Many thanks to Kevin Scott for his assistance in preparing this post.

On June 14, 2018, Governor Kasich signed into law H.B. 430 which will go into effect in September of 2018. The bill clarifies the language covering sales and use tax exemptions for certain oil and gas industry participants. Specifically, the new law modifies the existing statute governing the sales and use tax exemption for property used directly in producing oil or gas. Following recent actions by the Ohio Department of Taxation, H.B. 430 can help to ensure predictability and stability by reaffirming the sales tax exemptions received by Ohio oil and gas operators and service providers. Continue Reading New Ohio tax law clarifies and expands sales and use tax exemptions for the oil and gas industry

On March 5, 2018, the West Virginia Legislature passed new legislation known as the Cotenancy Modernization and Majority Protection Act, W. Va. Code § 37B-1-1 et seq. (Cotenancy Statute). This new Cotenancy Statute, which became effective June 3, 2018, is intended to facilitate oil and gas development of West Virginia properties that have numerous fractional oil and gas owners. It applies to tracts in which there are seven or more owners of the oil and gas in place, and changes West Virginia law by allowing an operator to produce oil and gas without the consent of all oil and gas owners under certain circumstances.

Background

Prior to passage of the Cotenancy Statute, West Virginia law mandated consent of 100 percent of the oil and gas owners before an operator could lawfully develop the oil and gas estate. If any oil and gas owner refused to sign a lease, regardless of how small that non-consenting owner’s fractional interest, the operator was compelled to either forego development or file a partition action under W. Va. Code § 37-4-3. Through partition, an operator could acquire the non-consenting owner’s interest at fair market value, as appraised by three special commissioners appointed by the court. Continue Reading West Virginia joins majority view on oil and gas leasing with new cotenancy statute

The Ohio Supreme Court’s latest oil and gas decision is good news for the industry. On Jan. 3, 2018, the Court decided Alford v. Collins-McGregor Operating Co., Slip Opinion No. 2018-Ohio-8, which held that under Ohio law, “there is no implied covenant to explore further separate and apart from the implied covenant of reasonable development.” Id. at ¶25.

The facts are straight forward and did not seem to make much difference in the decision. The Plaintiff-appellant filed suit in 2015 in Washington County against Defendant, a conventional oil and gas operator who had continuously operated a conventional Gordon Sand well on Plaintiff-appellant’s 74 acre parcel since 1981.   Continue Reading Ohio Supreme Court rejects implied covenant to explore further

Last week the Ohio Northern District Court, Eastern Division issued a decision in Lutz v. Chesapeake Appalachia, LLC, N.D. Ohio No. 4:09-cv-2256, 2017 U.S. Dist. LEXIS 176898 (Oct. 25, 2017), which involved a dispute about whether Ohio follows the “at the well” rule (which allows oil and gas royalty payments to be downward adjusted to account for a lessor’s pro rata share of post-production costs) or the “marketable product” rule (which does not allow producers to adjust royalty payments to account for post-production costs).

The case has an interesting history. In 2015 District Judge Lioi certified a question of law regarding post-production costs to the Ohio Supreme Court. The Ohio Supreme Court accepted briefing and heard oral argument before returning the issue to the Judge Lioi with instructions to interpret the disputed leases according to their plain language. The Ohio Supreme Court held, “[u]nder Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decertify the question of law submitted by the United States District Court for the Northern District of Ohio, Eastern Division.”
Continue Reading Federal district court finds that Ohio allows deduction of post-production costs from royalty payments required to be calculated “at the well”

On March 15th, 2017, the Ohio Supreme Court accepted a discretionary appeal in Alford v. Collins-McGregor Operating Company, Washington App. No. 16CA9, 2016-Ohio-5082. The Alford appeal arises from the Washington County Court of Appeals, Ohio’s 4th Appellate District. In Alford, the 4th District declined to expand Ohio’s implied covenant of reasonable development to encompass unexplored, deep formations.

