Shale Magazine

SHALE www.SHALEmagazine.com

FALL 2014

Utica Spotlight:

» Odebrecht’s ethane dream » Here come the engineers » Truckin’ is haulin’

n o i t a g i t i L

r e h s u g

Lawyers are as busy as driLLers in OHiO’s ay sHaLe pL

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WeLcome Lawyered up I’m not a lawyer, I just . . . well, actually, I’m just not a lawyer. Not even close. I am, however, now indebted to lawyers, and lots of them. If all of the help I got putting together a few of this edition’s articles was expressed in billable hours, I would have a debt of tens of thousands of dollars. Maybe more!

Many of the attorneys who helped me — including some pretty high-priced experts — were more than generous with their time. They were willing to spend hours talking to me about things like Ohio’s Dormant Mineral Act, home-rule lawsuits, held-by-production rules, and much, much more.

There is simply no way I could ever pay them back in full. But I do have a two-part payment plan.

First, I’d like to sincerely thank all of them for helping me — and for being so fun to talk to in the process. You might not think a “DMA case” can make for friendly banter, but it can.

Dan Shingler Editor

Shale Magazine

That’s my first payment; the second is tougher. To write that check, I need to convey what they taught me to you, hopefully in a manner that is more pleasant to read than a legal brief, but still as accurate as the attorneys were themselves.

I hope I’ve done that. I know they’ll let me know if I did not!

If I was successful, though, I have to admit I got lucky.

Considering that Ohio was hardly mentioned as an oil and gas producing state until about three years ago, I found an amazing number of talented legal minds who truly understand the industry, and the state laws that affect it here. And they not only can explain it all to a layman like me, but are willing to do so.

In fact, now that I think about it, we are all lucky.

Because, probably more than most industries, the oil and gas sector relies on contracts, regulations and the rule of law.

So having a strong cadre of capable lawyers might be more important to the development of Ohio’s drilling industry than a supply of rigs, rig-workers or even drilling companies.

And we have them in spades.

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tAbLe oF contentS FaLL 2014

www.SHALEmagazine.com 700 West St. Clair Ave., Suite 310 Cleveland, oH 44113 (216) 522-1383 • (877) 824-9373 PUBLISHER/EDITORIAL DIRECTOR

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John Campanelli

A ROUNDHOUSE FOR RAIL

ohio’s rail industry is making the turn and gaining steam

EDITOR

dan Shingler

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ART DIRECTOR

rebecca Markovitz FREELANCE GRAPHIC DESIGNER

Staci Buck

Legal Gusher

PRODUCTION MANAGER

ohio’s oil and gas attorneys have struck a gusher and have plenty of contentious issues to keep them busy as the Utica shale play develops

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Craig Mackey

ADVERTISING DIRECTOR

Nicole Mastrangelo SPECIAL EVENTS

Jessica Snyder

HELD By PRODUCTION?

that’s a question driving people to court in eastern ohio

MARKETING STRATEGIST

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CONTRIBUTING WRITERS

Michelle Sustar

NO REST FOR THE RICHES

dan McGraw Chrissy Kadleck

ohio’s dormant Mineral Act is suddenly a hot topic

HOME RULE VS. STATE SUPREMACy

All eyes are on the Munroe Falls case to see who wins

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Brazil’s odebrecht is ready to spend billions on an ethane dream

THE REAL DEALS

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TRUCKING’S ON A ROLL

industrial land and buildings are in short supply around drilling hot spots

there’s plenty for drivers to haul, but will it last?

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Lindsie Bowman John Banks dawn donegan Andy Hollander Mike Jansen SUBSCRIPTIONS

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ENGINEERING AN ENTRANCE

Firms are coming to ohio because of shale, but plan to broaden their scope

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Vorys_Crains-Shale_NoBoundries_HL_8x10.875_FA.indd 1

2/28/14 1:36 PM

Traditional energy production and rail traffic go hand in hand in Ohio, whether it’s a coal train in Conesville or a fracking sand train in Minerva (below) — and rail traffic is on the rise as the state becomes a major producer.

PHotoS: oHio dEPArtMENt oF trANSPortAtioN

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ALL AboArd? The Utica just might be the roundhouse that Ohio’s waning rail industry needs

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by dan mcGraw

ore than 150 years ago, the railroad industry helped marshal in an era of growth for Ohio and the nation. Tracks between cities and natural resources in the hinterlands paved the way for the Industrial Revolution and then carried the fuel to power it.

Belching locomotives carried coal and oil to factories and cities and then carried away finished goods from cities like Cleveland, Toledo and many others. They were the intermodal transport that connected ports, canals, rivers and the railroad stations themselves.

But the advent of an interstate highway system and the decline of Midwest manufacturing led to a rusting of the rails. In Ohio, many short lines were abandoned, and the huge rail yards that once ringed and cradled major manufacturing operations became less needed and fewer in number.

You’d have been forgiven for writing off Ohio’s rail industry as little more than a pass-through whistle stop. But then, who thought they were going to start building new steel mills in Youngstown just a few years ago?

Rail is back. Maybe not to its glory days, but it has a good head of steam at least.

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The Ohio Central runs on a short line in Youngstown, carrying steel for the town’s brand new mill, which is making pipe for drillers.

PHoto: dAN SHiNGLEr

The Utica and Marcellus shale plays are driving investment in local rail operations in and around eastern Ohio. Experts and industry players think rail cars will continue to have a larger presence in the Ohio and Pennsylvania shale plays, even if most of the output comes in the form of natural gas, rather than the crude oil that is filling up thousands of rail cars in the Dakotas.

Here, the midstream infrastructure is being developed with a combination of pipelines, trucks and rail, and the cargo ranges from gas processed to a state of pipeline readiness, to tankers full of liquids like ethane. Many are bullish that rail lines will see a big increase in traffic, because much of the rail system already is built, is running and can be operated at predictable and reliable costs. Meanwhile, some pipeline builders have to rely upon securing rights of way, permitting and construction in a world with all sorts of groups opposed to moving resources underground.

“Every transportation option will have a role to play, and rail will be a big part of that,” says Mike Filoni, vice president of sales and marketing for Carload Express, which operates four rail lines in Ohio and Pennsylvania. “But we have a better record when dealing with hazardous materials. The lines are already built.”

He adds another point in rail’s favor as well: “The pipelines will only go to certain locations, so many parts of the shale play are seeing railroads as the best transportation option right now.”

Last year, Carload Express rehabbed an old line near Hannibal, Ohio, in the southeastern part of the state. It had been dormant for about 10 years. The company invested about $3 million restoring the 12-mile short line, named the Ohio Terminal Railway, and its primary use will be to transport “wet” gas products from the drilling areas to new processing plants in eastern Ohio.

‘‘

The rail lines in the oil and gas game get a bonus, too. Like those trains of the 1800s, they have cargo going both ways.

“The Utica play is really still in its beginning phase, but we see it as being a long range opportunity,” Filoni says. “In both the Marcellus and Utica plays, we are filling the need for sand and fracking liquids to start the drilling, and then the wet gas that will come from the wells.”

Filoni even sees a third rail boost that the industry might be able to safely step on in the future.

“And as the natural gas gets to market, we think the lower costs of energy will bring back manufacturing, and that is good for us as well,” he said.

