On September 17, the Ohio Oil and Gas Commission issued Appeal No. 895, the first order concerning Ohio’s unitization statute, colloquially known as “mandatory pooling.” While the Commission’s order largely upheld the Ohio Division of Oil and Gas Resources Management’s initial unitization order, Ohio oil and gas operators should be aware of its slight modifications and future implications.
On May 13, 2014, Rex Energy filed an application for unitization of the Grunder North Unit in Carroll County, Ohio. The application requested inclusion of two unleased tracts owned by Ronald G. Roudebush, Trustee and Gary L. Teeter, Trustee (collectively the “Mineral Owners”). After hearing testimony from Rex and the Minerals Owners, the Division issued Chief’s Order 2014-544 on December 9, 2014, approving Rex’s development plans for four wells from a single pad encompassed within a 593 acre production unit. The division granted the Mineral Owners a 12.5% landowner royalty interest calculated on gross proceeds and a seven-eighths proportionate share of net proceeds from production only after Rex recovers 200% of the cost of the initial well and 150% of the cost of each subsequent well. Further, the Chief’s Order prohibited Rex from conducting surface operations on the Mineral Owners’ property without prior consent.
On January 7, 2015, Gary L. Teeter filed an appeal of Chief’s Order 2014-544 with the Commission. The Commission’s Appeal No. 895 focused primarily on whether the Chief acted lawfully and reasonably in issuing the Order. To resolve the issue, the Commission examined three issues: i) whether O.R.C. §1509.28 applied to the facts; ii) whether the Chief properly considered and approved Rex’s application; and iii) whether the terms and conditions of the Grunder North Unitization Order were just and reasonable.
Teeter argued that Ohio’s pooling statute applied and not its unitization statute. In determining that the unitization statute was applicable, the Commission granted great deference to the Division’s decision to move forward under O.R.C. §1509.28. The Commission noted that the pooling statute, applicable only to single well orders, is distinguishable from the unitization statute, which concerns orders targeting specific formations.
The Commission disagreed with Teeter’s argument that the Division neglected to extensively evaluate Rex’s economic projections and ‘rubber-stamped’ the application. While the Commission acknowledged that unitization was clearly necessary to increase profitability of the Grunder North wells, it did specifically reserve the right to employ more extensive scrutiny in ‘close-call’ situations.
Finally, the Commission generally considered whether the Order was just and reasonable. In its only departure from the Order, the Commission increased the gross royalty allotted to the Mineral Owners from 12.5% to 20%, which is the average royalty amount for the Grunder North Unit.
The Commission’s supportive-backing of the Chief’s Order is generally a positive for Ohio oil and gas operators. Ohio operators should, however, pay particular attention to the Commission’s authority to overturn a unitization order and its decision to increase the landowner royalty from the traditional 12.5% to the unit average.
This article was authored by Zachary Grey, Jackson Kelly PLLC. For more information on the author, see here.