicant have 65% of the proposed unit through consent or ownership, and be “reasonably necessary to increase substantially the ultimate recovery of oil and gas, and the value of the estimated additional recovery of oil and gas exceeds the estimated additional cost” of the unit.[9] In other words, the Ohio statute may allow private oil and gas companies to take of up to 35% of property within a proposed unit (which the companies come up with) as long as they can show it would be profitable. Since units for shale gas development can be upwards of 1,000 acres or more in size, this statute as its applied today can allow hundreds of acres at a time to be forced into development without agreement or consent of Ohio property owners.

Saving discussion on the constitutionality of the general application of Ohio’s forced unitization law to current shale gas development for another day, The Fifth District Court of Appeals’ ruling in Fuller appears to offer protections to landowners who have contracted limits on unitization from Ohio’s intrusive forced unitization law. Even landowners that are open to negotiating a lease often tell us that they feel like they can’t negotiate on equal footing with an a oil and gas company when company representatives threaten or initiate forced unitization proceedings if their standard lease terms aren’t met. Some older oil and gas leases contain size limits on units to 40 acres or less, and horizontal drilling in the Utica shale in Ohio often requires units of far greater than 40 acres, so the Fifth District’s decision could give landowners with such lease restrictions a lot of leverage in negotiations when approached to amend their lease.

Property rights issues, and oil and gas rights issues in particular, are often complex, and it is always advisable to speak to an experienced attorney about your rights when approached to sign or amend an oil and gas lease.

[1] Am. Energy - Utica, LLC v. Fuller, 5th Dist. Guernsey No. 17 CA 000028, 2018-Ohio-3250, ¶ 7.

[2] Id. at ¶ 10.

[3] Id. at ¶ 11.

[4] Id. at ¶ 15.

[5] Am. Energy - Utica, LLC v. Fuller, 5th Dist. Guernsey No. 17 CA 000028, 2018-Ohio-3250, ¶ 40.

[6] Id.

[7] O.R.C. § 1509.01(E).

[8] O.R.C. § 1509.27.

[9] O.R.C. § 1509.28.

Living in Coal Country: Justice for Sale

If you look at the law, you’ll see that you have protection. Living and working in coal country and the processes of coal extraction coexist beautifully in the statutes and rulebooks governing the handling of claims of damage from the process of mining. In reality, however, the law pits a landowner against two very powerful and resourceful figures: the coal mining company and the government, to enforce the landowner’s right to a replacement water supply or compensation for damage to buildings and lands that literally fall in to the ground due to subsidence once mining occurs in the area.

The law requires a replacement water supply or compensation for subsidence damage when a landowner complains to the mining company and the state conducts an investigation determining that mining was the presumptive cause or, for properties outside of a certain number of feet diagonally from the extracted coal, was the cause of the water loss or diminished quality or subsidence. If the state makes that finding, then the coal company is allowed time to rebut the presumption or otherwise prove that the cause of subsidence, contamination or diminished quantity of water is something other than mining. Many times, we see the state giving the coal company multiple opportunities to make such a showing.

Then it happens: the state issues an order stating that the coal company was right. We hear the same story from our clients almost every time. The story is that the state first orders the mining company to provide a temporary water supply replacement, which is usually in the form of a water buffalo that has to be filled at least once a week. Then, the state and the company test the water well for quality and quantity. They wait, test again, and may repeat this process as long as they see fit. Then, the company will produce an expert report that always seeks to rebut the presumption that they caused the damage. The state then gives in, sends a letter to the landowner stating that a replacement supply is not warranted, and the water buffalo is removed. Our client then has 30 days to appeal the decision.

Most of our clients start the appeal process headstrong to get their water back and seek justice. Even when we provide pro bono services, our clients are faced with the prospect of having to prove that the coal company’s actions caused the impact to their water or damage to their land and structures. The cost is daunting: around $15,000 at a minimum just for the development of an expert report. The decision our clients eventually have to make: spend money on an uncertain outcome to seek justice OR spend money on a solution to the home or structure damage, such as drilling a new and deeper water well or moving away. It’s an unfair outcome no matter which decision the client makes.

While we have settled many water supply replacement and subsidence cases, we have never won one. For example, after one 5-day hearing, Ohio’s Reclamation Commission, where appeals of the State’s decision on causation must be brought, factually ruled out every single one of the State’s reasons for causation (well maintenance, drought, and other local users), and yet could not reach a quorum on whether the nearby mining caused our clients’ water losses. The procedural result of this non-decision is that the State’s finding is upheld, despite the finding that the basis for their decision is false. These landowners are still without a potable water supply, more than 3 years after mining approached their properties and their wells went dry, and despite having plenty of water for household uses for decades from these same wells. The combination of two well-funded parties in the State and the Mining Company against a landowner, and requiring the landowner to prove exactly what occurred in the underground water source and how its connected to the nearby mining, is a nearly impossibly heavy burden in today’s expensive legal and expert services market.  Our clients simply cannot afford to go through hearing. Most of the time, our clients cannot afford an expert witness to opine on the cause of the water loss or structural damage.