Other rail companies also are making significant investments that buck the trends of recent decades.

Crosstex Energy LP owns and has reactivated the Black Run rail loading terminal located in Frazeysburg, east of Columbus, allowing the export of the Utica shale’s light-oil condensate production. The Black Run facility is a state-ofthe-art, 20-car rail rack with tracking gangways designed to top load multiple products.

In Newark, Ohio, railway giant Genesee & Wyoming has invested $2 million expanding its rail hub to better serve the Scio, Ohio fractionation plant. That plant is being built by M3 Momentum, which is investing millions in rail siding and storage racks to handle the estimated 10,000 carloads of natural gas liquids the facility will produce annually, once it starts up next year.

“Utica is still ramping up,” says Ryan Fischer, assistant vice president of emerging markets for Genesee & Wyoming.

“But we are seeing an increase of about 50% in our traffic in these shale plays in this year over last year. We aren’t building new lines, but we are seeing lines that had little traffic now having 10 to 15 trains a day using them.”

Like Filoni, Fischer says he’s competing successfully with pipelines to haul liquid products. And like Filoni, he’s hoping for some broad, long-term gains.

“The Utica traffic is a key driver in this part of the country for our business right now,” Fischer said. “Rail offers the flexibility that pipeline doesn’t have. And when the natural gas gets to market in ways we expect, the manufacturing sector will be in a growth phase. We are poised to be a part of that as well.”

THE pipELinES wiLL OnLy gO TO cErTAin LOcATiOnS, SO mAny pArTS Of THE SHALE pLAy ArE SEEing rAiLrOAdS AS THE bEST TrAnSpOrTATiOn OpTiOn rigHT nOw.

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Mike Filoni, vice president of sales and marketing, Carload Express

One law firm for all energy-related legal needs PHoto: CroSStEx ENErGY

Crosstex energy has reactivated its Black run Terminal, in order to haul light oil condensate from the Utica, via the Ohio Central railroad.

Right now, most of the rail freight is inbound; it’s fracking sand, pipe, equipment and the other stuff that goes into high-volume slick water hydraulic fracturing and infrastructure construction.

But with many drill sites heavy with natural gas liquids (NGLs), the Utica likely will provide railroads more outbound traffic than they were able to get in the Marcellus, where the gas is mostly dry.

For instance, CSX saw a big increase in rail traffic after two NGL fractionation plants opened in West Virginia and began producing outbound product.

“I think there is a lot of potential in the Utica,” said Rich Karn, director of marketing, chemicals and fertilizer at CSX. “It’s relatively underdeveloped compared to the other major shales in the country, especially when compared to the Marcellus, which it’s next to. What we’re talking about is inbound sand and outbound NGLs. There also is the potential for condensate, and that really is in its infancy in being developed. And rail will be a key component in that.”

For perspective on how much the rail industry has come to benefit from a reunion with its oil and gas partner, one need only to look at the volume of crude oil shipped by rail over the past few years in other parts of the country. The Association of American Railroads said in late March that major railroads delivered 434,042 carloads of crude oil in 2013, an increase of 83% from 2012. The association noted crude oil shipments remain a relatively small part of rail traffic, but they have grown significantly since 2008, when 9,344 carloads were delivered.

Of course, these figures are bolstered by the big amount of crude produced in the Bakken and Eagle Ford shale plays. But as the Utica develops, the rail industry predicts huge growth here as well.

“The Utica shale play is in a hot spot,” says Carload Express’ Filoni. “We see this part of the country being very strong for rail right now, and it (oil and gas) is a part of the history of this region — and is once again showing why it is so important.”

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, n o i s s e f o r p L a g e L s ’ o i h o for

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From leasing issues to lawsuits over land access and claims of nuisance, the shale play is proving to be wide and deep for lawyers across eastern Ohio by dan Shingler

J

ust about anyone who lives within trucking range of a shale play, like Ohio’s Utica, has heard plenty about how important oil and gas drilling is to other industries.

Industry supporters love to talk about how the oil and gas business buoys not just the drilling and oilfield service industries, but also the rail, trucking, engineering, construction, hotel and restaurant sectors — with more benefits to come for manufacturers who need cheap natural gas or the raw materials for plastics and specialty chemicals that largely are derived from natural gas.

But oil and gas boosters might be failing to mention the one existing Ohio industry that might benefit more from the oil and gas industry than any other, aside from the drillers and midstream companies themselves: the state’s already large legal sector.

Lawyers are having a field day with the Utica shale, and many are growing their firms to take advantage of a boom in new business.

“Yes, we are (seeing more oil and gas litigation) and our energy team has expanded,” confirms John Keller, an oil and gas attorney at the Columbus office of Vorys, Sater, Seymour and Pease.

Keller’s firm represents drillers, midstream companies and the contractors that serve them, and it has done so for many years. But, like other firms, it has never seen any source of growth like the Utica shale, which has become a source of employment for plenty of new lawyers.

Vorys, for instance, has grown its oil and gas practice by at least three fold over the last half-decade, largely because of the Utica shale.

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“On any given day, we have 30 to 50 people working on oil and gas matters,” Keller said, noting that just five years ago there would have only been enough work to keep five to 10 lawyers busy at a time. “We’re blessed to have good work, good clients and good people on our team.”

Matt Warnock, an attorney with Bricker & Eckler in Columbus, has been working on energy issues for seven years and has spent the last four years primarily working on oil and gas issues, largely because of activity related to the Utica. He said he’s still surprised at how much work the play is generating for him and other lawyers. He represents companies in the industry in transactions, on issues before the Public Utilities Commission of Ohio and, in his busiest area of late, on litigation with landowners, contractors and other entities.

“We have probably two or three dozen active cases pending,” Warnock said. “It’s doubled or tripled in just the last year. … I don’t know if I considered myself a litigator before I started doing all of this oil and gas.”

Before the recent shale boom, Bricker’s oil and gas team consisted of only one or two lawyers at any given time.

Today, the firm says it has six attorneys who work on oil and gas matters full time, with an additional dozen or so involved in specific aspects of shale development as needed.

three areas of concern That’s pretty much the story told by most law firms that are heavily involved in oil and gas litigation, especially if they were fortunate enough to have established their practice before the Utica began booming about three years ago.

And it’s not over yet, they say. In fact, most old hands in this area of law say that the work will come in stages — and the Utica is still in the first one, for the most part.

“Litigation arises in a couple of different areas … whether you’re in the Bakken, in the Dallas/Fort Worth area, or in the Marcellus and the Utica,” said David Overstreet, an attorney at a big oil and gas firm, K&L Gates in Pittsburgh, that is heavily involved in shale plays nationwide.

Overstreet sees three main areas of work: lease and property-rights suits that involve disputes over mineral rights leases and their validity; off-site impact cases that involve access to land and claims of nuisance or negligence by those that aren’t directly involved in drilling; and disputes over how oil and gas drilling can take place in populated areas.

Right now, the Utica mostly is still in the first phase, where property owners are sometimes contesting the validity of old oil and gas leases, often seeking the better terms afforded on more recent shale leases, he said.

But there already is work being done in all three areas.

