August 2017 â€¢ A Free Monthly Publication
Pipelines Pump Up Wooster Airgas Plans Progress for Ethane Cracker Left to Right: Ryan Joyce, Dan Blosser & Scott Davis
IN THIS ISSUE: ROVER PIPELINE UPDATE
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Table of Contents AUGUST 2017
A Look Ahead Gas & Oil Events
First Responders Receive Training On Best Practices For Security
G ROUP PUBLISHER Bill Albrecht
Long-Term Natural Gas Dividends
Court: Munroe Falls Must Pay Beck Energy $45,000 City: Plans to Appeal
Ray Booth RBooth@dixcom.com Rob Todor RTodor@dixcom.com Lance White LWhite@dixcom.com
Fracking, Taxing & The State Budget
Pipelines Pump Up Wooster Airgas
OOGA Summer Meeting
Steps Outlined by FERC for Rover Clean Up
RE G IO NAL E DIT O RS Scott Shriner email@example.com Cathryn Stanley CStanley@dixcom.com
CO NTE NT CO O RDINAT O R Emily Rumes
“Ohio Gas & Oil” is a monthly publication. Copyright 2017. 2
Table of Contents AUGUST 2017 ADVER TISING
Registration Open for Shale Insight 2017
Kim Brenning Cambridge, Ohio Office firstname.lastname@example.org 740-439-3531
Ohio Court of Appeals Clariﬁes “Production in Paying Quantities” Rule
Kelly Gearhart Wooster & Holmes, and Ashland, Ohio Offices KGearhart@the-daily-record.com 330-287-1653 419-281-0581 Mindy Cannon Alliance & Minerva, Ohio Offices email@example.com 330-821-1200 Diane K Ringer Kent, Ohio Office DRinger@recordpub.com 330-298-2002 Janice Wyatt National Major Accounts Sales Manager firstname.lastname@example.org 330-541-9450
L AYOUT D E SIG NE R Kassandra Walter
Plans Progressing for Ohio River Ethane Cracker Plant
When It Comes to Pipelines, Kindness Works Best
Bayesville Developing Plan to Protect Source Water
Ohio House Overrides Governor’s Veto
Ohio Well Activity Graph
Horizontal Drilling Activity Graph
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August 2017 • A Free Monthly Publication
Pipelines Pump Up Wooster Airgas Plans Progress for Ethane Cracker
Left to Right: Ryan Joyce, Dan Blosser Most Jobs Are Complete In Just Two
Fredricksburg, Ohio 44627
& Scott Davis
UPDATE IN THIS ISSUE: ROVER PIPELINE
Pipeline projects throughout Wayne, Holmes and Ashland Counties have been a boon for business at the Airgas locations in Wooster, Canton, Cambridge and Mansﬁeld. “There’s a huge number of support companies that beneﬁt from the pipeline activity.” -Dan Blosser, Airgas Branch Operations Coordinator
A Look Ahead
Gas & Oil Events • August 7-8, 2017
OOGA Summer Meeting in Zanesville, Ohio. Gather with hundreds of industry professionals for a relaxing time of sporting events and other activities at the 2017 OOGA Summer Meeting. You can look forward to a business session and networking opportunities while enjoying friends and great food. Be sure to register for the Oilfield Patriot Award Event and join in celebrating the life and accomplishments of this year’s surprise recipient! Online registration is available through August 2nd, more information and full event schedule at oogasummermeeting.com
• September 21, 2017
SOOGA Annual Trade Show Washington County Fairgrounds in Marietta, Ohio sooga.org/upcoming-events.aspx
• September 27-28, 2017
Shale Insight: A Shale Coalition Conference in Pittsburgh,
Pennsylvania. Shale Insight 2017 will provide participants a front-row seat for the most important discussion on shale development, featuring some of the most prominent industry and government leaders. Attendees will network with the most influential industry executives and innovative leaders through two days of technical and public affairs insight sessions, major keynote addresses and a dynamic exhibit hall featuring all the major shale players. More details at ShaleInsight.com
• November 1-2, 2017
OOGA Technical Conference and Oilfield Expo in Cambridge, Ohio. Network with other oil and gas professionals, listen to dynamic speakers and discuss cutting edge topics at this annual industry gathering. In addition to the Technical Seminar, the event will feature indoor exhibits and an outdoor display of large equipment. Join us for the opening Oilfield Welcome Reception held on the trade show floor to kick off this year’s program. Online registration is available through October 25th, more information at oogatechexpo.com
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First Responders Receive Training on
Best Practices for Security
Shane Hoover • GateHouse Ohio Media egional first responders gathered June 27 at the Stark County Emergency Management Agency to discuss how to safeguard pipelines and respond to emergencies with them.
