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August 2013

Ohio Court Enforces Change-in-Ownership Provision; Burden on New Landowner to Notify Lessee of Change in Ownership

by Timothy B. McGranor

The Ohio Court of Appeals for the Seventh Appellate District recently issued a decision enforcing a change-in-ownership provision contained in an oil and gas lease.  See Conny Farms, Ltd. v. Ball Resources, Inc., 7th Dist. No. 12 CO 18, 2012-Ohio-2874. 

The plaintiff had purchased property on which there were two identical oil and gas leases, and before buying the property, the plaintiff had received title work that disclosed the existence of the leases.  The leases contained a change-in-ownership provision that required the lessor to notify the lessee of any changes in ownership.  Notwithstanding this knowledge, the plaintiff failed to notify the lessee that it now owned the property.

After the change in ownership, the lessee’s storage rental checks were returned unclaimed.  For that reason, the lessee suspended further payments.  Several years after the change in ownership, the plaintiff wrote to the lessee’s lawyer and demanded that the leases be canceled for failure to pay rentals.  When the lessor refused, the landowner sued to have the lease terminated.

The court refused, holding that the landowner’s failure to notify the lessee of the change in ownership precluded its claims.  Relying on a decision from the Fourth Appellate District, Burlington Resources Oil & Gas v. Cox, 133 Ohio App.3d 543 (4th Dist. 1999), the court in June held that a landowner’s duty to notify the lessee exists even where there is no express change-in-ownership provision in the lease.  Finally, the court held that the suspense of the storage-rental payments was proper under the circumstances.

Top News from the Energy & Environmental Blog

Natural Gas Imports and Exports 
According to the Energy Information Administration (EIA): "In the face of unprecedented levels of domestic natural gas production, net imports of natural gas into the United States fell 23 percent in 2012. Net imports as a percentage of total natural gas consumed decreased to around 6 percent from 8 percent in 2011. A combination of both higher exports and lower imports led to a decline in net imports in 2012. Based on preliminary data for 2012, domestic dry natural gas production increased by about 5 percent to 24,063 billion cubic feet (Bcf). This growth led to greater domestic natural gas supply and relatively low prices in the United States, thus reducing U.S. reliance on foreign natural gas. It also widened the price differential between Henry Hub and foreign markets outside of North America, increasing interest in the potential export of liquefied natural gas (LNG)."

Storage Capacity Increasing In the U.S.
That's according to a recent report by the Energy Information Administration: "Natural gas working storage capacity increased by about 2 percent in the Lower 48 states between November 2011 and November 2012. The U.S. Energy Information Administration (EIA) has two measures of working gas storage capacity, and both increased by similar amounts: Demonstrated maximum volume increased 1.8 percent to 4,265 billion cubic feet (Bcf); [and] Design capacity increased 2.0 percent to 4,575 Bcf."

DOE Study on Hydraulic Fracturing
The AP is reporting on a year-long study from NETL (the National Energy Technology Laboratory, a part of the U.S. Department of Energy's laboratory system): "A landmark federal study on hydraulic fracturing, or fracking, shows no evidence that chemicals from the natural gas drilling process moved up to contaminate drinking water aquifers at a western Pennsylvania drilling site, the Department of Energy told The Associated Press." More? "After a year of monitoring, the researchers found that the chemical-laced fluids used to free gas trapped deep below the surface stayed thousands of feet below the shallower areas that supply drinking water, geologist Richard Hammack said." Very interesting. Read the whole thing. (And yes, the study remains preliminary at the moment ... but it's still interesting.)

PA: Lease Allows Surface Use
The Pennsylvania Superior Court recently held that an operator had the right to construct an 11-acre freshwater storage impoundment under the terms of its lease, regardless of whether it complied with a subsequent Surface Damage Release. See Humberston v. Chevron U.S.A., Inc., Case No. 1270 WDA 2012 (July 12, 2013). Quoting the trial court, the appellate court agreed that "[t]o produce the natural gas and maximize production from the Marcellus shale, Chevron must utilize hydraulic fracturing of the seam of shale. This process requires the use of significant quantities of water. Temporary impoundment of water on the surface of the leased premises is reasonably necessary for the hydrofracking process and, therefore, is incident to the grant [contained in the lease]."

Regarding the Surface Damage Release, the court stated: "[I]t is a separate agreement that provided for payment to the Humberstons for damage to the initial drilling area. The Release does not incorporate the Lease and therefore cannot limit in any way the use of the surface as contemplated in the Lease."

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Timothy B. McGranor



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This alert is for general information purposes and should not be regarded as legal advice. As always, please let us know if you want more information or have questions about how these developments apply to your situation.