For instance, Munroe Falls, in Summit County, is challenging the Ohio Department of Natural Resources’ role as the sole authority over where and whether shale drilling can take place in a certain area.

Following the Keystone State Just about all of the lawyers involved in this area of law think their boom will continue. If you want to see what the legal workload will look like in Ohio in the next few years, just look at Pennsylvania. The Marcellus shale play in that state got going about four years before the Utica took off, the lawyers say, and as the Utica tracks the development path of the Marcellus, so will the nature of shale-related lawsuits in Ohio.

“Ohio’s play is less mature than Pennsylvania’s, so there are fewer wells that are completed than there are in Pennsylvania,” said Steve Silverman, an attorney with Babst Callan in Pittsburgh. “What you’re seeing now in Pennsylvania, you’ll see more of (similar litigation) in Ohio later.”

That means more disputes between producers and contractors, between adjacent landowners, between drillers and property owners — and more lawsuits from outside interests on things like environmental issues.

“As there are more mature wells, we’ll see more environmental related claims, more surface damage claims and many more nuisance claims,” Silverman predicts.

Disputes, some of them heated, will be unavoidable. But he also predicts that most drillers will do almost anything that they can to prevent lawsuits, even if they have to take extra steps to keep all of the parties happy. That’s partly because they want to have a good image in the community, but also because they want to minimize the number of suits they must contest in court, not to mention awards for damages.

“Most operators want to act responsibly and will do whatever they can to minimize those claims,” Silverman said.

Nonetheless, he and others say they are still gearing up for more work in Ohio’s court rooms — some of which already are beginning to feel the weight of more, and more complex, lawsuits.

That all comes along with the rest of a shale boom’s local impact, they say.

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That’s a question that has driven many a lawsuit across eastern Ohio by dan Shingler

b

ack in the old days of the Utica — and we’re talking way back around 2010-11 — the play produced as much litigation as gas and oil. The major source of contentious trips to the courthouse back then were lawsuits over something called “held by production,” or, as most in the industry refer to them, “HBP” cases.

Most mineral rights leases in Ohio have an HBP provision, which means that as long as a driller keeps producing gas and oil, the lease remains valid. But when Utica shale leases became worth millions of dollars, suddenly a lot of folks were disputing whether real production occurred and whether their lease was valid, or if they could go out and sign a new one.

PRODUCTION continued on page 29

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r o f t s e no r s e h c i r the under Ohio’s dormant Mineral act, if you don’t use ‘em, you lose ‘em by dan Shingler

i

f you thought held-by-production lawsuits were fun, you’re going to love the fights that erupt over Ohio’s Dormant Mineral Act — or, more accurately, over the money mineral rights began to represent a couple of years ago.

“The real estate-based issues, like the Dormant Mineral Act (DMA) fights over who owns the minerals, are the first thing to become front and center,” said Don Fischbach, a longtime Oklahoma oil and gas lawyer who moved to Cleveland two years ago to practice at Calfee, Halter & Griswold.

Unlike held-by-production challenges over leases, Dormant Mineral Act suits are over the actual ownership of mineral rights. Usually, a surface landowner wants the rights re-attached to his domain. Held-by-production cases are over rights that have been leased; they’ve never left the landowners’ possession, and it’s just a matter of whether a landowner will get a new signing bonus payment or more in royalties.

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ACT continued on page 27

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. s v e L u r e y hom c a m e r p u s state

PHoto: dAN SHiNGLEr

Munroe Falls’ case before the Ohio supreme Court could decide whether local governments get control over drilling in the state by dan Shingler and dan mcGraw

t

here might be one thing some of those following the Utica shale are watching more closely than rig counts, midstream development or well results: the case of Munroe Falls vs. Beck Energy now before the Ohio Supreme Court.

It might decide whether the state’s claim to sole authority over all aspects of drilling stands, or whether local cities, villages, townships and counties also get a say in where and how drilling is done in their jurisdictions — or if it is done at all.

“As far as I can see, that’s going to be the decisive case in Ohio on Home Rule,” said Heidi Gorovitz Robertson, a law professor at Cleveland State University who studies environmental and property law in Ohio and other states with shale gas and oil.

“Home Rule.” Those are key words here. In lower case, home rule applies to

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a generic concept of local control. But put it in caps, and Home Rule refers to a specific, some say sacred, guarantee of local control granted by the Ohio constitution. The Ohio Supreme Court has historically decided to which matters it applies, and has yet to say if drilling is one of them.

The Munroe Falls dispute came about in 2011 when the Summit County city put a number of requirements to Beck Energy, which already had a permit to drill from the Ohio Department of Natural Resources. Munroe Falls told the company it needed a zoning certificate, construction permits, bonding, and an application fee.

“There was a whole list of things the locality wanted to have control over,” Robertson said.

Beck said no, and that all it needed was the state’s permission, along with a lease to the mineral rights it intended to tap. So says Ohio law, as well, if not Ohio’s constitution. The city sued,

won in lower courts, and the company appealed.

Munroe Falls said it is concerned that ODNR does not take environmental risks or circumstances into consideration, and that it fears for its drinking water. The two parties were off to court. The Ohio Supreme Court heard arguments in February, and many are hoping for a decision before year’s end.

On the surface, the case will decide whether Beck’s well can be drilled in one Ohio city. But in the drilling industry, the important stuff is always beneath the surface. Many in the industry, or those outside watching it, think the Munroe Falls case could have deep and lasting effects.

“It’s important because the industry realizes that someone has to regulate the industry,” said John Keller, an attorney with Vorys, Sater, Seymour and Pease in Columbus who argued the case for Beck Energy. “The question is: Do you want it regulated by the state, which has a lot of experienced people? Or do you want it regulated by local governments which, with rare exceptions, have no expertise?”

It’s important to others, including Munroe Falls officials, who argue the opposite — that ODNR staffers rarely know or consider important local assets or concerns. Local governments should be able to protect their assets with the powers given to them by the state constitution, they say, and other cities have filed court documents supporting Munroe Falls’ position.

“Everyone is watching that case very closely.

It’s a very important case,” said David Northrop, an attorney with Babst Callan in Pittsburgh who represents drilling companies in Ohio and elsewhere. He said drillers fear having to contend with other local barriers if the court does not keep local governments from holding sway over oil and gas activities.

“If the court disagrees (with the state’s claim to sole authority) we’re going to have many disputes with local jurisdictions,� Northrop predicted. “Those communities, given the opportunity, will try to affect drilling and that will impact operators.�

Horizontal drilling and hydraulic fracturing for oil and gas is a relatively new practice in Ohio, but it has been growing in other shale plays around the nation for about 15 years.

Some states, including long-time producers like New Mexico, Texas and Oklahoma, permit local communities to implement local rules, but their authority is often limited to things like establishing setbacks from schools and parks.

There are also election-year initiatives in Ohio and other oil and gas states. Gates Mills, a wealthy suburb of Cleveland, likely will have a drilling ban on the ballot from a citizen petition drive, for instance.

In Denton, Texas, the epicenter of the Barnett shale play, voters will decide whether to ban drilling in that city just north of Fort Worth, even though the city already has adopted a 1,200-foot setback.

Political matters are tough to prerobertson dict, but one thing is almost certain: The gas-drilling debate is going into the phase where the courts are becoming battlegrounds over local control.

