I. General Provisions – “Mineral Rights”
A. Under Ohio law, the term “mineral” generally includes oil and gas unless the language in the granting instruments suggests the parties intended otherwise. Kelly v. Ohio Oil Co., 57 Ohio St. 317 (1897).
B. Ohio has been producing oil and natural gas since the late 1800’s. There is an established body of case law that tends to support production and exploitation of mineral interests for the benefit of the landowner.
C. “Rule of Capture” generally encourages oil and gas
development. Permits landowner to develop oil and gas
production on landowner’s property irrespective of impact on
adjoining property.
D. “Rule of Capture” is limited, however, by the “Doctrine of
Correlative Rights.” A landowner who exercises the right
to produce oil and gas also has a duty to exercise that
right without negligence or waste. R.C. 1509.01(l) defines
“correlative rights” as the reasonable opportunity to recover
and receive oil and gas in and under the person’s tract
without having to drill unnecessary wells or incur other
unnecessary expense. R.C. 1509.01(H) defines “waste” to
include locating, drilling, equipping, operating or producing
an oil or gas well in a manner that reduces the quantity of
oil or gas ultimately recoverable under prudent and proper
operations from the pool or that causes or tends to cause
unnecessary or excessive surface loss or destruction of oil
or gas.
E. Correlative Rights addressed in Chapter 1509, Ohio Revised
Code:
• R.C. 1509.20 requires well owners to use every
reasonable precaution to stop and prevent waste of oil or
gas. Limits “flare off” of natural gas.
• R.C. 1509.06 establishes a limited term for a drilling
permit.
• R.C. 1509.021 addresses minimum separation for
surface location of wells.
• R.C. 1509.24-27 establishes minimum acreage for
drilling units, voluntary pooling agreements, mandatory
pooling orders and unitization of pool.
II. The “Held By Production” Doctrine
A. The “Habendum Clause” – Extending the Oil and Gas Lease
1. “Held By Production” is a general concept not a legal
principle. The focus for the legal inquiry is on terms of
the lease that may operate to extend the lease beyond
the original term (the “primary term”) to an extended
term (the “secondary term”). The later is referred to as an
“habendum clause” and may be triggered by continuing
production, operations or other events as defined in the
lease.
2. There are three seminal decisions of the Ohio Supreme
Court over the years that have impacted Ohio Oil and Gas
Law:
• Harris v. Ohio Oil Co., 57 Ohio St. 118 (1897). Held:
The rights and remedies of parties to an oil and gas
lease are determined by the terms of the written
instrument. Each lease is a contract that must be
applied in accordance with its terms. The parties are
bound by the production requirements of the lease.
(“Use it or lose it”).
• Beer v. Griffith, 161 Ohio St. 2nd 119 (1980). Held:
There is an implied covenant to “reasonably develop”
all tracts subject to an oil and gas lease and if certain
separable tracts are not developed, the lease may be
terminated as to those undeveloped tracts.
• Ionno v. Glen Gerry Corp., 2 Ohio St. 3d 131 (1983).
Held: Absent express exclusion, there is an implied
covenant in every oil and gas lease to “reasonably
develop the land.”
Ohio Oil & Gas Lease Disputes
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3. Lease Terms May Vary
• Older Version – The term of the lease is . . . for five
(5) years and so much longer thereafter as oil, gas or
their constituents are produced in paying quantities
thereon.”
• Primary term is five (5) years.
• Extension or secondary term is dependent on
(continuous) production in “paying quantities.” The
unanswered question is: what are “paying quantities”?
• Modern Leases – With horizontal drilling and more
complicated operational requirements to permit,
drill, and complete horizontal wells for production,
the emphasis on the secondary term is now on
“operations” rather than “production” and includes
such acts as site preparation, exploration, pooling
and permitting activities. See Henry v. Chesapeake
Appalachia LLC, Sixth Circuit, Case No. 12-4090,
January 14, 2014 (Chesapeake’s filing a Declaration
and Notice of Pooled Unit (DPU) including plaintiffs
land was a defined “operation” extending the lease to
the secondary term.
4. Assignment of Lease
• Oil and gas leases typically are decades old and have
been conveyed, assigned, or transferred in a variety
of ways over the years. Oil and gas lease rights may
be assigned, devised, licensed, partitioned, pledged or
released and may be conveyed by various instruments
including Sheriff’s deed, bankruptcy or receivership
actions, probate, judgment entry or other means of
assignment.
• Per R.C. 5301.09, leases, licenses and assignments
of natural gas and oil rights must be filed for record
without delay. No such lease or license is valid until
it is filed for record except as between the parties,
unless the person claiming thereunder is in actual and
open possession.