The plaintiffs in Alford sought to forfeit their 1980 oil and gas lease as to all depths below the Gordon Sand formation. The plaintiffs own approximately 74 acres that are held by production from one well – a well that has undisputedly produced in paying quantities from 1981 through the time of the case. However, the plaintiffs asserted that the defendant-operators did not have the equipment or capital to explore or produce from depths below the Gordon Sand formation; specifically, they were unable to drill a horizontal well to produce from the Marcellus and Utica shales.

The court of appeals, in applying its recent decision in Marshall v. Beekay Co., 2015-Ohio-238, 27 N.E.3d 1 (4th Dist.), refused to expand the implied covenant to reasonably develop to allow for the forfeiture of a lease as a remedy for undeveloped deep rights. However, the Alford court left the door open for the Supreme Court in saying that “this is a complex, evolving issue with no easy answer.”

Although the determination of whether an operator breached an implied covenant is an issue often dependent on specific lease language, and thus one to be addressed on a lease-by-lease basis, the Supreme Court’s decision in Alford could have statewide ramifications in litigation concerning implied covenants.

You can keep an eye on how the appeal progresses here.

On Feb. 17, 2017, the 7th District Court of Appeals upheld a Mahoning County Court of Common Pleas decision that ruled landmen must be licensed as real estate brokers to be compensated for negotiating oil and gas leases.

In Dundics v. Eric Petroleum Corp., 2017-Ohio-640, the plaintiffs were landmen who had negotiated leases on behalf of the defendant operator. The landmen were promised $10 per leased acre and a 1 percent working interest in any wells placed on the leased acreage. In the landmen’s suit for failure of payment, the operator successfully moved to dismiss the case on the basis that the landmen were not entitled to compensation since they were not licensed real estate brokers. The operator pointed to Ohio Revised Code Section 4735.21 in support of its motion to dismiss, which states in part:

“[n]o real estate salesperson … shall collect any money in connection with any real estate or foreign real estate brokerage transaction, whether as a commission, deposit, payment, rental, or otherwise, except in the name of and with the consent of the licensed real estate broker or licensed foreign real estate dealer under whom the salesperson is licensed at the time the sales person earned the commission.”

Continue Reading Ohio appeals court requires landmen to be licensed as real estate brokers to negotiate oil and gas leases

This morning the Ohio Supreme Court issued a decision in Lutz, which arose when the federal Northern District Court of Ohio, Eastern Division, certified the following question of law to the Ohio Supreme Court: Does Ohio follow the “at the well” rule (which permits the deduction of postproduction costs) or does it follow some version of the “marketable product” rule (which limits the deduction of post-production costs under certain circumstances)?

The Supreme Court initially accepted the certified question and the issue was fully briefed and argued earlier this year. However, this morning the Court declined to make a blanket ruling regarding allocation of post-production costs. The Court concluded, “Under Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the certified question.” This essentially leaves the issue to the trial courts to decide, on a case by case basis, how the parties to a lease intended to allocate post-production costs.

Justice O’Neill dissented, explaining that he believes the court should have adopted the “at the well” rule, thereby allowing a lessee to deduct post-production costs from a lessor’s royalty. Justice Pfeifer also dissented, commenting that he would have liked the Court to answer the certified question by adopting the “marketable product rule,” thereby forcing lessees to bear the burden of all post-production costs.

This week, the Ohio Supreme Court issued key decisions on its pending Dormant Mineral Act (DMA) cases. The Supreme Court Announcement itemized the various decisions released this morning, which were further detailed in Court News Ohio . Only three cases received full opinions: Corban v. Chesapeake Exploration, L.L.C., Walker v. Shondrick-Nau and Albanese v. Batman, while the remaining cases were disposed of based on the authority of those three opinions.

