Leases held by production creating legal hurdles
By Jamison Cocklin
The list of legal ramifications is growing as activity across the Utica Shale play continues to develop.
That list not only includes disputes between landowners and production companies, but also clashes among the companies themselves, as each looks to secure the precious mineral rights necessary to developing the play.
Typically those rights can be obtained from landowners, who lease them for rent and royalties.
But the situation becomes muddled when a company seeks a valid lease on a stretch of property where there is an existing lease or a previous lease holding up development.
In this case, the developer must seek the mineral rights from the entity holding the lease, such as another production company. Both parties then have to determine whether the existing lease has expired.
A common aspect of nearly all leases includes provisions about how long the lessee’s interest will last — for both a fixed amount of time and another that depends on how long oil and gas are produced on the property.
Don Fischbach, chairman of the energy group at the Cleveland-based law firm Calfee, Halter & Griswold, said Ohio courts have determined that production means any period in which oil and gas extraction occurs in “paying quantities.”
Growing litigation on leases held by production, though, surrounds thornier questions such as what can be considered paying quantities.
“There is uncertainty about what types of costs can be considered, and Ohio courts have not really specified the amount of profit required to constitute production in paying quantities,” Fischbach recently wrote in an edition of Crain’s Shale Magazine.
Production tends to vary over time, and as Fischbach pointed out in his article, it does not need to be “continuous to preserve a lessee’s interest.”
Parties also can decide for themselves what defines production when they draw up an oil and gas lease, but many contracts are old, and they were drawn up at a time when leasing in the state was not as widespread as today.
Already, in parts of the Mahoning Valley, law firms are witnessing land brokers soliciting property owners who have leases held by production.
Brokers are suggesting that such leases be negotiated via a landowners group for better financial terms, but the move can pose risks if a deal includes provisions that actually turn the leasing rights over to the brokers themselves.
“With the increase in activity expected to evaluate and develop the Utica shale formation, litigation over the status of prior leases can be expected,” Fischbach wrote.