The chief of the Division of Oil and Gas Resources Management (DOGRM) recently issued a new unitization order pursuant to R.C. §1509.28. This is only the second such order since the beginning of Ohio’s shale drilling boom. The unitization statute has become an increasingly important legal tool for oil and gas operators. We are seeing a new body of law take shape in Ohio, and last week’s order doubled its volume.
The process of unitization is conceptually related to mandatory pooling (R.C. § 1509.27), and is part of our ongoing blog series on Ohio’s compelled participation laws. (Read part 1 and part 2.) A unitization order allows oil and gas operators to join, or unitize, recalcitrant mineral owners to create the large tracts of land — often comprising hundreds of acres — that are necessary to profitably and efficiently produce hydrocarbons from shale formations while protecting each owner’s correlative rights.
In last week’s order, the chief granted Chesapeake Energy Corp. the right to operate a 549-acre tract of land as a unit and compelled the inclusion of 61.5 non-consenting acres in the unit, which is known as the Colescott South Unit. (See Order for Unit Operations of the Utica/Point Pleasant Formations for the Colescott South Unit, Carroll County, Ohio. Order No. 2013-06. March 7, 2013.) Stated differently, Chesapeake had already acquired lease rights to 88 percent of the proposed Colescott South Unit (the statute requires 65 percent) before filing its application. After considering the testimony and evidence presented by Chesapeake at its hearing, the chief concluded that the proposed unit “is reasonably necessary to increase substantially the ultimate recovery of oil and gas” and that “the value of the estimated additional recovery of oil or gas [from the unit] exceeds the estimated additional cost incident to conduction the operation of the [unit].”
On the Colescott South Unit, Chesapeake is proposing to drill three wells from one well pad. Similar to the previous order issued in 2012, the chief ordered the participation of unleased mineral owners subject to the following terms:
- Unleased mineral interests receive a 1/8 royalty interest and a 7/8 working interest, allocated according to the prorata share of their acreage in the unit.
- Working interest payments begin only after Chesapeake recovers 200% of the cost of drilling, testing, completing and producing the initial well, and 150% of the costs of any subsequent wells.
- Chesapeake is not permitted to conduct any activity on the surface of any unleased property.
Notably, the chief did not require Chesapeake to offer the unleased mineral owners a bonus payment. The July 2012 order for Chesapeake’s Rufener Unit had required Chesapeake to offer the unleased owners a $1,250 per acre signing bonus. It is not clear if the omission of this requirement signals a shift in the chief’s position or if such a requirement was omitted because the evidence presented by Chesapeake established that a fair offer, including signing bonus, was already extended to the unleased owners.
We are still in the early stages of development of Ohio’s shale resources, but as the play continues to develop we expect to see many more unitization orders.