Overall, the Corban opinion addresses the issues that were most anticipated by oil and gas lawyers around the state, finding that the 1989 version of the DMA applied a fixed look back from its effective date, and that it was only operative until its amendment in 2006. Critically, the Court also held that the 1989 DMA is not self-executing and that a surface owner was required to obtain a judicial determination of abandonment of a severed mineral interest under the 1989 DMA.  However, now that the 2006 version of the DMA has completely displaced any right to proceed under the 1989 DMA, only the 2006 version applies today.

 

Last year we reported on the flood of appeals pouring in to the Ohio Supreme Court raising dozens of questions about the Ohio Dormant Mineral Act (DMA), which can be found at R.C. 5301.56. A year later we finally have a few answers and the surge of new DMA appeals seems to have subsided.

This blog post provides a comprehensive update on DMA cases that have been decided and which remain pending before the Ohio Supreme Court to date. Overall, two cases have been decided – Dodd v. Croskey and Chesapeake Exploration, L.L.C. v. Buell – and 13 cases presenting 39 questions of law have been accepted and remain pending. There are no pending DMA appeals that have not been accepted for review.

Continue Reading Ohio Supreme Court still mulling many questions about the Dormant Mineral Act

On Jan. 21, 2016 the Ohio Supreme Court announced State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, Slip Opinion No. 2016-Ohio-178, a decision that finally laid to rest two important oil and gas cases that have been winding their way through the Ohio courts for more than four years – Hustack v. Beck Energy Corp., case No. 2014-1933 and State ex rel. Claugus Family Farm, L.P. v. Seventh Dist. Court of Appeals, case No. 2014-0423.

The opinion, which was authored by Justice French and joined by four other Justices, upheld oil and gas leases held by Beck Energy Corporation and which are said to directly affect almost 700 landowners located in southern and eastern Ohio. The Supreme Court decision addressed three issues; two from the Hustack case and one from the Claugus case. The Court, in a separate matter, also denied a request to toll the terms of the Beck leases involved in the cases.

Justice Paul E. Pfeifer, joined by Justice Terrence O’Donnell, concur in part and dissent in part.

Hustack v. Beck

1) Is the Form G&T (83) lease void as against public policy?

The leases at issue in this case were standard forms that were often used by Beck, known as a “Form G&T (83) lease.” The leases contained a provisions that allowed Beck to make delay rental payments if a well was not commenced within twelve months from the inception of each lease. The Lessors argued that this improperly allowed Beck to maintain the leases in perpetuity by making nominal delay rental payments, and with no obligation to drill. The Lessors argued that a contract that runs in perpetuity is void as against public policy in the state of Ohio.

The Court, citing precedent from Brown v. Fowler, 65 Ohio St. 507, 63 N.E. 76 (1902), disagreed with the Lessors, holding that Beck’s right to extend the leases by paying delay rentals, in lieu of drilling, only applied to the ten-year primary term of the lease.  Consequently, under the terms of the lease, if Beck failed to drill a well in the first twelve months it could extend the lease for up to ten years by making the required delay rental payments.  But, in order to extend the lease beyond the ten-year primary term, Beck would have to comply with the requirements stated in the leases to trigger the secondary term. In particular, to extend and maintain the leases into the secondary term, the form leases required proof that either oil and gas are being produced or are capable of being produced on the premises in paying quantities, or that the land is being operated in the search of oil and gas.

The Court discussed the definition of “capable of being produced,” as the Lessors also contended that this could extend the lease in perpetuity at Beck’s discretion. Again, the Court disagreed and held that Beck would not be able to determine if oil and gas were capable of being produced on the premises without first drilling a well.

The Court ultimately held that Beck’s form leases are not void as against public policy.

2) Is the Form G&T (83) lease subject to an implied covenant of reasonable development?

The second issue the Court addressed from the Hustack case was whether the form leases were subject to an implied covenant of reasonable development.