We have noticed the difference between legal protection on the face of the law and justice most in these water supply replacement cases among all of our environmental cases. It renders legal rights meaningless when the administrative process is used to bargain those rights away.

The Rustic Ridge Settlement: creating citizen enforcement opportunities in the coalfields

To date and without any explanation of its consideration of the Pennsylvania Constitution's Environmental Rights Amendment, the Pennsylvania Environmental Hearing Board has put the burden of proving any objections to environmental permits, such as an inadequately sized geologic barrier between a newly proposed mine and an abandoned mine, on ill-equiped individuals and community organizations. 25 Pa. Code § 1021.122(c). Therefore, the most effective environmental permit challenges in PA are those where unsupported permit conditions are made practical, impactful and reasoned, which should make those conditions better. Defeating a permit is hard under these circumstances.

The process of challenging an environmental permit involves all-out litigation - factual & legal theory development, motions that whittle away at those theories and the parties respective budgets, hiring and working with scientific and engineering experts who can intelligently educate the judge on her expert opinion about the permit and its protectiveness. Then there's a lengthy trial where the administrative law judge sits as judge and jury. It's a three-party trial that typically pits an individual or community against a powerfully-aligned governmental agency and industry. Going to trial does not often yield the exact results sought. It's an expensive, and because of the inexplicable and unjust burden of proof rule, incredibly risky proposition to rely on the Board's hearing process to achieve reasonable results through a hearing on the merits.

Since we are, after all, lawyers as counselors instead of lawyers as monotonous predictors of the outcome of single court or administrative arguments, we can look at the permit challenge process as an opportunity to secure better results than what a full hearing on the merits may be able to achieve if the industrial party and community organization or individual party are willing to discuss settlement. Without fail, what my clients are seeking in this process is to be heard and valued for what they have to add to the decisionmaking process. So, in any process that I engage in for my clients, I seek to fulfill the objective of adding that client's value to the decisionmaking process. 

One of the best ways to ensure that your client is valued in environmental decisionmaking is to both maximize their access to information and data AND to give them as much future opportunity to enforce against violations of a permit (or a settlement agreement) in the future. In a hotly contested and well-funded coal mining permit challenge called Mountain Watershed Association v. DEP and LCT Energy Co. (Rustic Ridge Mine No. 1 case) we achieved that twofold objective in a way that should be replicated.

In the Rustic Ridge case, we achieved the following:

·      Barriers: 800 foot barrier increased to 1400 foot horizontal barrier between the Melcroft No. 3 abandoned mine & the new Rustic Ridge No. 1 Mine; a piezometer will be placed in the barrier to detect water level changes that would indicate an illicit discharge to the Melcroft No. 3; and quarterly monitoring and more frequent monitoring the closer the mining comes to the barrier of that piezometer goes to MWA.

·      Temperature: relocation of the wastewater outfall to a downstream location just prior to the confluence with Champion Creek.

·      Flow: 1500 gpm flow from dewatering of the coal seam reduced to 1,000 gpm to ensure that streambed erosion does not occur.

·      Noise & blasting: eliminated fan shaft & return shaft through development of three slopes in the pit; location of variable frequency fan underground during slope development; peak particle velocity limited to 1.0 inch per second; air blast limited to 126 db; seismograph installed at home nearest to mine & readings from the seismograph go to MWA.

·      Lighting: dark sky & canopy lighting to be used.

·      Information: Discharge Monitoring Reports, pumping rates & six month mining map to be provided to MWA regularly.

This settlement, which likely looks incredibly practical and reasonable, marks the first time in years that my client actually felt heard in the permit appeal process. On many occassions, we reached out to the governmental decisionmakers to try to make the exact points that the settlement agreement ultimately rested upon. The governmental attorney's response to our requests? Either that there's no need to meet or that my client has the ability to comment on the permit in the same way as everyone else. It is more than fair to criticize the PA governmental attorneys' apparent inability to do anything other than work to obstruct individuals and community organization's ability to be heard and valued.