The Pennsylvania Supreme Court ruled in December, 2013 that the state had jurisdiction over how drilling can be done, while the local governments can use their environmental protection powers to decide where drilling can take place.

The New York Court of Appeals ruled in June that the state oil and gas law doesn’t trump the authority of local governments to control land use through zoning.

On the other hand, a Colorado judge ruled at about the same time that a fracking ban in the city of Longmont violated a state law that prevents local governments from controlling drilling.

The oil and gas industry is not necessarily against having the courts involved, either. They often welcome it, including in Ohio.

Broadview Heights, another suburb of Cleveland, is facing lawsuits from Bass Energy Co. and Ohio Valley Energy after voters passed a bill of rights in November 2012, banning oil and gas drilling. The companies want the court to invalidate the claimed local authority.

But the one Ohio case at the heart of it all is the one from Munroe Falls. How big an impact it will have will depend upon the breadth of the upcoming ruling.

A broad ruling against the city would be a severe setback for any other local government that hopes to control drilling, Robertson said. But the court could rule only on specific aspects of the case and decide that local governments can regulate some aspects of drilling, but not others. They might say local governments can have rules on setbacks, or noise, for example, but not be allowed to ban drilling generally. “You can see (local governments) waving their hands around going ‘Home Rule, Home rule!’ The question is, is this an area where Home Rule applies?� Robertson asks.

On the other hand, she notes, the courts could decide that the legislature’s efforts to consolidate state control, over matters that have a local impact, is going too far on behalf of industry and violates the state constitution. “Industry, of course, wants it to be easy. That was the Legislature’s point and that’s what the industry wants — to only have to go to ODNR,� Robertson said.

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15

Odebrecht is playing shale’s high-stakes long game in Appalachia

Ethane’s Potential T

By Dan Shingler

he Utica and Marcellus shale plays could supply Brazil-based Odebrecht with all the raw material it needs to operate a major ethane cracker the company plans to build in Parkersburg, W. Va. But that’s only one of three major factors that will be needed to make the plant work and for Odebrecht to move forward with its development, says David Peebles, the company’s vice president in charge of the huge project.

It also needs a pipeline to deliver that ethane from separation facilities that remove ethane from socalled “wet gas,” and then it needs a market for the polyethylene Odebrecht ultimately hopes to produce. That end market largely is in Northeast Ohio, where the plastics industry has a strong presence.

“It’s the second-largest gas play in the world, maybe the largest” Peebles says of the Marcellus and Utica, which his company views as a single resource.

To take advantage of it, Peebles plans to vertically integrate so that the operation not only turns ethane into ethylene, but will include three additional plants to produce polyethylene — much of which will be shipped to end users in Northeast Ohio.

“It’s an integrated facility that we hope will also take advantage of the world’s largest polyethylene market — which is right here,” Peebles said on a recent visit to Ohio, during which he met with Crain’s Cleveland Business’ Shale magazine.

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Odebrecht is an international giant that builds large petrochemical plants, such as the one pictured here and the giant complex (preceding pages) it is constructing in Mexico. The company says the plant it plans for West Virginia would be almost a twin of the Mexico facility.

PHotoS: CoUrtESY odEBrECHt

While some landowners, drillers and others involved in the shale play take a short-term view when it comes to development, Peebles is looking much further out. Major projects such as what Odebrecht has planned for Parkersburg only make economic sense if they operate for many years, or even decades, he says.

He hopes others adopt his long-term view, because it would not only be good for his plant, it would be the best way for Ohio, and other surrounding states, to take full advantage of the shale boom.

The way to truly leverage and take advantage of all of the gas and ethane being produced here is also to process and use that gas, he says — from the initial separation of gas and liquids like ethane, which already is being done in Ohio, through the process of turning that ethane into polyethylene resins for plastics and, ultimately, making stuff from the plastic itself.

“We’ve got this resource, so are we going to be timber and coal again? Are we just going to be an extractive economy?” Peebles asks. “To me, the long-term positive sustainability is to try to figure out how you’re going to build down the value chain, right to the end manufacturers.”

Looking for a line There is, however, a major missing piece that Peebles needs to fill in.

He has raw materials, and he has an end market. He has a way to get his product, the polyethylene, to his customers in Northeast Ohio and other industrial regions in the Midwest. The plant will employ about 3,000 rail cars to do that.

What he doesn’t have, yet, is a way to get the ethane to the plant in the first place. That will require a pipeline from a de-ethanizing plant.

There already are several such plants in Ohio, with more coming, but so far no one has committed to building a pipeline to Parkersburg.

Currently, gas producers here send their gas to midstream processing and pipeline companies,

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which in turn ship the gas to distributors and send the ethane to the U.S. Gulf Coast and, to a lesser extent Canada — where there are already major ethane processing facilities and existing pipelines or at least connectors.

“They know where their market is right now and it’s the gulf,” said Peebles, who said he completely understands the logic in doing that.

But long-term, it makes more sense to keep the ethane here, he says — that avoids the larger tolls required to ship the gas to the Gulf, as well as the transportation costs of shipping polyethylene back to Ohio and other industrial states. Reducing those costs could boost the profits of drillers and also lower the raw material costs of end users, Peebles says.

Odebrecht is negotiating to get a pipeline to its plant. It could partner with a midstream company to build one, or it could just commit to using the pipeline for a long-period and paying the tolls that would support its development.

He’s also hoping that politicians, business executives, unions and other thought leaders will see the logic of his argument, and possibly help persuade developers to commit to a pipeline to Parkersburg.

one word: Plastics The plant’s construction could be what economic developers here need, said Andrew Thomas, a long-time oil and gas attorney who has recently been researching the potential economic impact of the Utica shale as a visiting scholar at Cleveland State University.

“I think it’s very important,” Thomas said.

“On a global macro level, if you look at what they’re trying to do, on the one hand there is abundant long-term ethane available. On the other hand, there is a huge market for polyethylene in Ohio. So it just makes sense.”

State officials recently estimated that it will cost $100 million a year to send ethane to the Gulf Coast. That money could be saved and would benefit local producers and manufacturers if the ethane were processed right here, Thomas said.

The risk, Thomas said, is that producers and midstream companies all will be committed to shipping product to the Gulf before Odebrecht is up and operating or has a pipeline in place. Odebrecht is looking at a three- to five-year timeline, but producers and midstream companies must find markets for their ethane today.

“They have a little bit of a trick box there that they’ll have to figure out,” Thomas said.

Peebles is certainly working hard to crack it.

He has supply agreements from producers in place to supply him with more than half the ethane he’ll need to operate the West Virginia plant at capacity. He’s also in serious negotiations aimed at getting a supply line built.

“We’re serious. We’ve bought land, we’re engaged and we’ve spent money,” Peebles said.

“Where we’re really focused now is on how do we get ethane to the plant. … But the real deal is the downstream (end users) — that’s where the economic development is.”

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the Utica’s other land rush Eastern Ohio’s industrial buildings and acreage are in high demand and short supply by chrissy Kadleck

S

outheastern Ohio has loads of oil and gas underground. What it needs is more midsize to large buildings and industrial space on the surface.