Transmission wants to cross northern Stark County and southern Summit County with its own natural-gas pipeline. That interstate project is awaiting federal approval.
Vulnerable Asset The meeting was timely given the ongoing construction of Energy The pipeline-security course was Transfer’s Rover Pipeline in Stark, developed by the Rural Domestic Carroll and Tuscarawas counties. Preparedness Consortium, an organization established by Congress Class attendees included law- and the U.S. Department of Homeland enforcement officers, firefighters, Security. pipeline company workers, health department staff, Red Cross Duane Jones, security director for Kinder representatives and emergency planners. Morgan, a pipeline company with assets in Ohio and across North America, Stark County is crossed by miles of conducted the class. natural gas and liquids pipelines and is home to Marathon Petroleum More than 3,000 companies operate Corporation’s Canton refinery and a more than 2.5 million miles of pipelines large natural-gas storage field in Jackson in the United States. Those pipelines Township. carry natural gas, gasoline, crude oil and other products. More pipelines are coming. Energy Transfer is building the interstate Rover The federal government has guidelines Pipeline to ship natural gas produced by for pipeline security, but the guidelines Utica and Marcellus shale wells. are voluntary.
A pipeline failure can kill people and damage property and the environment. Threats to pipelines include terrorists, thieves, vandals, protestors, disgruntled workers, computer hackers and landowners who dig in a right-of-way without checking the location of the pipeline, Jones said. Poor maintenance, outdated pipeline materials and natural forces, such as a flood, also can cause pipelines to fail. “The threats are out there,” Jones said.
Jones said it was vital for pipeline companies to have security plans in This was the second time the county place and be in regular contact with Emergency Management Agency had authorities at the local and federal levels. hosted a pipeline-security course since 2015. Also, local emergency forces should know how to find the pipelines in Agency planner Steven P. Foss said their jurisdictions, know who operates Rover’s construction generated interest them and know whom to contact in an in the course, which was a way to get various stakeholders together in the emergency, Jones said. same room. Although safer than trains or trucks when transporting natural gas and “It’s always good to have a refresher,” hazardous liquids, pipelines are still Foss said. vulnerable, Jones said. They carry volatile substances, are often located Reach Shane at 330-580-8338 or shane. in remote, hard-to-secure areas and are firstname.lastname@example.org Photo Credit: Michael Balash, GateHouse In another project, NEXUS Gas critical to the function of the economy. Ohio Media
Long-term Natural Gas Dividends Projections show the natural gas industry will ﬂourish in the future, but it’s going to take time and improvement. Jacob Runnels • GateHouse Media
ccording to a report from the American Petroleum Institute (API), projections to the year 2040 showed positive growth in the natural gas industry for America, especially Ohio.
natural gas industry contributed $26.7 billion to Ohio’s economy in 2015.
“Projections are about the hopeful demand growth increasing, so there’s an outlet for our natural gas resources here in Ohio with our shale resources,” said API Ohio executive director Chris In late June, the API released a national report showing that, Zeigler. “From the information that came out in this report, it by 2040, there will be up to 5.9 million jobs created through lines up with the information that we’ve seen over the years.” the natural gas industry, compared to 4.1 million natural gas industry jobs that existed in 2015. Among the three functions of He said the projections are based on the successes the natural natural gas — end use, infrastructure and production, API also gas industry has enjoyed since 2015. It also takes into account a predicts total wages in the sector that utilize the three functions relatively successful future for natural gas policies and practices, will increase by 2040. It predicts going from a total $269 billion in such as innovation. 2015 to $397 billion in 2040. He said the study examined how much natural gas had been Also in the report, it stated that, in Ohio, there were 188,500 consumed among different sectors, whether they be residential, jobs created within the natural gas industry, which represented commercial use or through power plants. He said it took those 3.6 percent of all the jobs in Ohio. The report also states that the factors into consideration when determining how many jobs could be created from it.
