This is not Ohio’s first oil and gas boom. There has been a series of them. I think it is fair to say that in the past the oil and gas business had a freer rein (some would say reign). But this time things are likely to be different. With the internet, higher land prices, higher cost wells, financially-strapped governments, more laws and regulations, and environmental awareness — fundamentally, people’s expectations are different. As a result, the relationships between oil companies, mineral owners and regulators, who represent the public in general, are changing.
As in the past, the cost and availability of energy will have a major impact on Ohio. Energy independence is apparently within our grasp and Ohio needs the economic development that comes with energy resources more than ever. Do we have the will to realize it? Surely, as any “fracktivist” will tell you, whatever is realized will be the product of a new and different process.
It’s not business as usual in the oil patch this time. Success in this climate will require insight gained from experience in a variety of disciplines and an awareness, if not an understanding, of a new landscape. A business skating toward anything other than where the puck will be is going to be frustrated.
Following are what some might call my musings on this topic, gleaned from a career in the oil and gas industry.
Past Oil Booms and Impacts
The first oil well drilled in Ohio for commercial production was located in Macksburg, Washington County. It was drilled in 1860, one year after Colonel Drake discovered the first oil well in Titusville, Pennsylvania. From 1861 through the early 1900’s shallow sandstone reservoirs were developed in southeastern Ohio.
In 1884 the Lima oil field was discovered in northwestern Ohio, making Ohio the world’s largest oil producer at the time. As a result, businesses were formed, opportunity flourished, and people flocked to Ohio. Past booms have left their mark.
The Standard Oil Company, established as on Ohio Corporation in 1870, was the predominant integrated oil producing, transporting, refining, and marketing company of its time. It was the largest oil refiner in the world. The Husky refineries operating in Lima and Toledo were once owned by Standard. Standard’s production component became the Ohio Oil Company. A successor, Marathon Petroleum Company, still operates in Findlay, Ohio. Pipelines throughout Ohio, some still operating under the original rights of way, will be reborn as new Ohio and Pennsylvania production comes on line.
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Through much of the 20th Century, Ohio built a reputation as the world’s glassmaker. Nearly free natural gas lured east coast glassmakers to the state in droves and Ohio became a dominant world player in the glass industry by riding the demand of the nearby auto industry. Toledo became “the glass city,” and Fostoria, Findlay, Tiffin and others also had thriving glass businesses.
In fact, Ohio historic industrial cycles can be explained in large measure by the availability and cost of energy. Another cycle is beginning, this time driven by abundant natural gas liquids (e.g., ethane), feed stocks for the plastics industry, and natural gas (methane), which can be used in transportation.
The law adapts to cycles because, in the long run, the law is exactly what we want it to be – it is a reflection of the values of a society. And, like society in general, there is a tension in the law between the predictable and comfortable status quo and the need to recognize and accommodate change. Laws relevant to oil field production are illustrative.
When oil was discovered in Ohio, the prevailing principle of mineral ownership was that the property owner owned from the heavens to the center of the earth. While this principle worked well with hard minerals, it did not work with oil and gas. Oil and gas can migrate underground in response to geologic forces and it is fungible so that it is impossible to know from whose property it may have originated. These characteristics of oil and gas made the prevailing legal principal obsolete. Further, the laissez faire political and economic theory of the era, which sought to reward the diligent worker to the ultimate benefit of society, demanded change so that oil and gas resources could be developed.
The law responded by adopting the “rule of capture” to modify the old ownership doctrine. See, John S. Lowe, Oil and Gas Law, West, 2003. Under the rule of capture courts likened oil and gas to wild animals. That is, animals and oil cannot be owned until captured. It was every man for himself. Private property was not only private, but could now include oil from the neighbor’s property!
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As late as the 1960’s, an unfettered “rule of capture” governed how producers developed Ohio oilfields. For example, an oil boom in Morrow County got started in 1961 when a 200 bbl/day well was drilled on Orrie Myers’ property. When wells sprung up everywhere, it became obvious that the law had to change once again. Well spacing and conservation laws were a result of the Morrow County boom and the rule of capture was replaced with the doctrine of correlative rights.