Buildings with 10,000 to 20,000 square feet of space, as well as three- to five-acre parcels, are needed to service the growing shale gas industry. But they’ve become tough to find.

The coveted buildings and potential lay-down yards for pipe and supplies have been in such short supply and high demand that real estate advisers like Bryce Custer, of NAI Spring in Canton, have become more than a little proactive. They’re resorting to knocking on doors and asking owners if they are willing to sell. “Right now I’m working with three to four clients who are still looking for facilities,� said Custer, who focuses his business primarily on servicing clients coming to the area to work in the Utica shale. “A lot of times I will go to an existing business and ask if they have any desire to relocate and a lot of times the owners feel it could be more profitable for them to sell their building and relocate their business somewhere else.�

In December 2013, he opened a Carroll County satellite office in Carrollton to better serve his clients. “If we find the land, we can work with investors to build the building,� Custer said. “We do a lot of leg work, there is no question — because a lot of the product does not exist, so we have to make it happen.�

In one case, a company in Carroll County sold its building to an energy company looking to expand as a way to raise capital for itself. “Fortunately for them, we were able to sell their building for more than they could ever possibly imagine, which allowed them to literally quadruple their size at another facility,� he said.

PHoto: CoUrtESY BrYCE CUStEr

Bryce Custer has carved out a new niche by specializing in commercial properties for buyers working the Utica shale. he and other realtors say industrial land and buildings are now in short supply across the region.

“If you’ve got the right product (land or buildings), those opportunities do exist.�

NAI Spring is one of the largest real estate firms focused on Ohio’s shale play. It has worked with more than 45 production and midstream companies throughout a seven-county area atop the Utica shale, Custer said. His company has handled more than 25 lease transactions and more than 20 outright sales that involved oil and gas, with more still on its agenda. “If you add it all up, we’ve done in excess of $45 million of oil and gas business since we’ve really

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been heavy into this the last two years,� he said.

While the numbers of calls from prospective companies has decreased significantly during the last 12 months, the pace of sales has not, Custer said. “At first we were getting two to three calls a day, and now we might get a call a week or every two weeks,� he said. “The difference being though is that (with) the calls that are coming in now, we know companies are more serious — they want to be here and they have a real need and desire to be here.�

‘‘

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Meanwhile, existing companies that aren’t in the oil and gas field are feeling the crunch when looking for expansion space, because the supply of available property is so low.

Custer says the new Century Park, a 65-acre industrial park being developed just south of Canton, off I-77, will inject some much-needed commercial land into the market when it becomes available in early 2015.

Farther south, commercial listings in Guernsey County, especially around Byesville and Cambridge, are hot commodities, said Kim Benincasa, a broker with NAI Ohio Equities LLC in Columbus. (It’s a separate company from Custer’s.)

“I just listed a property in Byesville — a 50,000-square-foot building with another 15,000-square-foot warehouse on nine acres,” Benincasa said in early August. “I already have two showings on that property, and I didn’t have time to get my marketing together.”

The kinds of property oil and gas companies are looking for “is that 10,000 to 20,000-squarefoot building on three to five acres. There is a huge shortage of those,” she said. “I don’t know why somebody hasn’t gone out and just built a bunch of those. Seriously, because they are leasing those as soon as one becomes available.”

The shortage has forced some companies to look outside of their preferred geographic areas, which usually is somewhere between Canton

THErE HAvE bEEn A LOT Of rEAL ESTATE TrAnSfErS in THE LAST cOUpLE Of yEArS And A LOT Of nEw rETAiL dEvELOpmEnT. rETAiLErS wAnT TO bE THErE. Kim Benincasa, broker, NAi ohio Equities

and Cambridge along the I-77 corridor.

“They are moving out and coming further west, simply because (property’s) not available,” Benincasa said. “I have companies looking for land in the Zanesville area, mostly because they can’t find any in the Cambridge area.” She grew up in Zanesville and says she is again often in the town three or more times a week benincasa doing real estate work.

Many companies are not interested in purchasing properties and prefer short-term leases.

“They’ll do a one-year lease, maybe a threeyear, but beyond that, even though they think they’ll be here 10 to 15 years, nobody’s really willing to commit much longer than that,” Benincasa said. “They want that short-term commitment so that if things change, then they’re out of there.”

Cambridge has been transformed since the influx of oil and gas, she said. Five new hotels

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are going up, and local restaurants are thriving.

In nearby Byesville, an energy hedge fund out of New York is building a multifamily development.

“Hospitality and housing are two areas that a lot of investors have capitalized on,” she said of the area. “There have been a lot of real estate transfers in the last couple years and a lot of new retail development. Retailers want to be there.”

Custer said he is working with other developers who are looking to build multi- and singlefamily housing. He sees more businesses looking at locating in the Carroll County area.

“We are getting requests for hotel/retail, an example being locating the property for Corporex, who is building a Candlewood Suites in Carroll,” he said.

Custer thinks the growth will continue, as the area’s development evolves.

“The trend seems to be: business and industrial followed by retail, followed by housing,” he said. “As the cycle continues and we have more retail and housing, I would expect to have larger industrial users interested in the area when there are places to shop and live.”

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the WAy in

Shale drilling and its effects are providing plenty of work for engineering firms, many of which are opening new Ohio offices

entrAnce rAmP: CeSO engineer Kevin Bohman, Director of Oil & gas and manager of the firm’s Pittsburgh office, surveys an access drive at an Ohio drilling pad. CeSO and other firms see oil and gas as their entry point to Ohio’s broader engineering markets. PHoto: CESo

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by chrissy Kadleck

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anton’s BL Companies have been in town for about two years, with an office that provides architectural, environmental, engineering and land surveying services. It’s so busy, the office is what the firm calls an “exporter of work.”

“We generate more work than that particular office can do so we’re actually exporting that work to our other 12 offices, which makes our Ohio team very, very proud,” says Mark Koellner, principal and director of environmental sciences at the Meriden, Conn.-based company. “Sometimes when you open up a new office in a company like ours — where you have 250 people across 13 offices — sometimes you take on work from the bigger offices to get you going but … our success and our growth in Ohio have exceeded our expectations.”

Koellner Most engineering and environmental firms across the Utica shale region are in growth mode. They’re optimistic about opportunities in the burgeoning oil and gas industry that prompted them to open Ohio offices in the last few years. But they are quick to point out that they did not come to Ohio just to do oil and gas work — that’s just their initial springboard.

Take Pittsburgh-based Hull & Associates, which has five Ohio offices providing a broad array of services Kasper in waste management, environmental engineering, brownfield redevelopment, alternative energy and oil and gas. It opened its St. Clairsville, Ohio, office, in the heart of shale country, in July 2013.

Craig Kasper, CEO of Hull, said the company worked in the Marcellus shale play after acquiring a company in Pennsylvania in 2009 and it has also worked in West Virginia on shale-related projects. When it opened its most recent Ohio office, it had already gained valuable experience in working with shale-drilling issues, but it also sees and is counting on other opportunities.

“We waited to open our St. Clairsville office because we don’t want to open an office just to do oil and gas. We wanted to make sure that office was going to be sustainable and be able to work in all our other markets, so we took a little longer than a lot of firms,” Kasper said. “We are committed to the community of St. Clairsville. We’re up to nine to 10 people, and we’re still hiring and growing.”

