Notes from the Utica – November 2010

Written by about Drilling and Producing + Leases on November 8, 2010

During the summer of 2010, the oil and gas leasing situation in Ohio changed markedly. Prior to this point in time, oil and gas leasing and drilling in Ohio was conducted primarily by smaller, local companies. In 2010, an influx of larger companies changed the oil and gas landscape in Ohio. The primary company behind this move was Chesapeake Energy — a huge oil and gas producer based out of Oklahoma. Another large company, East Resources (recently purchased by Shell Petroleum) has also made a move into Ohio. Other out of state companies of varying size have also begun leasing — seemingly following at Chesapeake’s heels.

The initial area of interest in Ohio was in the southeastern part of the State. Huge amounts of acreage were leased in what appear to be the primary areas of interest – Jefferson County and Columbiana County. The surrounding areas of Mahoning County, Portage County, Stark County, Carroll County, Harrison County and Belmont County are also being leased.

The common practice in Ohio, prior to recent developments, had been to pay annual delay rentals to acquire a lease, with typical payments of $10-20 per acre, per year. These new players in Ohio are paying sums many times that amount and paying the delay rentals in advance, for the entire term of the lease. In certain hot spots, sums of $2,000/acre have been paid for a 5 year paid up lease. On the outer edges of the play sums of $4-500/acre are commonly offered. Some companies are offering more than the one-eighth landowner royalty, which has been the standard in Ohio for many years. I will say that the “standard” lease being offered by these new companies, while carrying favorable monetary terms, is otherwise heavily slanted in favor of the oil and gas company and needs substantial revision to get it into a fair agreement.

What are these new companies after? Certainly, the eastern tier of counties in Ohio does contain Marcellus shale, but it pinches out fairly close to the Pennsylvania border. Other Devonian shales of similar geologic age to the Marcellus exist in abundance in the eastern half of Ohio. Whether production from these shales or from the Marcellus (where it exists) will rival what is being produced in Pennsylvania is presently unknown. Another, deeper shale in Ohio (the Utica shale) is also of interest to oil and gas developers. Some believe that these shales in Ohio are more likely to produce liquid hydrocarbons or oil than the shales in Pennsylvania. Present pricing for oil and liquids is much more favorable than for dry natural gas.

Presently, there have not been enough wells drilled and produced in Ohio to know whether we are onto something really big in this State. Over time, we will learn more. I am presently involved in representing numerous landowners in lease negotiations, both individually and in groups — there are benefits to both approaches. It’s been a very busy summer.

About Eric Johnson

ERIC C. JOHNSON attended Ohio State University, earning a degree in economics and then graduated from the University of Cincinnati Law School in 1983. His areas of practice are personal injury law, real estate, oil and gas, contracts, litigation and appeals.