Although the Ohio Department of Natural Resources has not yet approved any requests for such orders, some landowners appear to have chosen to settle out of fear that such alterations of their lease terms are indeed possible.

It is important for landowners with unit size provisions in their leases to speak up to defend those provisions.

The rise of larger drilling units

Many Ohio leases signed before the horizontal shale drilling boom included unit size limitations appropriate for the kinds of drilling activities then occurring (160 acres or less). Some leases prohibited the leased property from being unitized with any other property.

Newer leases contemplating horizontal drilling usually contain larger unit size provisions (640 acres or more) in anticipation of the long horizontal wells. Horizontal drillers have taken assignment of many of the earlier leases, and have had to deal with the smaller unit size limitations or unitization prohibitions.

Generally, the drillers have either (1) negotiated lease amendments with the lessor that would accommodate larger unit sizes, or (2) drilled a horizontal well or wells while conforming with existing unit limits. Many of the wells drilled thus far in Ohio are on leaseholds with 160 acre unit limits.

The emergence of unitization orders

But in the last year or so some drillers have glommed onto an old Ohio statutory procedure that was basically unused until 2011, ORC Section 1509.28, entitled “Order providing for unit operation of a pool or part thereof.”

That statute includes a procedure for “unitizing” acreage overlying a defined pool of oil or gas, giving the ODNR Oil and Gas Resources Management Division the authority to involuntarily include lessors and oil and gas rights owners in the pool so long as 65 percent of those interests consent.

At least 22 such applications have been filed. And in a few of these, enterprising drillers have asked the ODNR to “conform” any “non-conforming” unit sizes stated in existing leases to the much larger unit size requested in the unitization application.

If such a request were to be granted, it would be as though the unit size negotiated years before would be ignored, overridden or amended by regulatory action.

So far, it does not appear that any of these requests have been addressed by the ODNR.

However, the threat to the “non-conforming” lessors and the cost of fighting such applications have motivated some landowners to settle. On other occasions, the drillers have withdrawn applications before hearings take place, possibly fearing an adverse precedent.

State law should block such violations, but …

Can they do this? Until a “nonconforming lease” unit size is affected by an order of the Division Chief, and probably is addressed in the courts, we will not know for sure.

But, it certainly should be argued that they cannot legally do this. The unitization statute, 1509.28, provides the means by which an order for unitization addresses reasonable consideration to an unleased participant, or an involuntary oil and gas rights owner.

The statute does not at all address consideration to a lessor for the taking away of valuable lease rights, namely the proportion of royalties from a drilling unit that the lessor should receive based on the unit size limitation negotiated in the original lease.

Regulatory agencies cannot act without specific legislative authority. Even if the ODNR did approve a unit while ignoring unit size limits in underlying leases, the underlying leases should still be legally binding, and subject to enforcement in the courts.

Governmental agency actions that could negatively affect pre-existing contract rights and economic benefits arising therefrom have serious constitutional implications, and perhaps might amount to a “taking” of valuable property rights for the benefit of the private drilling companies.

Lessors, Beware!

Unless an affected lessor speaks up, it is very possible that an order might be entered without the ODNR even knowing of the conflicting unit size limits in underlying leases (the drillers tend to not be anxious to reveal such details).

Thus, any lessor who has property included in a drilling unit must promptly raise objection if the unit size sought in a driller's application is larger than any limitation contained in his or her lease.

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Alan D. Wenger is an oil & gas lawyer in Youngstown, Ohio, and chair of the Oil & Gas Law Practice Group at HHM.