‘‘

wE’vE SEEn in OHiO wHAT wE wErE HOping fOr And THAT iS THAT THE SHALE indUSTry crEATES SOmE OppOrTUniTiES fOr OUr ArcHiTEcTUrAL And civiL (EnginEEring) grOUpS TO bE invOLvEd in HOTELS And rESTAUrAnTS. Steve Olson, vice president of CESo inc.

more technical professionals in the Canton office, as it leverages its oil and gas work to support expansions in other markets.

“Business continues to be on the uptick for us and we see the oil and gas market as a catalyst for a lot of other opportunities and jobs and development for the Ohio area,” he said. “We want to take advantage of that and be part of that.”

Steve Olson, vice president of Dayton-based CESO Inc., an engineering and consulting firm that opened a Canton olson office in 2011, echoed similar sentiments.

“We’ve seen in Ohio what we were hoping for and that is that the shale industry creates some opportunities for our architectural and civil (engineering) groups to be involved in hotels and restaurants,” he said.

He categorized the last year or so as one of steady growth within the oil and gas markets. CESO has recently rebalanced its staff among multiple offices to be able to serve clients most effectively. That resulted in shifting some professionals from Canton to offices in Pittsburgh and Columbus. CESO, which has 27 people in Canton, recently opened a Bridgeville, Pa., office to serve Marcellus shale clients as well as Utica shale clients in eastern Ohio.

“We experienced tremendous growth in 2011 — it was probably geared around one or two key clients — and now we have seven upstream oil and gas clients, and seven midstream oil and gas clients that are taking us to different parts of the state,” he said. “It’s a good steady pace of business and there is still more opportunity

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Kasper believes there is more than enough work to go around to the engineering and environmental firms in the area.

“The firms that are responsive, that add value and that can work safely — which is really important in this industry — if you can do those three things, then you’ll have a good opportunity.

But you still have to compete for the work,” he said. “What you’ll hear from a lot of consultants is this is a very relationship-oriented business.”

Sometimes, those relationships are the impetus for firms coming to Ohio. Enter RETTEW, which was encouraged by clients such as Chesapeake Midstream, now part of Access Midstream, to follow them from Pennsylvania’s Marcellus shale play.

“We had clients moving out into the Utica and that was the new hot thing about three years ago.

We saw an opportunity to serve our clients in Ohio. So, we got out there and started doing some work with our clients and realized we needed to have a local presence and have a strong local support structure,” said Geoff Fix, vice president of business development at RETTEW, which has gained a reputation in water resource services.

“We’ve grown with the industry and grown with our clients to be more of a complete solution. We are doing anything that has to do with the development of their infrastructure,” Fix said, noting that the firm is involved in everything from early-stage drilling to projects that help move gas and other products into the midstream and ultimately to end markets.

RETTEW’s Canton office is now 35 professionals strong, most of whom were local hires with the exception of a few transplants from Pennsylvania — including Jake Wilburn, regional manager of the office.

“Oil and gas is what brought us here but we are a multidisciplinary engineering and environmental consulting firm,” Wilburn said. “What we are looking to do here in Ohio is exactly what we’ve done in Pennsylvania. As we continue to serve our oil and gas clients, we are also working in transportation, industrial markets and with municipal clients.”

Fix said the company is “very optimistic” about future opportunities and continues to hire

for explosive growth so we’re excited about it.”

Diversification was critical for BL Companies, an employee-owned company that originally came to Ohio to support midstream pipeline companies.

“We’ll move to an area for a single client or two but we’ll immediately go to work trying to diversify across all of our target markets, which include energy, public infrastructure and retail/ commercial (development),” Koellner said. “We do things a little bit different. We look at opportunities and risk. We need to consider the long-term success of our decisions because our employees are our stakeholders — so we take a very longterm view of our decisions and we like to create sustainable offices for the long-term good for our employees and the community.”

The firm’s Canton office has 15 employees — all local hires — and the company expects to add 10 more people in the next six to 12 months.

“There’s more than enough work for everybody out there, believe me. It’s really scheduledriven so if you can get your teams together and understand your clients and the regulatory framework, and largely meet the schedules, you are going to do fine,” he said.

He said the Canton office has been ramping up its work in the area of electric transmission working with a very large transmission and distribution company located in Northeast Ohio.

“We are now pre-qualified with the Ohio Department of Transportation and we are working on some proposals and we’ve gotten a number of nice opportunities and contracts on the retail and commercial side, which is growing with oil and gas,” he said. “We’re taking advantage of that growth as well.”

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23

trUcKinG Is On A ROll by dan mcGraw

P

bUT SOmE wOndEr HOw LOng THE bOOm wiLL LAST And jUST HOw fAr THEy SHOULd gO TO mEET THE dEmAndS Of driLLErS

PHoto: dAN SHiNGLEr

eople like to say “there’s always tomorrow.” But they seldom have an accurate forecast of what tomorrow will bring.

That’s why, for many in the trucking business — an ancillary industry critical to the growth of shale drilling in Ohio — getting in now is all-important. Get the market share now, the logic dictates, or never get it.

Others, however, question how far they or their drivers should go to chase the shale bonanza.

Demand for trucking services in eastern Ohio is as high as most can remember. The big question is whether the demand will be sustained once the oil and gas industry’s midstream infrastructure — things like pipelines, processing centers and related rail-line extensions — is built, and once most wells are drilled and producing.

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Will demand drop off? Continue to rise? Plateau? No one knows for sure, but bets are still being taken today in the form of capital investments by companies hoping to dominate the industry here, for however long the boom reverberates. “There is no doubt that the shale drilling in Ohio and West Virginia and Pennsylvania has become a significant part of the trucking business in a short period of time,� said Paul Williams, president of Wooster Motor Ways Inc. and board chairman of the Ohio Trucking Association. “But I think everyone in this business knows that this is not something that is going to last forever,� Williams said. “From what we are looking at, we think there is a significant run of about 10 years. And we are making the investment to react to that market.�

Smaller profit window Currently, the key role of trucking companies in the shale play is to carry water and sand. Drillers need tons of sand and millions of gallons of water for each well they complete. The sand is mixed with the fracturing fluid that breaks up the shale where the oil and gas deposits reside. Though each well requires different amounts of sand and fluid, it is estimated that 2,000 truckloads of fluids and sand are needed, on average, for each completed well.

It’s all front-end work — truckers carry a lot of materials to a well site when it’s being built and drilled, but they don’t carry as much away. True, they haul some wastewater in the form of initial flowback from most wells, but once a well is producing, most of what comes out of the ground is transported by pipeline, or possibly rail.

That’s why Williams and others think that trucking’s big profit window may not last as long as the shale boom itself. But there’s so much material to be hauled in first, he and others in the trucking industry are willing to invest.

For instance, Wooster Motor Ways has expanded its stable of bulk pneumatic trailers (known as “sand cans�) from four to 19 in the past two years because of the increase in sand transportation. Each of these pneumatic trailers costs $74,000, a substantial investment for a trucking company — more than $1 million for 15 trailers. But the expense is worth it, Williams said, as his company is working on about 100 different wells a year in the Utica and Marcellus shale plays.