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“Generally, it accounts for increase end use whether it’s for natural gas, power generation, or petrochemical industry or whatever it may be. [It also] utilizes resources we have domestically and accounting for that and putting a quantitative number to the number of jobs and economic impact it would have.” —Chris Zeigler Zeigler said he’s looking out for the future of the natural gas industry through potential policies that could help or harm it. In particular, he said the API is looking at potential policies such as HB 178 and SB 128, which would address Ohio’s zero-emissions nuclear resource program. “We’ve propped up on economic nuclear power generation at the expense of further investment in cleaner natural gas getting
online,” he said. “[It would also] impact technologically and through its practices. negatively the direct impact of further He said, when it comes to the technology, production of our Utica Shale resources.” Ohio can eventually overcome difficulties, such as parts of shale developments with With predictions of gradual increase unsavory drilling conditions, like shallow within the natural gas industry, Shawn depths and lack of pressure to extract gas. Bennett, executive vice president for the Ohio Oil and Gas Industry (OOGA), As prospects of improving the trade grow, said that this progress in the oil and gas Bennett said it does take time for things industry has seen a rapid boom since 10 such as technological and economic factors years ago. to catch up. “When you think about the oil and gas industry, the research and development that takes place is extraordinary,” he said. “What we’ve discovered again is the Utica shale development does work in the state of Ohio. We’re utilizing the development we’re doing in 2016 and prior to that, and each well, as a data point.” Bennett said the natural gas industry in Ohio is still discovering what it can do with natural gas and, given some more time, the industry will only advance
“We do have an infrastructure bottleneck when it comes to building pipelines,” he said. “In the Appalachian Basin, without efficient takeaway capacity, our producers are getting a significantly lower price for their commodity, natural gas, than their competitors from other states, such as Texas or Oklahoma. Until we relieve that bottleneck by putting in more pipelines, we will be selling our natural gas at a lower price.”
“It’s not going to be an overnight With Ohio’s natural gas producers discovery,” he said. “It’s about pushing the identifying the problems they face and boundaries of what’s economical.” tackling them accordingly, Bennett said the state’s technology, policies and practices He said factors pertaining to what Ohio can catch up to meet the numbers in the does outside of the state matter as well. API’s report. With each well they create, he He said it’s “imperative” that the natural said producers are always getting better gas industry in Ohio should focus on at improving their wells and techniques. how to “attract large scale end-use” With improved technology, he has hopes of manufacturers in America to the areas expanding the Ohio natural gas producers’ around the Appalachian Basin. He said ability to extract the resource. this would help utilize Ohio’s natural gas and create more jobs.
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Court: Munroe Falls Must Pay Beck Energy $45,000 City: Plans to Appeal
Jeff Saunders • GateHouse Media he city has lost a round in its legal The latest litigation was connected with a well that Beck wrangling going back more than five Energy planned to drill on a vacant portion of the Sonoco years with an area oil and natural gas paper mill property off North Main Street. drilling firm. “The City of Munroe Falls respectfully disagrees with On July 13, Summit County Common Pleas Judge Paul the July 13, 2017 decision of the Court of Common Pleas J. Gallagher ordered Munroe Falls to pay Ravenna- awarding fees to Beck Energy,” says a written statement based Beck Energy $45,000 for “reasonable attorney’s from the city. fees and expenses incurred” in a request for declaratory judgement case the city filed last year, according to court The court’s decision stemmed from a declaratory records. Gallagher, in his decision, referred to the city’s judgement action filed by the City of Munroe Falls case as “frivolous litigation conduct” because, he said, on May 27, 2016. That declaratory judgement action the matter had been dealt with in a 2015 Ohio Supreme was designed to seek clarification from the court on whether local communities have authority to impose Court decision. any restrictions or even seek information from a drilling company when unelected administrative authorities such as the Ohio Department of Natural Resources have granted permits.
