The Ohio Supreme Court must decide whether the acceptance of free gas is sufficient to prevent a property owner from terminating an oil and gas lease on her property.
Justices heard oral arguments on that issue Tuesday in a case pitting a Washington County landowner against an oil and gas company, with the decision having implications for other leases across eastern Ohio’s emerging shale gas and oilfields.
“The appeal concerns a fundamental question that directly and immediately affects the validity and viability of thousands of oil and gas leases across the state,” the Ohio Oil and Gas Association and like-minded groups wrote in a brief supporting Heinrich Enterprises, the company involved in the suit.
The Ohio Farm Bureau and its offices in Guernsey and Washington counties countered in its own filing in support of Patricia Schultheiss, the landowner: “An injustice surely would occur, if the use of property by its legal owner creates from thin air the right for someone else to possess and use it.”
The case focuses on land in Washington County, near Marietta, that was subject to an oil and gas lease dating back to 1950.
The agreement at the time called for a well to be established within 10 years, with the lease running for that time and “as much longer as oil and gas is found in paying quantities thereon,” according to documents.
Schultheiss owns 48 acres of the larger area covered by the lease. A well was completed on what is now her property in 1951, and Schultheiss later agreed to exchange royalty payments for free, unlimited gas to her home.
Between 1977 and 1981, there was no commercial sale of gas from the well on the property. And subsequent production came from a well on property that was not owned by Schultheiss but that was part of the original lease agreement, according to documents.
In 2014, Schultheiss filed legal documents noting the termination of the lease, citing the periods when no “payable quantities” of oil and gas were produced from the well on her property.
Heinrich, which acquired the lease in 1981, argued that Schultheiss had accepted royalties from the well — that is, free gas to her home — among reasons for keeping its lease in place.
A trial court ruled in favor of the company; an appeals court sided with Schultheiss. The Ohio Supreme Court accepted the case for consideration on one issue: whether the acceptance of free gas prevented the termination of an oil and gas lease.
Daniel Corcoran, legal counsel for Heinrich, argued that the royalty payments kept the lease in effect.
“The production from the well and the benefit that she received, the gas in lieu of royalty, was in itself sufficient to maintain the lease,” he said in oral arguments Tuesday. “… The well was located on her property. A well does not produce gas over 30 years unless someone is maintaining that well, repairing it when it needs to be repaired, swabbing it periodically. She would not have received that gas over the period of time had it not been for our clients’ efforts in order to maintain the well.”
Corcoran argued that the landowner should have moved decades ago to legally terminate the lease, if she believed the agreement was no longer valid.
“It is inconsistent that our clients would continue to operate this well for more than 30 years under what they believed to have been a lease, because there was no issue ever raised back in the late ’70s and early ‘80s,” he said. “They owned the well, she would not have had the ability to get any gas for her house without her well.”
He added, “This is not a clear-cut thing. When a well goes out of production, that doesn’t mean that the lease ends. The operator can maintain the the lease anyway, as long as he’s reasonably diligent in getting back into production.”
But Ethan Vessels, representing the landowner, said court precedent in Ohio and across the country has sided with landowners in comparable cases.
“These wells go out of production all the time,” he said. “The reason why the leasee will allow it to go out of production is obviously because it’s commercially unproductive. What they don’t want to do is, if they can avoid it, plug the well, because it’s very expensive… When these wells stop producing or they stop selling the gas and the landowner’s getting free gas, what they’ll simply do is allow the well to remain. It’s really just a matter of keeping the hinges open.”
He added, “I strongly reject this contention … that the gas doesn’t belong to the leasor. Once the lease expires and terminates under its own terms, the landowner is required to do nothing… The landowner isn’t required to say anything, isn’t required to do anything, isn’t required to send a letter to the leasee saying your lease is over. Once that happens, the estate in the oil and gas reverts. It now flips back to being owned by the landowner… and it is free for them to use.”
Justices have taken the case under advisement, with no timeline for a decision.
Marc Kovac covers the Ohio Statehouse for Gatehouse Media. Contact him at firstname.lastname@example.org or on Twitter at OhioCapitalBlog.