Producing shallow oil vs. deep gas
From Bloomberg BNA
A company that is drilling for oil could be forced to extract natural gas, as well, on an Ohio property or lose those rights as part of a lawsuit that tests the requirements of a 37-year-old contract signed before fracking became commonplace.
The lawsuit, considered by the Ohio Supreme Court Sept. 26, turns on a 1980 contract that Linda Alford signed with Collins-McGregor Operating Co., allowing it to drill for oil on 74 acres of her property near Ohio’s West Virginia border.
The drilling company has continually extracted oil from the property as required by the contract, but Alford wants to force the company to dig deeper for natural gas—or allow her to sell those rights to another firm now that hydraulic fracturing is more practical and lucrative ( Alford v. Collins-McGregor Operating Co., Ohio, No. 2016-1281, oral argument 9/26/17 ).
Forcing Collins-McGregor to explore deep fracking would be the first such requirement in the nation and would be prohibitive to smaller companies only interested in oil, Brent Barnes of Geiger Teeple Robinson & McElwee PLLC, the attorney representing the company, said at the court hearing. He estimated fracking Alford’s property would cost between $8 million and $10 million.
Imposing the requirement retroactively also would force drilling companies to perform work they never intended when they entered into contracts with landowners, Barnes said.
Court Skeptical
A majority of justices appeared reluctant to expand this new duty to oil and gas leases in Ohio. Justices R. Patrick DeWine, Terrence O’Donnell, Patrick Fischer, and Chief Justice Maureen O’Connor all asked questions that seemed to show they were concerned about implications for the industry.
“So, because you have a right you must use it?” O’Donnell asked Alford’s attorney Sean Scullin of Scullin & Cunning LLC. “So the lease just says, ‘develop,’ and they’re in compliance because they’re developing their shallow rights.”
Scullin argued that the deeper rights weren’t part of the contract at all back in 1980 because fracking wasn’t in the picture. For older contracts that still include these inherent duties, companies should be required to develop natural gas through fracking or allow landowners to re-sell those fracking rights so that the industry can take full advantage of the state’s natural resources, he said.
Only Justice William O’Neill asked questions that could be seen as supporting extending this duty on drillers.
“Do the people have a right to say, you’re not doing as well as my neighbors, so you’re gone?” he asked Scullin. O’Neill also questioned whether the lawsuit was properly dismissed by the common pleas court and indicated he might have let the case go to trial there.
Both the common pleas and appellate courts previously ruled for Collins-McGregor. Although Ohio law protects property owners whose land goes undeveloped, the courts held that the state doesn’t separate the deep rights used for fracking from the closer-to-surface rights used for oil extraction. The courts said that since the company is holding up its end of the bargain by extracting oil, Alford doesn’t have a case.
