Storage Field area and your Mineral Rights - A must read

Monday, August 20, 2012

By Dan O'Brien

YOUNGSTOWN, Ohio -- Natural gas storage fields beneath tens of thousands of acres in Ohio have become the flash point of the latest legal battle over drilling rights across the state.

At issue is whether landowners within these fields own the deep drilling rights to their land, an especially sensitive issue since major energy companies are stepping up oil and gas exploration in the Utica shale and paying generous bonuses and royalties to residents.

"It's going on all over the state," says Dale Arnold, director of energy policy for the Ohio Farm Bureau. "This issue comes up in every storage field in Ohio."

Natural gas storage fields came into prominence shortly after World War II, Arnold says. These fields are areas of the Clinton sandstone strata between 3,000 and 6,000 feet below the earth where energy companies once drilled, some as far back as the 1930s. Once a particular region of the sandstone was drilled dry, these companies converted the acreage into storage areas connected to major pipeline networks that pump natural gas to and from the underground fields.

Ohio is home to 16 such storage fields.

The premise is for natural gas companies to keep a reserve for the winter months where it can be tapped when demand increases. "There's an injection season and a withdrawal season," Arnold says.

Natural gas is purchased and transported into the storage fields between April 1 and Oct. 31 each year, Arnold explains. That reserve is then drawn down between November and March, demand being highest during the colder months. "They're designed to address at least three to four cold snaps or adverse winter climate," he says.

The main legal question before courts in northeastern Ohio is whether those who own land within a designated storage field also own the mineral rights, Arnold says.

During the 1940s and ‘50s, energy companies negotiated many leases with landowners that specifically awarded these companies the rights to storage, Arnold says. However, drilling companies exploring the Clinton formation would often cut into the storage field and extract gas from the reserve.

After that, the language in these leases was changed to include not only storage rights, but also mineral and production rights of any potential drilling on or even near the land, Arnold notes. "They wanted to protect the storage field," he says. "Depending on how your lease is worded, it could mean any new gas coming out underneath the field," such as gas drilled from the Utica shale.

Fast forward to today. It's these leases that are complicating matters for thousands of landowners as an entirely new phase of development and billions of dollars of investment from the oil and gas industry take root in eastern Ohio.

Today, two of these storage fields – the Brinker Storage Field in Columbiana County owned by Columbia Gas, and the North Canton Storage Field owned by Dominion – are the subject of a legal fight over these leases.

Landowners outside these storage fields have signed lucrative land deals with energy giants such as Chesapeake Energy Corp. – some of them commanding bonuses of $5,800 an acre and 20% royalties. But many of those within the field are being held to these decades-old leases that at most award them $200 a year for their rights to any gas produced and a 12.5% royalty on any oil found. Moreover, Columbia Gas interprets the leases to mean that royalties could be collected only if the well sits on that property.

"Some of these leases are worse than others, but they're all bad," says Jill McNicol of Leetonia, who lives in the Brinker field. "There is no protection for your property, and they can use your water without compensation. There's nothing good about these leases."

The Brinker Storage Field is one of the smaller fields in Ohio, encompassing 25,000 to 30,000 acres, she says. Her repeated attempts to obtain a map of the field were denied by both Columbia and the Ohio Department of Natural Resources, she relates. They cited “proprietary issues” as the reason for their denials.

McNicol and her husband, Patrick, along with five other parties, have sued Columbia Gas Transmission LLC in the Columbiana Court of Common Pleas, arguing that the company breached the terms of these leases years ago and that these leases should be rescinded or reformed.

"We have 65 acres," she says. "They say they want to live by the terms of the lease, but they haven't. I know of a lot who haven't received a penny."

Since the lawsuit was filed May 30, NiSource Gas Transmission and Storage, parent of Columbia Gas, announced a partnership with Houston-based Hillcorp Energy Corp. that calls for the construction of a $300 million processing and pipeline network in eastern Ohio.

McNicol says others toward the center of the storage area were afforded the opportunity to modify their leases during the 1980s and 1990s, but those who lived on the outer edges – such as McNicol – were not. "Those people were able to sign leases, and they're valid," she says.

However, McNicol points out, landowners with the modified leases aren't likely to have wells drilled on their properties because much of the surrounding land is leased under the older agreements. These older agreements, she says, contain language that prohibits their land from becoming part of a larger drilling unit – in some cases spanning between 300 and 600 acres.

McNicol and others are also voicing their support for a bill sponsored by state Rep. Mark Okey, D-Carrollton, that would provide minimum royalty payments of 15% to landowners.

Meantime, other landowners have filed a class action suit in Stark County that involves drilling rights in the North Canton Storage field, owned by Dominion Gas. The North Canton field extends from the east side of Wayne County into Stark County and involves as much as 60,000 acres.

"There are thousands and thousands of landowners who are affected, including the [Akron-Canton] airport," says attorney Robert Tscholl, who is representing landowners.

Tscholl says that Stark County holds the potential of becoming the heart of the Utica's oil play, and the North Canton field could be a major contributor. "This could drive the economy in Ohio for who knows how long," he suggests.

Jim Mathews, another attorney representing landowners in the dispute, says that Dominion never intended to drill in the field and used the land only for storage. "All Dominion ever wished to hold was the Clinton level for storage interests,” he says. “They had no obligation to explore.”

The lawyers argue that the deep rights and storage rights are severable, and that maintaining the storage rights does not bind them to production rights. And, they contend. since Dominion has not adhered to the terms of these leases, they should be considered expired.

Mathews also notes that similar cases arose in Pennsylvania as oil and gas exploration in the Marcellus shale accelerated. “We’ve found some cases that support our position,” where a court sided with landowners. The court ruled that the company had consideration for storage rights, but not drilling and production rights.

Alan Wenger, an attorney with Harrington, Hoppe and Mitchell in Youngstown, says that he's been dealing with landowners in the Brinker field since energy companies first began canvassing Ohio more than two years ago. Wenger has not filed a lawsuit on behalf of his clients.

"There was a lack of contemplating anything that's happening right now," Wenger says. Thus far, he knows of no drilling activity in the Brinker field, although some leases have been signed. He foresees a settlement on some level with these landowners in the near future as the appetite for drilling increases.

"I think that with or without the lawsuits, there will be some resolution," Wenger says. "We've argued many times with Columbia, and I believe the companies will come around to some sort of accommodation."