• An oil and gas review will typically require a
comprehensive title search to determine the title
chain, reservation of mineral interests and recording
of oil and gas leases. A good title search will include
a “working interest” analysis to address whether there
has been continuous production or operation of a
given well or wells. The “working interest” review will
likely focus on public ODNR well logs and production
reports.
• The “assignment” creates no greater rights than
provided in the “root” lease. The assignees’ rights and
remedies are determined by the terms of the written
instrument, the conduct of predecessor – in-interest
and applicable Ohio law. Harris v. Ohio Oil Co., 57
Ohio St. 118 (1897).
B. Express Lease Terms Control – Failure of required
production required by the express lease terms results in
automatic termination.
1. Is an oil and gas lease a fee simple determinable
which automatically reverts to the lessor upon failure
of performance or a fee simple subject to a condition
subsequent which may give rise to a claim for
termination?
2. Under Ohio law, a leasehold in an oil and gas lease
terminates automatically without any requirement of
notice or judicial ascertainment in the event of failure
of production at or after the end of the primary term.
Hanna v. Shorts, 163 Ohio St. 44 (1955) (Since no oil or
gas was produced for sale during the term of the lease,
the lease automatically expired by its terms); American
Energy Services, Inc. v. Lekan, 75 Ohio App.3d 205 (5th
Dist. 1992) (If after the expiration of the primary term
of an oil and gas lease the conditions of the secondary
term are not continuing to be met, the lease terminates
by the express terms of the contract and by operation of
law and revests the leased estate in the lessor.); Wagner
v. Smith, 8 Ohio App.3d 90 (4th Dist. 1984) citing Brown
v. Fowler, 65 Ohio St. 507 (1902) (Since the term of the
lease, after its initial fixed term or terms, was dependent
upon continued production of oil or gas in paying
quantities, the issue is not one of forfeiture as upon a
condition or covenant, but whether the lease expired by
failure to produce gas or oil in paying quantities); Tisdale
v. Walla, 1994 WL 738744 at *4 (11th Dist. 1994)
(The lease terminated automatically for lack of required
production without the necessity of notice, demand or
judicial ascertainment.); Moore v. Adams, 2008 WL
4907590 (5th Dist. 2008) citing North Star Oil & Gas Co.
v. Blubaugh, 1981 WL 6434 (5th Dist. 1981) (Lessee’s
failure to operate a well or pay shut-in royalties for more
than six (6) years caused the lease to terminate by its
terms); Kramer v. PAC Drilling Oil & Gas LLC, 2011 WL
6917588 at *3 (9th Dist. 2011) (An oil and gas lease is a
fee simple determinable.).
3. Evidence of non-qualifying production can include ODNR
well logs and production reports, tax reports, royalties
paid, the duration of non-production and the reasons.
ODNR records may be incomplete. Production reporting
may be suspect and identification of wells and well
coordinates may have errors.
February 2014 Ohio Oil & Gas DISPUTES
4. Courts generally consider the circumstances of the
non-production: (1) the duration of non-production; (2)
cause of the cessation; and (3) the lessee’s diligence in
restoring production. Wagner v. Smith, 8 Ohio App. 3d 90
(4th Dist. 1984).
5. If the landowner currently accepts royalty payments
under the lease, the lease may be held to be ratified.
Litton v. Geisler, 76 N.E. 2d 741, 743 (4th Dist. 1945).
Contra, Bonner Farms Ltd. v. Fritz, 355 F. App’x 10,
16 (6th Cir. 2009). (Landowner is entitled to royalty
payments and acceptance is not a ratification of nonperformance
of the lease.).
6. The definition of “paying quantities” requires some
commercial production generally at a profit over costs
of operation. Production for domestic use only is not
“commercial production” in “paying quantities.” Tisdale v.
Walla, 1994 WL 738744 (11th Dist. 1994).
7. The doctrine of apportionment of rents does not dispose
of the rights of separate owners of separate tracts
subject to a lease. Northwestern Ohio Natural Gas Co.
v. Ullery, 68 Ohio St. 259 (1903). Quite to the contrary,
since no royalties attributable to production from any
well have been paid, it follows that the lease has been
forfeited and abandoned for lack of production. See
Northwestern Ohio Natural Gas Co. v. Davis, 3 Ohio
Dec. 282 (Cir. Ct. 1895) aff’d 59 Ohio St. 591 (1898);
Anderson v. Chief Drilling, Inc. 1983 WL 6351 (5th
Dist. 1983); Beer v. Griffith, 1979 WL 210970 (5th Dist.
