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Statutory Unitization of Oil and Gas Lease Which is Silent on Unitization is Not a Breach of Lease

By September 18, 2019November 1st, 2019Oil and Gas

By: Cody Smith, Emens Wolper Jacobs & Jasin Law Firm

Ohio oil and gas law continues to develop. In Paczewski v. Antero Resources Corp., 2019-Ohio-2641 (7th Dist.), the Court of Appeals for the Seventh District of Ohio (the “Seventh District”) limited the interplay between an oil and gas lease and statutory unitization under Ohio Revised Code § 1509.28.

In 1975, a landowner in Monroe County, Ohio entered into an oil and gas lease which covered over 700 acres of land. The original parties to the lease struck a single clause from the lease which would have provided the lessee the right to voluntarily pool the acreage covered by the lease with other acreage to form drilling units for the production of oil and gas. After Antero Resources Corporation (“Antero”) was assigned the deep rights under the lease, it attempted to obtain an amendment from one of the lessor’s successors-in-interest, the Paczewskis, for the right to allow Antero to voluntarily pool the acreage covered by the lease. When negotiations failed, Antero applied to the Ohio Department of Natural Resources (the “Division”) for a statutory unitization order under Ohio Revised Code § 1509.28. Antero’s application set forth that the lease contained non-conforming provisions which limited the amount of acreage that it could consolidate and this would require it to reduce the lateral length of two of the three wells it was planning to drill on the unit. After an administrative hearing where the Paczewskis appeared and made objections, the Division issued the order authorizing unit operations on the unit (the “Order”).

On appeal, the Paczewskis claimed that although the Order was proper under Ohio Revised Code § 1509.28, the Order constituted a breach of the lease because the lease did not allow for unitization. The Seventh District rejected this argument finding that the deletion of the unitization provision did not prohibit unitization, but merely made it silent on the issue. Based on the finding that the lease was silent as to the subject of unitization, the Seventh District held that the Order was not a breach of the terms of the lease.

The Seventh District distinguished the facts in Paczewski from those in Am. Energy-Utica, LLC v. Fuller, 2018-Ohio-3250 (5th Dist.) on the basis that the parties wrote the words “Unitization by written agreement only!” in the lease in Fuller. In Fuller, the parties to the lease struck the pooling provision in the lease and replaced it with those words. Based on this language the court in Fuller held that because the lease expressly prohibited unitization without a separate written agreement from the lessor, the use of the statutory unitization procedure without Fuller’s written agreement constituted a breach of the written terms in the lease in that case.

The lessor in Paczewski also appealed the trial court’s decision alleging that forced unitization is akin to eminent domain with their property being taken without just compensation. However, the Seventh District quoted the United States Supreme Court which has held “that a state may adopt reasonable regulations to prevent economic and physical waste of natural gas” and such reasonable regulations “constitute a proper exercise of its police power.” Therefore, the Seventh District found that because statutory unitization leaves each landowner’s property interest in the minerals intact (where they receive royalties from the minerals after production) that the exercise of the state’s power constitutes regulation of mineral interests, rather than a taking without just compensation.

Paczewski makes it clear (unless the Ohio Supreme Court decides otherwise) that landowners who want to prohibit or limit pooling/unitization of an oil and gas lease cannot merely rely on the absence or elimination of a pooling/unitization provision in the lease. Rather, the prohibition or limitation needs to be explicitly set forth in the lease. However, this clarification is unlikely to help landowners currently looking to lease acreage in eastern Ohio as oil and gas companies now typically require that leases allow for pooling/unitization. The greater impact of this decision will be on oil and gas leases which were signed prior to the Utica/Point Pleasant shale play when landowners could more easily strike pooling/unitization provisions or negotiate lease language prohibiting pooling/unitization. Based on this decision, oil and gas companies may not even need to attempt negotiations with landowners whose leases contain pooling/unitization provisions which were struck out. Rather it appears that companies can use the statutory unitization procedure without needing to obtain any agreement or consent from such landowners.