Rob Sidley, vice president of JP Jenks Trucking, Inc. of Madison, Ohio, said that about half of his company’s business now involves shale drilling, with eight to 10 trucks dedicated to shale drilling deliveries at any given time. Sidley said the business has overcome some shaky stops and starts, and now is “becoming steady in a way that we can plan better for the logistics to make it work for us.�

Sidley said the road for shale truckers has finally smoothed out a bit, after a bumpy first few years. “It took three or four years for the drilling companies to do the due diligence to know where they were going to drill and whether they were going after dry gas or wet gas, and if oil will come into play in this area,� he said. “But the business is steady now and we can plan accordingly.�

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PHoto: dAN SHiNGLEr

if you’ve waited at a light in Carrollton over the past couple of years, chances are you were behind a truck. These were hauling water and became a fixture on local roads in Carroll County before drilling even really began.

managing driver time One thing that’s changed has been the drilling industry’s use of fewer outside trucking companies as the number of wells being drilled has increased.

Initially in the Utica, some companies brought in drivers and trucks from Texas and Oklahoma, because those haulers knew the timing and logistics of well drilling transport. But over time, the cost of putting those drivers up in hotels for long periods had become an unnecessary expense. As a result, more work is going to local firms that have learned the business and gotten better at serving it.

“The drilling business is a very reactive business, and the drilling companies have to have flexibility in using personnel and time and deliveries differently for each well,” said Thomas Balzer, president of the Ohio Trucking Association.

“I think it took some of the regional trucking companies some time to realize that this is not a business that has a schedule that is the same week to week,” he said. “Every well is different, and the biggest issue is managing driver time.”

A major issue for shale trucking firms is how drivers’ off time is scheduled.

Federal regulations generally limit truck drivers carrying cargo to 60 driving hours in a seven-day period, after which drivers have to take at least 34 hours off. Drivers in the oil and gas industry, however, are exempt from this rule, and can drive again after 24 hours — even if those 24 hours are spent in the sleeper berth of their cab.

Some drivers also can count the time they spend waiting at well sites as “off duty,” excluding that time from their daily hours — and there is a lot of waiting involved in hauling for shale drillers.

Trucking companies might like that loophole, but not all truckers do. With a fairly large shortage of licensed drivers nationally and locally, some companies said they have trouble keeping drivers when they might have to wait at a well head for an indeterminate amount of time before drillers are ready for their sand and water.

“We had several drilling companies wanting our drivers to be waiting around and then working without time off for hours that were well outside of the federal regulations and we just decided we didn’t want to be in that business,” said one trucking firm owner who didn’t want his name used.

“We just thought of our drivers and safety and the fact they didn’t want to work with us on this as a reason to get out of the sand transport business.”

Wooster Motor Ways’ Williams said he also has heard those complaints. But he added that the labor shortage of drivers — a demand gap that could reach 20,000 drivers in Ohio alone by 2020, according to industry reports — is making both the drillers and trucking companies observe the regulations, in both letter and spirit, in part to make the business as driver-friendly as possible.

“When you have a driver making $45,000 a year for you, and then he gets poached by another company to make $100,000 a year, you have to be aware of what is legal and what is not and how to keep your valued employees,” Williams said. “We have a $25 million business here in Wooster, and we know that comes from having an outstanding safety record. We will do nothing to change that.”

“I think it took some of the regional trucking companies some time to realize that this is not a business that has a schedule that is the same week to week.

Every well is different, and the biggest issue is managing driver time.”

Thomas Balzer, ohio trucking Association president

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ACT continued from page 13

DMA cases are all-or-nothing affairs, and that’s one reason they are becoming more common. The landowner isn’t fighting for more money. Instead, he or she is fighting to determine whether they’ll get any money at all from drilling on their land, Fischbach said.

“These are straight disputes over who owns the mineral rights — and whoever owns the mineral rights has the right to lease them and gets the lease-bonus payment and royalties,” added Matt Warnock, an attorney at Bricker & Eckler in Columbus, who said DMA cases are now the single biggest source of litigation that he sees.

As above, so below . . . maybe The uninitiated often assume that whoever owns land on the surface also owns rights to the minerals below. In most cases, that’s true. But the rights can be sold, and they have been in Ohio since the 1800s.

They could have been purchased by John D. Rockefeller, Aubrey McClendon or any of a thousand other oil and gas investors in between.

“Some of these severances took place 100 years ago. You’ll see it in a deed from 1880,” said Brouse McDowell attorney Christopher Swing in Columbus.

Some landowners still sell their rights today. Some know that their rights were sold years ago by a previous owner, possibly a family member. Some unlucky few only recently have learned that their mineral rights previously were sold. They can get a knock on the

door from someone who tells them there will soon be drilling on their property, and not only can they do nothing about it, but they likely will receive nothing for it, either. And that person at the door may very well be right; the company with its name on the truck might own those rights free and clear.

More often, however, the cases involve different property owners who have been involved in real estate transactions in the past, and they might even be neighbors.

“Maybe 50 years ago when that property was sold, the predecessors of Farmer Jones retained Fischbach the oil and gas rights. … Often, it’s not a big company vs. a farmer, it’s farmer vs. farmer,” said Gregory Brunton, an attorney at Reminger Attorneys at Law in Columbus.

But Ohio law says it’s a use-it or lose-it proposition. If you own the mineral rights to what’s beneath someone else’s land, you have 20 years to do something about getting the minerals out.

“If those oil and gas rights have not been exbrunton ercised in 20 years, those rights revert back to the surface owner,” Brunton said.

So as far as lawsuits over mineral rights ownership go, the revelation that the Utica shale was worth billions was like throwing a match on a pool of gasoline the size of eastern Ohio.

ACT continued on page 28

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ACT continued from page 27

Past family members might have forgotten their mineral rights were sold, because they weren’t worth anything. There was no such thing as “shale gas” or “shale natural gas liquids,” because no one knew how to get those things out of the solid rock. And they never thought anyone else would figure out how to do it, either. If you didn’t live above a pool of oil, a pocket of gas or maybe a coal seam, there was not much reason to give your mineral rights much thought.

And if you bought, inherited or otherwise owned mineral rights to someone else’s surface land, you might not have thought much about preserving them for those very same reasons.

“These issues were always there, but there was not really enough money involved to worry about it” before shale drilling came along, said Clay Keller, an attorney with the Babst Callan law firm’s Akron office.

Then someone comes along and says the stuff underground has gone from being worth nothing, to being worth millions of dollars, or tens of millions. If that doesn’t send a landowner running to the papers in grandpa’s rolltop, what will?

new math: 20 years + shale = lawsuits What happens after someone fails to do anything to preserve their mineral rights for 20 years? According to Ohio’s Dormant Mineral Act of 1989, those rights revert back to the surface owner, automatically. A farmer who found out in 1990 that the owner of his mineral rights had not done anything since 1969 was free to sell or lease those rights — they were his, again. He didn’t have to lift a finger, turn a shovel or even move a pen.

Then, at a Statehouse meeting in 2006, legislators made things even more complicated. They passed a new Dormant Mineral Act that still had the 20-year provision, but it added the requirement that the landowner must inform the mineral rights owner of their intent to reclaim those rights.

The owner of the rights has 60 days to respond.