1974), aff’d 61 Ohio St.2d 119 (1980).
C. Production must apply to all tracts. “Held by production”
may be limited to a producing tract.
1. Applies to Producing Tract
Where only a portion of the entire leasehold property
subject to an oil and gas lease is actually developed for
oil and gas production, the lease is forfeited for nonproduction
as respects the portions undeveloped. See
Northwestern Ohio Natural Gas Co. v. Davis, supra (Tract
purchased by a subsequent owner is held to be treated
as a separate tract under an oil and gas lease and the
lease expires on its own terms as to that separate tract
where gas was no longer found in paying quantities on
that tract.); Anderson v. Chief Drilling, Inc., supra (Where
there was no production on two tracts of land subject to
an oil and gas lease, the lease is cancelled by its terms
as to those tracts notwithstanding production from a
third tract.); Beer v. Griffith, supra (With respect to wells
requiring future efforts to be productive and with respect
to all unexploited acreage, forfeiture of lessee’s interest is
warranted in order to assure the development of the land
and the protection of the lessor’s interest.); Coffenberry v.
Sun Oil, 68 Ohio St. 488 (1903).
In Anderson v. Chief Drilling, there were originally a 160,
60 and 108 acre tract that comprised the leasehold. The
60 and 108 acre tract were subsequently transferred to
one individual while another owned the 160 acre tract.
Any production on the 160 acre tract did not operate to
bind the balance of the tracts. In Beer v. Griffith, the court
ordered forfeiture of the lease as to the portions of the
leased property not developed.
2. May be limited to the operational “footprint” of the well.
Zimmerman v. Mormack Industries, Inc. 1989 WL 50677
(9th Dist. 1989) (Court ordered forfeiture of all 322 acre
lease parcel for non-production except for the 20 acres
upon which one production well was sited to comply with
then current ODNR well-spacing requirements). Brannon
v. King, 1985 WL 6153 (9th Dist. 1985) (Court ordered
forfeiture of the majority of the leased property for nonproduction
except for the one (1) acre site upon which
a producing well was located,); Lake v. Ohio Fuel Gas
Co., 2 Ohio App.2d 227 (5th Dist. 1965) (Lessor waived
a claim of forfeiture of lease premises by accepting
royalties but not as to the portion of the property for
which there was no production.) citing Sauder v. Mid-
Continent Petroleum Corp., 292 U.S. 272, 54 S.Ct. 671,
78 L.Ed. 1255 (1934) (The production of oil on a small
portion of the leased tract cannot justify the lessee’s
holding the balance indefinitely and depriving the lessor,
not only of the expected royalty from production pursuant
to the lease, but of the privilege of making some other
arrangement for availing himself of the mineral content of
the land.).
D. No Requirement Of Advance Notice
There is no advance notice or demand requirement to
trigger forfeiture for non-production. See Harris v. Ohio Oil
Co., 57 Ohio St. 118 (1897) (While a demand was made,
the court did not hold notice and demand was required.);
Zimmerman v. Mormack Industries, Inc., 1989 WL 50677
(9th Dist. 1989) (While notices and demands were made,
the court did not hold that these were required for a claim
of forfeiture.); Brannon v. King, 1985 WL 6153 (9th Dist.
1985) (The court actually held notice and demand was of no
consequence because no notice or demand is required as a
condition to a forfeiture action.). See also Hanna v. Shorts,
supra, Anderson Energy Service, Inc. v. Lekan, supra and
other cases cited above for the proposition that an oil and
gas lease terminates automatically without any requirement
of notice or judicial ascertainment in the event of failure of
production at or after the end of the primary term.
February 2014 Ohio Oil & Gas DISPUTES
February 2014 Ohio Oil & Gas DISPUTES
E. “Implied Covenants”
1. In the absence of an express exclusion, there is
an implied covenant in every oil and gas lease to
“reasonably develop the land” for mineral production. The
purpose of this implied covenant is to ensure reasonable
and timely development of mineral interests and the
protection of the lessor’s interest. Ionno v. Glen-Gerry
Corp., 2 Ohio St. 3d 131 (1983); Beer v. Griffith, supra.
2. Ohio cases have addressed other “implied covenants”
including:
• The covenant of reasonable development and
additional exploration;
• The covenant to market the product;
• The covenant to conduct all operations that affect the
lessor’s royalty interest with reasonable care and due
diligence.
See, American Energy Services, Inc. v. Lekan, 598 N.E. 2d 1315
(1992) 212 citing Williams & Meyers, Oil and Gas Law (1991);
Moore v. Adams, 2008 WL 4907590 (5th Dist. Nov. 17, 2008).
