New legislation proposed by two Ohio lawmakers would put landowners at a steep disadvantage in their business dealing with oil and gas companies. 

Ohio representatives Tim Ginter (District 5, including Columbiana County) and Brian Stewart (District 78, south of Columbus and Zanesville) have sponsored House Bill 152 to amend existing Section 1509.28 of the Ohio Revised Code, which addresses unitization by oil and gas companies (some call this “forced pooling”).

Unitization facilitates uniform development of oil and gas resources and provides a process for moving forward if a small minority of mineral owners in a proposed unit refuse to lease their minerals.

The current process requires the companies to negotiate in good faith with owners for a lease before seeking unitization. House Bill 152 pulls the rug from under the owners’ ability to reasonably negotiate when facing unitization or even when negotiating leases at any time.

What the Proposed Law Would Mean

Under HB 152, oil and gas companies could bludgeon mineral owners to sign leases far inferior in financial terms to those routinely seen since the inception of the horizontal drilling boom in eastern Ohio.

Should an owner not accept the company’s lease, the proposed law would assure the company certain basic company-favoring outcomes. The law would remove incentives for the companies to negotiate lease terms with mineral owners.

The unleased mineral owner would be forced by law to choose one of the following three unfavorable alternatives:

• 1. An “imposed” lease with a royalty of 12.5% of gross proceeds, and a bonus payment of one-half of the “current market rate” for bonuses.  The landowner could either sign such a lease, or those terms would be imposed regardless if the landowner did not choose one of the remaining two options.
• 2. The mineral owner could elect to become a “consenting joint operator” of the unit to the extent of the fraction of the owner’s total unit interest; by so electing, the owner could become subject to the costs of development alongside the oil and gas company, with risks and costs being extensive and impractical.
• 3. The landowner could elect to become a “non-consenting joint operator”, in which case the landowner would not be required to participate in “out of pocket” for development costs, although any share of proceeds for landowners’ small interest would be paid only after the active operators have recovered 200% of their costs. Thus, any benefit could come only years later, if ever.

It appears under the proposed law that, if the mineral owner elects options 2 or 3, they would not also receive a royalty share of 12.5% plus the operating share, as has generally been the case with unitization orders approved thus far by the Ohio Department of Natural Resources.

It is hard to imagine more blatantly one-sided legislation favoring oil and gas companies.

Concerned mineral owners should be contacting their state legislators, and as to any legislators promoting or voting for this bill, owners might well consider voicing their opinions at the ballot box.

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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.