It's not just the governmental attorney at fault. There's absolutely no reason that industries seeking permits cannot start the process of valuing the community in which they seek to operate long before a permit is even in draft form. If lawyers for those industrial users choose to push things through bureaucratic processes without valuing individuals and communities, then they should expect that hearings on the merits will focus on creating value by increased recordkeeping and data development as permit conditions, and by reducing environmental impact through more stringent pollution control requirements subject to citizen enforcement.

The way to engage in these otherwise lopsided hearing processes and ensure that you are meeting your client's objective of being valued in the environmental decisionmaking process is to see the attorney's role - for the industrial client, for the individual or community organization, and even for the government - as a true counselor, which involves much more than simply predicting the outcome of a legal argument. Lawyers as counselors can build value in all parts of the community and build community wealth. Use the settlement between a small watershed association and a coal mine as your guide for the possibilities. 

Emily

Day 5 & 6: Even the hunters have changed.

We spent day 5 broken into two parts: a fast rail-trail run from Marlinton to Cass, where we had a hearty lunch before heading out on technical and steep trail. For the second time, we were astounded by how few people used the trails: the rail trail and the mountain trail. If there was a theme to these last two days, it's that the amount of trail miles (and the unsegmented length of trail miles) available in WV are incredible. We heard stories about locals using the trail for cycling and horseback riding, but we didn't meet anyone running. Instead, we met hunters and one fisherman. If there was any disturbance to a trail, it was from a hunter dragging her deer down the trail or, in one case, from a bear cantering across the trail. There were instances when we wanted to alert mountain bikers about trails so that the cyclists could help prep the trail for running. Naturally, we started planning group runs and races that we could host across our tour.

On Day 5, we started to notice that the towns that we encountered had more of a quaint small town feel. Agriculture and farming dotted the landscape when we had only encountered a few small gardens in the days prior. The dogs that greeted us turned from those sought for protection - shepherds, pit bulls, and rottweilers - to hunting dogs - labs and beagles. And chain linked fences became non-existent in our last few days. We should mention that all the dogs we met, and especially the pit bulls early in our running tour, were very friendly. I think they just wanted to run with us. Only one dog required a little assistance - Connie walked her back to her house and told her to stay, which she did.

By the time we got to Cass, we realized that people were coming in from out of town to visit or stay for the weekend. The change was remarkable. People weren't just surviving, but deciding to spend time and money on the brink of West Virginia's glorious outdoors. Even the hunters had changed. They were coming in from out-of-state to hunt here. By the time we hit Davis, full blown tourism was upon us.

The extraction industry changed from coal to timbering by Cass. Where the historical markers were telling us about labor battles between coal miners and the coal industry in our first few days, the mill town historic markers described good labor relationships between owners and workers. There were company towns and company stories in both regions, but somehow the mill towns have turned to tourist destinations. The coal historical markers were typically all alone on the side of the road without a person in sight.

The stretch from Marlinton to Cass and then Durbin to Glady led us to start talking about racing - something we didn't talk about all week. In fact, we didn't even talk about training during our 6-day adventure. There was too much to see. We talked about what we were seeing. We only started talking about racing because we wanted to figure out how to let more people see this world that we had just discovered.

The fall colors must be breathtaking, but the November landscape on our last day gave us the subtle color contrasts that only wetlands surrounded by mountains can provide. The mountains started to outcrop and become even more amplified in their scenery.

We arrived at our cabin on the last day of running to get to work preparing a turkey dinner. The turkey, a heritage breed from Barton Farms and Gardens, turned out perfectly. We sat down, enjoyed a small feast, and talked about where we should go hiking the next morning.

You're probably wondering about how we're holding up, I'll say this: when you get up each day and go out for a run for the entirety of the day, you begin to feel very natural running for many miles. We all had different experiences with how we felt each day, but we all felt better over time. We were able to stay well-fueled by eating a good, protein-rich breakfast each day and a nice dinner each night. We cooked for ourselves for almost every meal. The breads we had from the Brimfield Bread Oven were the perfect accompaniment to our meals and snacks.

We also had critical gear and apparel on our run that got us through. Patagonia's trail running base layers and the airshed pullover were perfect for the crisp, freezing morning and sunny daytime running that we enjoyed. Nathan's hydration packs were awesome for the long haul: lots of pockets to store everything from food to clothing to lights and batteries. 

The folks who pitched in to help us along the way (both on the run and at home) deserve much credit. Roy Heger, Emma Hempstead, Rose Monahan, and Liz & Tom Kiousis were all wonderful crew. Jenn ran with us and crewed in an amazing display of logistical prowess. And Zach Vierheller both delivered the turkey and ran with us on the last day. Thank you.

We're coming home with stories, pictures, and a keen desire to retrace our steps with all of you.