The Lessors claimed that Beck improperly failed to develop the leases, instead relying on payment of delay rentals to hold the leases. The Court ruled that Ohio law only imposes an implied covenant of reasonable development when a lease “fails to refer specifically to the timeliness of development.” The Form G&T (83) leases in these cases required Beck to commence development within ten years, and furthermore, expressly state that no implied covenant shall be read into the lease. For these reasons, the Court held that there was no implied covenant of reasonable development in these leases.

Claugus v. 7th District Court of Appeals

The Claugus case has its roots in the Hustack case.

In the early stages of the Hustack case, the trial court certified a class of Plaintiffs which included any Lessors who were subject to a Form G&T (83) lease.  Later, the Seventh District Court of Appeals entered various orders tolling the terms of all leases that were affected by the case. Claugus Family Farm was not a named party to the Hustack lawsuit and did not even receive notice of the lawsuit, but Claugus was a member of the certified class because their property was subject to a Form G&T (83) lease. Claugus discovered that they were affected by the Hustack lawsuit and tolling orders after another oil and gas company defected a new lease they had signed when due diligence revealed that their property was subject to a Form G&T (83) lease and tolling order.

Claugus sought a writ of prohibition from the Ohio Supreme Court to permanently enjoin the Seventh District Court of Appeals from enforcing its order tolling the Form G&T (83) leases on the Claugus property and a writ of mandamus directing the Seventh District to vacate its tolling order.

The Court laid out that in order to be entitled to a writ of prohibition, the moving party must establish “(1) the court of appeals is about to exercise or has exercised judicial power, (2) the exercise of that power is unauthorized by law, and (3) denying the writ would result in injury for which no other adequate remedy exists in the ordinary course of law.” The Court also noted that “Even if Claugus Family has an adequate remedy in the ordinary course of law, it may be entitled to a writ if the court of appeals ‘patently and unambiguously’ lacked jurisdiction.”

Similarly, for Claugus to be entitled to extraordinary relief in mandamus, it must “establish a clear legal right to the requested relief, a clear legal duty on the part of the court of appeals to provide it, and the lack of an adequate remedy in the ordinary course of law.”

The Court ultimately found that Claugus had an adequate remedy in the ordinary course of law because it had a chance to intervene during the Seventh District Appellate proceedings. Despite Claugus not receiving formal notice of the proceedings, Claugus’ counsel admitted to knowing about the September 26, 2013 tolling order sometime in October 2013. The decision rendered on the merits of the appeal did not occur until September 26, 2014. Thus, the Court found that Claugus should have moved to intervene during this eleven-month period.

The Court, in applying the part of the test requiring relators to demonstrate a lack of jurisdiction, ruled that the Seventh District had jurisdiction to issue an order to maintain the status quo during the course of appeal, and the tolling order did that. For these reasons, the Court denied Claugus’ writs of prohibition and mandamus, resulting in the validity of the original tolling orders

Beck’s motion for a tolling order

As Beck had done in each of the lower courts, it also asked the Ohio Supreme Court to toll the leases at issue in these cases during the pendency of the appeal to the Ohio Supreme Court. While Beck prevailed on every other issue in the case, it did not prevail on this point.  The Court, in a brief statement, denied Beck’s motion to toll the terms of the Form G&T (83) leases during the proceedings before the Ohio Supreme Court.

What to take away

Broadly, the Claugus decision seems to reaffirm the Court’s intention to apply traditional contract law concepts and analysis to oil and gas leases and to enforce leases as written, without allowing amorphous public policy arguments supplant traditional analysis to any greater extent with oil and gas lease disputes than with any other contract dispute.

More specifically, the Claugus decision (1) approves and refreshes old precedent which holds that under lease terms such as those at issue in these cases, delay rentals allow a lessee to extend a lease through only the primary term of the lease, and (2) holds that the phrase “capable of being produced,” when used in connection with the right to extend a lease into the secondary term, refers only to production from a well, not the possibility of production from undeveloped land, and (3) holds that Ohio law does not impose an implied covenant to develop when a lease requires development to commence within a certain period or when the lease specifies that no implied covenant shall be read into the agreement.