And then … what?

“If you respond in the 60 days, does that mean game over and the landowner loses? … The law doesn’t say,” noted Eric Johnson, an oil and gas

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PHoto: APi oHio

now that wells in Ohio can produce prodigious amounts of gas, natural gas liquids and sometimes oil, drilling is an around-the-clock operation and mineral rights are more valuable — and more often fought over in court.

attorney in Canfield for his family’s firm, Johnson & Johnson.

If that weren’t enough, the new law also didn’t say what happens if someone claims their rights already reverted back to their ownership under the 1989 law. If a landowner discovered in 2008 that the owner of their mineral rights had not done anything to produce gas or oil since 1969, what happens? Did the rights revert back to them in 1989, in which case they al- Johnson ready owned them again by the time the 2006 law passed? Or does the newer 2006 law supersede it and mean that they now must notify the owner they are attempting to usurp?

Again, the new law isn’t clear. But that, lawyers say, is potentially a billion-dollar question in eastern Ohio.

“There are probably tens if not hundreds of millions of dollars, maybe billions of dollars, that are going to swing one way or another depending upon how these statutes are resolved by the Ohio Supreme Court,” Johnson predicted.

So far, Ohio’s Seventh District Court of Appeals in Youngstown has ruled in favor of the surface landowner and said they owned the rights under the 1989 law, and still own them today.

But that’s being challenged in the Ohio Supreme Court. Many hope the court will issue a decision before the end of this year, on this and some other issues important to DMA cases.

When the court does make its rulings, no matter what it decides, it likely will spur more lawsuits, many lawyers say. That’s because there are potential plaintiffs who will be able to tell from the ruling whether they are likely to prevail in their own Dormant Mineral Act suit — and those that are given confidence in their claims will no doubt pursue them.

In other words, hang on, because Ohio likely has a heck of a lot of dormant minerals that are about to be woken up, leased out and drilled.

Not to mention fought over in court.

PRODUCTION continued from page 12

“Typically when there’s a shale play like this, the first phase is fighting over the validity of leases and land questions — who owns the minerals and that sort of stuff. That’s what’s primarily happened since late 2010,” said attorney John Keller, who works on oil and gas legal issues for Vorys, Sater, Seymour and Pease in Columbus.

And the first suits usually filed are HBP suits, say Keller and others.

Here’s a typical scenario: Mr. Smith is talking to his neighbor, Mrs. Jones, in Carroll County. He’s showing her his new Kubota tractor, which not only does a dandy Keller job on the yard, but it tills up a heck of a garden.

Pricey though. Luckily, he just got handed a bonus payment for signing a shale lease. He got $4,000 an acre; can you believe it? Those same acres were only getting $40 an acre back in the days of vertical drilling, even in the boom of the 1980s.

That’s something Mrs. Jones knows all too well. She’s thinking now that maybe Mr. Jones wasn’t so bright after all, when he got those same 40 bucks for their acreage long ago. Since then, they’ve gotten free gas for the house, but not much in the way of royalties. They get 12% of whatever’s brought up on their land, but 12% of nothing is still nothing.

It sure would be nice to get that $4,000 per acre that Mr. Smith just

got, she thinks, eyeing that Kubota and checking out his neat rows of peppers and beans.

That night, the Joneses get to talking, and then they get to looking at their mineral rights lease. According to it, the driller they signed with has to produce gas or oil in “paying quantities” in order for the lease to remain in effect.

“Hell, that thing hasn’t paid in ‘paying quantities’ in 20 years!” one of the Joneses said. (They sound a lot alike, so it’s tough to say who actually said it.)

Regardless, the Joneses head out pretty soon thereafter to see their lawyer, who looks at the lease, looks at their statements from the driller, and agrees with them. There’s only been a trickle of gas coming out of the property, and no one’s tried to get it flowing any faster, so this lease is over. Everyone thinks the Joneses ought to be able to sign a new lease and get some of this new bonus money and maybe a better royalty.

Everyone, that is, except the driller who signed the lease with the Joneses. He not only thinks the well has been producing about as good as most old vertical wells in the region, he’s planning to sell his lease to one of these new shale drillers and let them really open things up. He’ll get the bonus payment for himself, of course.

In cases like these, the parties end up in court arguing over what “is” production, and what “is” a paying quantity. It’s a party Bill Clinton might like, but the shale drillers aren’t too crazy about it — all it does is gum up the works and prevent them from getting access to the shale through a lease they know is solid.

PRODUCTION continued on page 30

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County courthouses, like this one in Carrollton, have already seen plenty of action related to shale gas development — and there's likely more to come.

PRODUCTION continued from page 29

That night, the Joneses aren’t talking as much about getting a new lease.

Today, things have slowed down, at Now they’re talking about the fact that least in some areas. There are not only other people keep getting paid, and far fewer HBP suits being filed, but they don’t. Maybe it would be best to many that were filed are being dropped. just get drilling on their land going — Some are being shelved without even they’d still get that 12% royalty, and a settlement, simply abandoned by the 12% of millions is worth having. They overstreet landowners that filed them. tell their lawyer to drop that HBP suit.

Why? Back to Mr. Smith and Mrs. Cases like these happen a lot, attorJones for that: neys say, because landowners realize Flash forward two years and they the basic economics at play. are talking again. Mr. Smith has a few “A lot of lessors initially think the more nice attachments on the back of value of their lease is all in the bonus, his Kubota these days, which all spend when in reality if you have a producthe night warm and cozy in his new pole tive well that results from you leasing barn. Turns out, though, he didn’t pay Warnock to an operator, you’re going to make for those out of his bonus money — his far more money from royalties than you new royalties bought all these new toys. He’s in a would from a bonus,” said Steve Silverman, an drilling unit that was tapped fairly early — oil and gas attorney with the Babst Callan law everyone in it had a nice clean lease and firm in Pittsburgh. was sitting atop some coveted rocks. His Landowners also have learned, sometimes the royalty payments are way more than hard way, that getting out of a lease might not his one-time bonus payment. be the best thing to do, especially if they are not

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in one of the play’s sweet spots, where interest in drilling is the highest. A landowner in a marginal drilling area might get out of a lease, in part because no one is willing to fight to keep it — only to find that the gas is not as green as it appeared on the other side of the fence.

“In Pennsylvania, a lot of people thought they were going to sell their holdings for more money and then found out there were no takers — or the price went down” after they successfully voided their initial lease, said David Overstreet, of the firm K&L Gates in Pittsburgh.

“The overriding question is always the economics in any given case,” he said.

For these reasons, many HPB cases, especially in the northern part of the Utica in Ohio, have been dropped or settled. The bad cases are usually dropped, while lessors and lessees usually find a way to come to terms over disputes in the most attractive drilling areas.

“Good HBP claims don’t get litigated, they get settled,” said Gregory Brunton of the Reminger law firm in Akron.

But, as the play moves, so do its legal trends, and as the Utica’s sweet spot has shifted geographically, so has the concentration of active HBP suits.

Matt Warnock, of Bricker & Eckler in Columbus, said he’s still busy with HBP suits, just in different areas. He doesn’t think the trend for more suits is over yet either.

“As the play has shifted south, I think you’re seeing more and more,” Warnock said.

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