Unitization: Action of last resort in the drilling industry, in which companies gain permission to tap the mineral rights of property owners who object.
Purpose: The goal of the statute is to balance the competing property rights of the landowners within a drilling unit, to prevent waste and to allow drilling to occur when appropriate. Unitization is about gathering all the mineral rights for a specific portion of gas-oil resources and bringing its development under common control.
Rights issue: When property owners want to tap and profit from their mineral rights, they are deprived of that right if nearby opponents are not forced to join the drilling unit; opponents say it forces them into a business arrangement or creates risks they do not want.
Property protected: State and gas officials say the law guarantees fair compensation and that the properties of unwilling landowners won’t be damaged. Under the state rules, there can be no surface operations, roads or pipelines on the unleased properties.
History: Became law in 1965 in response to a vertical drilling boom in Morrow County between Mansfield and Columbus. The law helped establish spacing rules and reduce overdrilling in an area where wells were drilled in close proximity. Until 2011, the law was invoked only twice.
To qualify for unitization: A horizontal well requires a minimum 640 acres of surface land. Owners of 65 percent of the land within the area to be tapped must have signed leases to their mineral rights for the unitization proposal to be considered.
Process: The driller pays a $10,000 fee to the Ohio Department of Natural Resources for consideration. A panel holds a public hearing and the ODNR renders a decision. Appeals go to the Ohio Oil & Gas Commission, comprised of persons appointed by the governor. Further appeals can be made to Franklin County Common Pleas Court.
Payment methods: Payment to unwilling landowners differs from payment to willing landowners. When unitized, opponents without standard leases can choose to become working-interest owners or nonparticipating working-interest owners.
Working-interest owners become well partners. They pay projected costs to drill and complete the well based on their percentage of property in the unit. They are responsible for their share of up to 200 percent of each well’s cost, which ranges from $7 million to $10 million. Those costs are subtracted from royalties, which are payments from well production, pro-rated to the percentage of ownership. In addition to the royalty, participants receive a proportionate share of the net revenue interest when the well begins producing.
The other option is the nonparticipating working-interest owner. There is no prepayment of well costs. Instead, the well owner carries the property owner’s working interest expenses and deducts those pro-rated costs from the well’s revenue. That may include deductions of up to 200 percent of each well’s cost and of up to 600 percent for not participating in the upfront drilling risks. Payments of landowner royalty begins with production. The participant does not gain working interest until the carried well costs and risk-factor costs have been recovered.
— Bob Downing