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The court answered the question in the negative and then determined that the city’s request constituted frivolous misconduct. “The city’s disagreement with the court’s decision on the issue of ‘frivolous misconduct’ is based upon disputed factual evidence that was not addressed by the court in its decision and also a legal issue that it believes was wrongfully decided,” the city stated. “The city believes that the court of appeals will resolve both of these issues in its favor.” Mayor James Armstrong declined additional comment July 20 because an appeal in the Ninth District Court of Appeals is pending. Beck Energy President Raymond Beck told the Stow Sentry July 20 that he is satisfied with the decision. “The original lawsuit five years ago should never have happened,” said Beck. “Beck Energy never broke any laws in drilling our well at that time. “We turned the Sonoco well on in January 2017. (Six)
months later, there have been no complaints from however, is zoned R-4 residential, which would require anyone. We are thankful to Judge Gallagher in awarding a zoning variance to drill a well and Armstrong said the us a settlement.” city was trying to seek clarification as to whether it can demand that Beck seek a variance. The city’s battles with Beck Energy go back to 2011, with cases in the common pleas and appellate courts and In July 2016, Gallagher ruled against the city, stating that then in the Ohio Supreme Court. The issue has been one state law takes precedence over local zoning codes. In of regulation, local zoning codes versus state law that the meantime, Beck filed four counterclaims against the grants authority to the OGNR. city. In a February 2015 decision, the high court ruled 4-3 Beck dismissed the counterclaims this past February, that the state has “sole and exclusive authority” over but then filed a motion for sanctions requesting that the regulation of oil and gas wells. But while he was part of court order the city pay Beck for its costs in the litigation. the majority on the decision, Justice Terrence O’Donnell separately wrote that the opinion does not address local land use ordinances. Armstrong told the Stow Sentry last year that this was the crux of the city’s request for a declaratory judgement. According to the city’s complaint filed last year, oil and gas wells are conditionally permitted under city zoning codes in I-1 industrial zoning districts, which total about 32 of the city’s more than 1,700 acres. The Sunoco parcel,
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Fracking, Taxing & The State Budget
Mark Kovac • GateHouse Media t wouldn’t be a biennial budget debate “You and I couldn’t have a budget conversation if I didn’t bring without a little final talk of raising taxes on up my favorite (topic), the severance tax,” said Rep. Jack Cera oil and gas produced via horizontal hydraulic (D-Bellaire), in questions to state budget Director Tim Keen. fracturing. Cera specifically asked about the balance of the severance tax It was toward the end of the first gathering of the Conference fund and projections for growth moving forward. Committee, the panel that will spend coming days haggling over a final version of the two-year spending plan, that there “… It’s grown pretty substantially even at the low severance tax that we have ...” he said. was a mention of the fracking and taxing issue. Keen answered, “The existing, very low severance tax rates that we have in place in the state have seen annual growth rates that are quite significant because of the additional (oil and gas production) activity. We’ve gone from … annual revenues maybe in the vicinity of $10 million to over $50 million in the Fracking-related oil and gas has helped that part of the state, last six or seven years.” with investments from companies in wells and increased production. Those funds, Keen said, have been used in the past to cover Ohio’s regulatory work, with “significant excess funds” that But fracking talk in general and related tax debates have can be tapped now for other purposes. quieted considerably as of late, with clear indications that the governor and Republican lawmakers haven’t found common The latter prompted criticism from Cera, who is among those ground on whether to raise rates on oil and gas produced who think part of those funds should be directed to the eastern through fracking. Ohio communities directly impacted by oil and gas production activities. Gov. John Kasich included his latest severance tax proposal in the executive budget he offered in late January. Republican “What I need to tell my constituents is that it’s OK to use some lawmakers, as they have on multiple occasions before, dutifully of that money now to help balance a budget but that right now, as it stands, they can’t expect to see any of that new revenue removed it and haven’t said a whole lot about it since. coming back to the area?” Cera said. That didn’t stop the severance tax from making a brief Keen responded, “I would suggest, of course, that general appearance during Conference Committee, however. fund services that are provided throughout the state of Ohio, including the shale regions — school funding, funding of the Medicaid program, subsidies for higher education — directly benefit your constituents. In fact, they are benefiting when those services can continue to be provided at levels that are MADE IN contemplated in this budget.” Not too long ago, fracking was a hot topic of discussion around the Statehouse, with frequent mentions and hopes of big boosts to the state economy, thanks to deep underground fuel deposits in eastern Ohio’s shale deposits.
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And that was that, likely leaving the severance tax debate for another time — possibly early next year, if the governor decides to propose another increase as part of his last mid-biennium budget review. Marc Kovac covers the Ohio Statehouse for Gatehouse Media. Contact him at firstname.lastname@example.org or on Twitter at OhioCapitalBlog.