3. Implied covenants can be disclaimed. Holonko v. H.D.
Collins, 1988 WL 70900 (7th Dist. June 29, 1988);
Bushman v. MFC Drilling Inc., 1955 WL 434409 (9th
Dist. July 19, 1995).
4. Forfeiture is an equitable remedy which will only apply
where damages are inadequate. Where an implied
covenant is breached, forfeiture of the lease may apply
but only where damages are not an adequate remedy.
Ionno v. Glen-Gerry Corp., supra at 134-135.
5. If a lease continues under “held by production”, damages
may still apply to compensate for non-performance.
III. Mandatory Pooling Orders
A. If the landowner declines to grant a lease, the developer or
other landowners can still pursue alternative unitization or
mandatory pooling options addressed in Chapter 1509, Ohio
Revised Code. These alternatives can force inclusion of land
within a drilling unit subject to ratable compensation.
B. Relevant provisions of Chapter 1509, Ohio Revised Code
are:
R.C. 1509.26 – Agreements to Pool Tracts to Form Drilling Unit
Owners of adjoining tracts may agree to pool the tracts to form
a drilling unit that forms to minimum acreage and distance
requirements. Agreement shall be in writing and submitted
to the division with the permit application required by R.C.
1509.05.
R.C. 1509.27 – Mandatory Pooling Orders
If a tract of land is of insufficient size or shape to meet the
requirements for a drilling unit and owner of tract who is also
owner of mineral interest has been unable to form a drilling
unit under agreement under R.C. 1509.26, owner may make
application for a mandatory pooling order.
Application shall include information required by Chief and
shall be accompanied by an application for a permit under R.C.
1509.05. Chief shall notify owners of land within the area to
be included in drilling unit and provide for a hearing. Chief may
issue a mandatory pooling order which would include:
• Description of boundaries of drilling unit
• Proposed production site
• Description of each tract of land pooled
• Allocation on a surface acreage basis or pro rate portion
of production to each tract owner. May vary as to specific
geology circumstances
• Specify the basis for sharing expenses if owner elects to
participate in drilling
• Designate the person to whom the permit shall issue
Statute also addresses rights and duties of a non-participating
owner.
R.C. 1509.28 – Order Providing for Unit Operation
Chief, upon own motion or upon application by the owners
of 65% of the land overlying the pool, shall hold a hearing to
consider the need for operation of the pool as a unit. Chief may
issue an order providing for unit operation if such operation is
reasonably necessary to substantially increase ultimate recovery
of oil and gas. Statute further provides for requirements of an
order. Order conditioned upon approval of 65% of the owners of
the plan for unit operation.
R.C. 1509.29 – Order Establishing Exception Tract
Upon application by an owner of a tract for which a drilling
permit may not be issued and the owner is unable to enter into
a voluntary pooling agreement or a mandatory pooling order,
Chief may issue a permit and order establishing the tract as an
exception tract. Statute further provides additional conditions for
the exception tract.
IV. Ohio’s Forfeiture Statute
R.C. 5301.332 provides a mechanism for a lessor to have a
lease cancelled of record where there has been no sufficient
production under the terms of the lease.
R.C. 5301.332 provides that whenever leases concerning lands
upon which there are no producing or drilling oil and gas wells
become forfeited, the lessor may file for record an affidavit of
forfeiture.
February 2014 Ohio Oil & Gas DISPUTES
Lessor shall give notice by certified mail and, upon failure,
by publication, upon lessee, successors or assigns. Affidavit
shall identify lease, state the cause of forfeiture and shall state
lessor’s intent to file an affidavit of forfeiture.
After 30 days and not more than 60 days after notice, lessor
may file affidavit of forfeiture identifying the lease, stating the
cause of forfeiture, confirming that there are no producing or
drilling wells and lease has been forfeited.
If lessee, successors or assigns contest forfeiture, lessor or
assigns shall notify the lessor filing the affidavit of forfeiture
within 60 days after notice. Lessee or assigns shall file for
record an affidavit denying the lease has been forfeited.
If lessee or assigns do not contest forfeiture, county recorder
shall note the lease cancellation of record.
V. Ohio’s Dormant Minerals Act
R.C. 5301.56 provides a surface owner with the opportunity
to clear title to previously severed mineral interests if those
interests have not been “used” during a 20 year look-back
period. The 1989 version of the statute is a “use it or lose
it” statute. If rights have not been exercised within a 20 year
look-back time period, rights are automatically vested in
surface owner. The 2006 version of R.C. 5301.56, which was
substantially amended, provides that the surface owner must
follow a notice and multi-step process to invalidate an interest.
