Drilling Down

Most Oil and Gas Leases in Valley Will Not Be Renewed

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YOUNGSTOWN, Ohio – Oil and gas leases signed five years ago during the initial dash forexploration in the Utica shale are close to their expiration dates, and it’s likely most won’t be renewed.

The majority are in Mahoning and Trumbull counties, says Alan Wenger, chairman of the oil and gas law practice group at Harrington, Hoppe & Mitchell Ltd.

“There are thousands of leases,” he says, spread across Mahoning, Columbiana and Trumbull counties signed during the spring of 2011. “A huge number of them are up.”

Those landowners who hold lease agreements that involve acreage where no drilling has occurred are not bound to the agreement once it expires, Wenger says.

“They’re either held by production, in which the lease will keep going, or nothing has happened and they’ll expire,” Wenger explains.

Landowners who signed five-year leases with corporate giants such as Chesapeake Energy received one-time bonus checks based on the number of acres they held, the lawyer says. Chesapeake was among the first companies tying up positions early in the Utica shale race.

The company spent more than $1 billion to acquire leases across the Mahoning Valley, and further south in Carroll, Jefferson and Harrison counties. In some cases, landowners were paid more than $5,000 per acre. By 2012, the company had built the largest leasehold position in the entire Utica play.

In this region, many of these leases signed in 2011 were negotiated through groups such as the Associated Landowners of the Ohio Valley, or ALOV, which Wenger advised. A year later, ALOV helped negotiate the terms of more than 2,000 leases in Trumbull County with BP America. Those leases are scheduled to expire next spring, he says.

However, BP, and drilling companies such as Halcon Energy Resources, discovered Trumbull County and northern Mahoning County to be a bust and pulled up stakes in the Utica and have come out all but empty-handed.

It’s therefore unlikely that energy companies will seek to renegotiate leases that involve land in the area where drilling hasn’t taken place, especially in a weak oil and gas market, Wenger says.

Should the lease expire without being renewed or renegotiated, it’s the responsibility of the energy company to release the land for the record, he adds.

“The problem is, they don’t do it,” Wenger says. “Right now, that’s the least of their concerns. Some of them are just fighting to stay alive.”

Thus, it’s important that landowners understand that should their lease expire without renewal, and the company doesn’t release the agreement for the record, they can do so by notifying the lessee via an affidavit through certified mail, Wenger says.

Last week, Wenger wrote a memo to members of ALOV and another land group, Standing United Really Excels, or SURE, that encouraged landowners to seek legal advice that could help them in preparing these documents.

“My effort was to try to get information to them on how to get their land released on record,” Wenger says.

Landowners in areas where oil and gas production is proven – central and southern Columbiana County, for example – stand a much better chance of being renewed before their lease expires and receive another round of bonus payments.

And, energy companies aren’t dishing out the bonus money as they did five years ago as many contend with one of the worst oil and gas markets in recent memory.

During the week ended April 23, for example, the Ohio Department of Natural Resources didn’t issue even one permit for new horizontal wells in the Utica, Moreover, the rig count stood at a mere 11.

Permit activity fared better last week across the play, ODNR reports. Agency data show that 10 new horizontal permits were issued, all in the lower tier of the play in southeastern Ohio.

Four permits were awarded to Chesapeake for new wells in Jefferson County, Statoil USA Onshore Properties LLC secured four permits for wells in Monroe County, and two permits were issued to XTO Energy Inc. for wells in Belmont County.

The southern portion of the Utica shale has emerged as the most productive region of the play, records show. Areas of Mahoning and Trumbull counties in the northern section, as well as some wells in northern Columbiana County, aren’t nearly as productive as the big units in regions such as Belmont and Monroe counties.

Central and southern Columbiana counties, however, appear to hold the most productive wells in the northern tier, according to ODNR data.

“Some of them don’t see a real good business reason [to renew leases],” Wenger says, while other energy companies might be holding off on negotiations until the market improves.

“If you’re in the vicinity of a viable unit, then there could be some leverage there for the landowner,” he says.

Published by The Business Journal, Youngstown, Ohio.