While helping shut-in shallow Midwest oil wells in the 1980’s (when oil prices were in the range of $20 per barrel), this author was told, “There is a lot of $40 oil in the ground.” It’s true. The quantity of oil and gas is a function of its price in the market and the cost to recover it. Supply and demand, pure and simple. But supply is also a function of technology. Hydraulic fracturing (“fracing” or “fracking”), combined with horizontal drilling technology, has changed everything. Once again, the law must change.
In the old days, tanks did not have bottoms, produced fluids were contained, somewhat, in pits and discharges to surface waters were not only unregulated, it was not even seen as a concern. A creek running through Findlay, Ohio, adjacent to a former refinery site, is still known as “Oil Ditch.”
Times have changed. One need only to have raised children in the 1980’s and ‘90’s and to have helped them with their science homework, perhaps even environmental science, to know that environmental awareness is much more acute. We now have environmental advocacy groups, “green” standards for everything from buildings to computers, advanced degrees in environmental science, and environmental laws and regulations. Like everything else it seems, divisive partisanism is everywhere and what is reasonable is probably somewhere in the middle. Ironically, cleaner burning natural gas will benefit the environment, but that doesn’t seem to matter when the habitat of the spotted owl might be affected by a pipeline or natural gas-fired power plant.
Unlike older traditional wells that could be drilled by regional or local businesses, horizontal shale wells are deeper, more expensive, require more land, millions of gallons of water, etc. Only bigger, multistate or international companies have the skill and capital for such projects. For these companies, where to drill is a function of return on investment. They can pick where to drill and if they can get a better return in one state as opposed to another that’s where they will drill. Law makers, regulators and taxing authorities need to understand that the producers have choices.
Since the advent of environmental laws in the 1970’s and 1980’s, emissions and releases of hydrocarbons to the air, water, groundwater and land are now regulated in a myriad of ways. The low hanging fruit has long since been regulated. Now the focus is on well construction standards, pre and post drilling groundwater testing, the composition of drilling mud, brine transportation and disposal and new source performance standards. And there is more to come. The oil and gas sector is going to be regulated like never before.
Found Money & Taxes
Yet some things have not changed. There is something exciting about the oil business. Black gold, Jed Clampett, J.R. Ewing — landowners and wildcatters can strike it rich. It exemplifies the American dream. But this time around cash-strapped governments are also looking for ways to take their share. Severance taxes, ad valorem taxes, commercial activity taxes, state and local sales taxes, payroll taxes, state, local, and school income taxes, permit fees, workers compensation fees, etc. For taxing authorities (there are 3,300 of them in Ohio), it is found money. The oil industry has always been a big target for taxing authorities, but it will probably be worse this time.
It is fair to say that during the 1900’s, the value of farm real estate has generally risen, but not much. See, William McD. Herr and Phillip Eberle, “Trends in Farm Real Estate Values in the North Central States: 1912 to 1989,” Farm Real Estate, Illinois North Regional Extension, August, 1990, page 7.
It is also fair to say that oil and gas can make the land much more valuable than it would have been otherwise. Even today a farmer or other landowner would be hard pressed to turn down the possibility of a signing bonus and a monthly royalty check.
What has changed, however, is that farmland, at least in Northwest Ohio, goes for $6-7,000 an acre. That, coupled with environmental awareness, has changed oil leases and spawned surface use agreements. Where before a lease might contain a provision that lessee would pay lessor for damage caused to growing crops, now the impact of roads, pipelines, soil compression, drill pads, permanent productions facilities, etc., are heavily negotiated and often measured, and paid for, by the square foot. A lessor may even require a performance bond to ensure proper reclamation of this valuable asset.
On top of all that there is the internet. Where before it might have been difficult to gather information, now the challenge is to differentiate the good, or at least reasonable, information from misinformation. Need to negotiate a lease or easement, organize NIMBY opposition, find a pipeline opposition attorney, confirm your expectations that fracking is a threat to groundwater, or confirm a conspiracy theory that big oil and big government are out to screw all of us? No problem. In this information age it is too easy to become, as they say, too smart by half.
The Role of Government
More unsettling is the tendency to find acceptable the government’s involvement in more aspects of what used to be private land and private business. Clearly, the unfettered rule of capture was not sustainable. So too, the rest of where we are heading is probably inevitable for the same reasons. But there is still something appealing about less government, at least to this writer.