The “savings” exceptions are:
a. A “title transaction” filed or recorded in the county recorder’s
office;
b. Actual production of oil or gas by the mineral interest owner;
c. Underground storage operations on the property;
d. Issuance of a drilling or mining permit to the mineral interest
owner;
e. The recording of an affidavit to preserve the mineral interest;
or
f. The creation of a separate tax parcel for the severed mineral
interest.
The owner must serve notice by certified mail to each holder
or each holder’s successors or assignees, at the last known
address of each, of the owner’s intent to declare the mineral
interest abandoned. If certified mail notice is not possible, the
surface owner must publish notice at least once in a newspaper
of general circulation n each county in which the land is
located.
The owner may then file in the county recorder’s office an
affidavit of abandonment at least 30, but not later than 60, days
after the date on which the notice was served or published.
The affidavit must contain: (i) a statement that the person filing
the affidavit is the surface owner; (ii) the volume and page
number of the recorded instrument of the mineral interest; (iii)
a statement that the mineral interest has been abandoned; (iv)
the facts constituting the abandonment; and (v) a statement
that notice was served on each mineral interest holder or their
successors or assignees.
There are significant issues in the operation of R.C. 5301.56.
These issues include:
1. Which version of statute applies?
Wendt v. Dickerson, Tuscarawas Cty. C.P., Case No.
2012CV0135 (February 21, 2013). Held: 1989 version
applies since 2006 amendment cannot affect rights
“previously acquired” under 1989 law.
2. Is the statute constitutional?
Tribett v. Shepherd, Belmont Cty. C.P. Ct., Case No. 12-CV-
180 (July 22, 2013). 1989 version is constitutional relying
on Texaco v. Short, 454 U.S. 516.
3. If 1989 version applies, what is the 20 year look-back
period? Various interpretations – Fixed period March 22,
1969 through March 22, 1989 or March 22, 1972 through
March 22, 1992 or 20 years prior to date of inquiry.
4. What “title transactions” are covered?
– Oil and gas lease covered – Bender v. Morgan,
Columbiana Cty. C.P., Case No. 2012-CV-378 (Mar. 20,
2013).
– Transfer of surface property that referenced the severed
mineral interest. Croskey v. Dodd, Harrison Cty., C.P.,
Case No. CVH-2011-0019 (Oct. 29, 2012).
VI. Recent Cases
Chesapeake Exploration, LLC v. Oil and Gas Commission,
Slip Op. No. 2013-Ohio-224 (January 30, 2013) – Writ of
prohibition granted prohibiting Ohio Oil and Gas Commission
from exercising jurisdiction in an appeal from issuance of a
drilling permit. A leaseholder appealed. Held: Pursuant to R.C.
1509.06(F), issuance of a permit shall not be considered an
order of chief. No appeal rights to Oil & Gas Commission.
Wendt v. Dickerson, Tuscarawas Cty. C.P. Case No. 2012-CV-
02-0135 (February 21, 2013). Plaintiffs filed complaint for
declaration regarding their ownership of mineral rights and to
quiet title. Held: 1989 version of R.C. 5301.56 applies. Under
that version, severed mineral interests were automatically
abandoned.
Mong v. Kovach Holdings LLC, 2013-Ohio 882 (11th Dist.
Trumbull Cty. 2013). Held: Reformation of an instrument is not
justified where contract of sale indicates the reservation of oil
and gas rights but the deed omits such reservation.
February 2014 Ohio Oil & Gas DISPUTES
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Bilbarin Farm, Inc. v. Bakerwell, Inc., 2013 – Ohio – 2487 (5th
Dist. Knox, June 12, 2013). Held: Oil and Gas lease expressly
disclaimed any implied covenant to reasonably develop the
property.
Henry v. Chesapeake Appalachia, LLC, Sixth Circuit, January
14, 2014, Case No. 12-4090. Lease provided for a five-year
term through October 17, 2011 to be extended on occurrence
of various events including conduct of “operations” on the
leaseheld or on lands pooled, unilized or combined with all or
a portion of the leasehold, with no cessation greater than 180
consecutive days, provided such operation results in a well
capable of producing oil and/or gas. The term” operations”
included bona fide efforts to prepare the surface, drilling,
testing, completing, any acts in search of or in an endeavor to
obtain, maintain or increase production and any acts similar or
incident to the foregoing. Held: Chesapeake filing a Declaration
and Notice of Pooled Unit (DPU) including the subject property
was an “operation” extending the lease.
As a reminder, this Advisory is being sent to draw your attention to issues
and is not to replace legal counseling.