Pipelines Pump Up
Emily Rumes • GateHouse Ohio Media eeing the benefit of the three pipeline projects – Rover, Utopia and NEXUS – that are all slated to run or are currently running through Wayne County, Airgas, an Air Liquide company in Wooster, has been keeping busy round the clock. Their branches in Canton, Cambridge and Mansfield also experienced growth this year. The Rover Pipeline project is about 380 miles with the main line covering a section that is 186 miles long. The pipeline will transport gas from the Marcellus and Utica Shale areas in Ohio, Pennsylvania and West Virginia to the Midwest, Michigan and Canada.
all be delivered directly to those workers in the field. “There’s a huge number of support companies that benefit from the pipeline activity,” said Airgas Area Branch Operations Coordinator, Dan Blosser. “Our experience is that the workers we have been in contact with have been very professional, kind, generous and hard working people.” Scott Davis works as an Airgas VMI Technician and Customer Service Rep, going out directly to the local industrial clients each week, the majority of which are in the Wooster and Orrville areas.
For workers in the field, portability of equipment, like According to the Rover Pipeline website there are currently welding machines, is important. Airgas can supply filler between 4,500 and 6,500 workers employed by the project in metals, the apparatus to cut and join pipes, torches and the state of Ohio. Airgas provides gases and welding supplies, safety products. as well as fire retardant clothing and safety supplies that can “Weather normally determines the traffic at our retail store,” said Branch Manager, Ryan Joyce. “Normally on the rainy days workers have time to stock up on supplies and this has been a record year for our branch overall. Right now most of the workers we see are from the Rover Pipeline project, some are from NEXUS.”
Airgas is also capable of handling large, nitrogen purging projects. When pipe is being installed, sections are blocked off and filled with nitrogen. The gas then pressurizes the line. Tests are done to make sure the pipes can hold pressure for 24 hours, which ensures there are no leaks.
Clients can register for an online account at Airgas.com/ register. Here they can access and purchase products from their computer, tablet or
Welding and safety products line the walls at the Airgas retail store in Wooster.
mobile device. There is an expanded product selection, improved product search, one-step reordering and detailed online and offline order histories available – all making it easier to keep the supplies coming out in the field. The Airgas website offers real-time access and control as clients search for products and make purchases. Customers may prefer to set up a cash account. As long as they have an email, they will still be able to receive all the updates on sales and promotions that are coming through the online forum. The bulk of the retail store, which is at 115 N. Smyser Road in Wooster, is dedicated to propane and cylinder exchanges and welding and safety products; however, customers have the ability to purchase from their entire product offering which includes hundreds of thousands of items. The company has been in Wooster since July of 2014. At their Dan Blosser (L) and Ryan Joyce (R) stay on task as Airgas location in Stow, Ohio they have an Advanced Fabrication continues to see growth from the pipeline projects in the area. Center for Technologies where training sessions for welders are held each month for three and a half days. The current “We are grateful to all our customers in the Wayne, Holmes training sessions are titled, “The Hidden Cost of Welding.” and Ashland County areas,” said Blosser. “We’re looking forward to working hard to service all their needs.” A full catalog and list of services that Airgas provides can be found on their website, Airgas.com or via the Airgas app.
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OOGA Summer Meeting
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10:00 AM - 2:00 PM Fishing 7:30 PM - 8:30 PM Networking (Luburgh Inc.) Sponsored by Welcome Reception (Zanesville OOGA officials encourage Luburgh Inc. Barbecue lunch Country Club) gas and oil industry leaders served on site to gather with hundreds of 8:30 PM - 1:00 AM Zanesville industry professionals for 10:30 AM Golf Flight A - Country Club Bar Open (Cash a relaxing time of sporting Tournament Play (Zanesville Bar) events and other activities Country Club) Lunch served on the course Tuesday, August 8, 2017 The full schedule of events includes: 5:00 PM - 5:30 PM Oilfield 7:00 AM - 8:30 AM Breakfast at Patriot Award Event Zanesville Country Club Monday, August 7, 2017 Registration & Reception (Zanesville Country Club) 7:00 AM - 4:00 PM Registration 8:30 AM - 4:00 PM Registration Separate registration required open at Zanesville Country Open (Zanesville Country Club (Clubhouse) Club, Clubhouse) Sponsored 5:30 PM - 7:30 PM Oilfield by Antero Resources Patriot Award Dinner & 7:00 AM - 8:30 AM Breakfast and Registration open at The Virtues Golf Club (formerly Longaberger)
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Steps Outlined by
FERC for Rover Clean Up Shane Hoover • GateHouse Ohio Media
over Pipeline must clean up drilling waste contaminated with diesel fuel before it can operate the natural gas pipeline it’s building, federal regulators said Wednesday.
13, coating 6.5 acres in mud. Another 3 million gallons of slurry could remain underground.
