The 7th District Court of Appeals in Youngstown is expected soon to hear a class-action lawsuit that could affect hundreds of property owners in Ohio angered by long-term oil and gas leases that lock up their land.
For some time now, courts across the state have heard from landowners who say restrictive oil and gas leases signed for as little as $50 per acre before the Utica Shale boom have prevented them from pitching their land to larger companies — offering leases for thousands of dollars per acre with a chance to earn lucrative royalties if their mineral rights are put into production.
But those cases have proceeded with little success. In most instances, judges have upheld the contractual obligations of those lease agreements and ruled in the companies’ favor.
In 2011, though, a group of six landowners from Monroe County filed a lawsuit against Ravenna-based Beck Energy Corp. They allege the company used a blanket oil and gas lease drafted in 1983 that tied up their mineral rights where the company initially planned to drill into the Clinton Sandstone formation — but never did — leaving the land undeveloped.
Rick Zurz, of the Akron-based law firm Slater & Zurz, which represents the landowners, said it was realized that hundreds of other property owners were leased under the same standard lease across 21,000 acres and the case was certified as a class- action suit. Just two months after the suit was filed, court documents show that Beck Energy sold the deep mineral rights across some of the 21,000 acres to XTO Energy, a subsidiary of the country’s largest publicly traded oil and gas company Exxon Mobil.
“The record makes clear that [Beck] sold the deep rights on a lot of those leases for a lot of money,” Zurz said. “We don’t have the figure. The company hasn’t disclosed it, but it was likely in the millions of dollars. The landowners got nothing. Beck kept it all.”
The case has dragged on for nearly two years. In 2012, a Monroe County Common Pleas Court judge issued a summary judgement in favor of the landowners, saying at the time that the leases “clearly, unequivocally and seriously offend public policy.” The court voided the 21,000 acres of leasehold and said Beck breached the contract by failing to develop the land in a timely manner.
XTO purchased the deep mineral rights knowing that litigation was pending, and it included a provision in the sales agreement requiring Beck to defend title to the leases.
Neither Beck nor its attorney, Scott Zurakowski, could be reached to comment.
XTO, which filed a motion to intervene and become a party in the case, was denied by the Monroe County court. It has since declined to comment citing pending litigation.
Thomas Stewart, executive vice president of the Ohio Oil and Gas Association, which has filed a friend of the court brief along with 13 other industry-affiliated groups supporting Beck’s argument that the leases must be reinstated, said if the lower court’s decision is upheld on appeal in Youngstown, it could put the state’s oil and gas industry at a disadvantage and disrupt the way it negotiates for property.
“You take a lease for a primary term. It’s a contract between the mineral owner and the producer,” Stewart said. “Apparently, the judge in Monroe County didn’t like the way that contract was negotiated. The primary term of the leases had not been reached and the judge terminated it. You can’t do that.”
Stewart added that when the leases were negotiated for $50 per acre, most of which were signed between 2001 and 2006, neither the company nor the landowners could have predicted that demand for leasehold across the Utica Shale play would drive the price for acreage up by thousands of dollars, saying that’s “the nature of the marketplace.”
Don Fischbach, chair of the energy group and an attorney at the Cleveland-based law firm Calfee, Halter & Griswold, which is not involved in the class-action lawsuit, said the finer points of oil and gas leases that involve operating expenses, revenue allocation during production, the length of leases and what it takes to extend them will continue to be addressed in Ohio courts in the coming years.
Compared to other producing states where shale gas drilling has occurred for longer, Ohio has little case law to address such issues, Fischbach said.
“If the circuit court issues an appellate decision, it has weight in lower courts that address similar issues in the future,” he said.
“The higher you go up the appellate ladder, those decisions get more obligatory on the lower court judges that have to apply them.”