The Ohio Environmental Protection Agency has accused Rover of numerous environmental violations during its construction of the $4.2 billion pipeline across the state, including Wayne, Ashland, Stark, Tuscarawas and Carroll counties.
Rover dumped the contaminated slurry in two quarries. One site is near Aqua Ohio wells north of Massillon. The other quarry is close to the Canton Water Department’s Sugar Creek water supply near Beach City.
The biggest incident happened in April in Bethlehem Township, Stark County, where workers were drilling under the Tuscarawas River south of Navarre.
Testing by Ohio EPA later revealed the slurry was contaminated with low levels of diesel fuel.
Representatives of Aqua Ohio and Canton Water Department have said tests show their water supplies haven’t been contaminated.
In a letter on Wednesday, Terry L. Turpin, director of the Federal Energy When Rover’s path crosses Regulatory Commission’s a highway, river or other Office of Energy Projects, obstacle, workers drill a told Rover to: horizontal path beneath the surface. Bentonite • Remove and properly clay slurry -- commonly dispose of dieselcalled drilling mud -- is contaminated waste in used to lubricate the drill. the quarries; Sometimes the slurry inadvertently comes to the • Remove all slurry and surface through cracks in drill cuttings from the the soil. Tuscarawas River site; According to the Ohio EPA, • Plan to restore the Rover spilled more than 2 wetland; and million gallons of slurry into a wetland next to the • Plan to monitor private Tuscarawas River on April and public water wells
Each Rover Pipeline construction area isolates the workspace with silt fence and other erosion or sedimentation control techniques to avoid allowing sedimentation to enter into the sensitive area. The area pictured is located between Wooster and Fredericksburg, Ohio. near the quarries and the wetland for at least two years, and possibly longer, if contamination is found.
FERC intends to develop a plan to prevent future contamination, but workers for Rover and its contractors haven’t been available, which is delaying the A message seeking investigation, Turpin wrote. comment was left with a Rover spokesperson. Ohio EPA also is investigating how the slurry Rover must take those steps became contaminated with to get FERC’s permission to diesel fuel, and on Monday use the pipeline, according agency Director Craig W. to the letter. The interstate Butler announced he had pipeline will carry natural asked the Ohio Attorney gas produced by wells in General to take civil action the Utica and Marcellus against Rover and its parent shales. company, Dallas-based Energy Transfer Partners. New drilling projects along the pipeline route The state demands Rover remain on hold while remove the contaminated FERC investigates why the waste and monitor wells drilling slurry leaked and and is seeking a civil penalty why it was contaminated of almost $1 million. with diesel fuel.
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merica’s energy security was forever changed nearly a decade ago, as domestic shale development positively shifted America’s energy outlook. As a Harvard Business School study concluded, responsible shale development is “perhaps the single largest opportunity to improve the trajectory of the U.S. economy.” This transformation – due in large part to the industry’s ongoing ingenuity and innovation
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President Donald Trump speaking at Shale Insight 2016.
Ohio Court of Appeals Clarifies
“Production in Paying Quantities” Rule
David J. Wigham • Attorney n June 16, 2017, Ohio’s Seventh District Court of Appeals issued an important “paying quantities” decision against Beck Energy that will surely shape the future of many “lack of production” cases in Ohio. In Paulus v. Beck Energy Corp. 2017-Ohio-5716, the Court of Appeals, among other things, clarified what income and expenses should be considered in calculating “production in paying quantities” under an oil and gas lease in its secondary term. To understand the depth of this ruling, it is important to explain what “paying quantities” is and why it matters under an oil and gas lease. In Ohio, most oil and gas leases contain a primary term and a secondary term. The primary term is a period of years within which the producer must commence drilling operations in search of oil and gas. If, after the expiration of the primary term,
the conditions of the secondary term are not being met, then the lease automatically expires by its own terms. The secondary term of an oil and gas lease is indefinite and extends the producer ’s rights under the lease, typically “for so long as oil and gas are produced in paying quantities.” In order to extend an oil and gas beyond its primary term, oil or gas actually must be discovered and produced in paying quantities. In other words, there must be actual production that generates a profit over and above operating expenses attributed to the well or wells drilled under the lease. An oil and gas lease that is in its secondary term automatically expires by its own terms on the day the well stops producing in paying quantities. Once a lease expires, ownership of the mineral rights, including the shale rights, reverts back to the mineral owner. This allows the mineral owner to lease its mineral rights, in certain situations, to a shale producer for a lucrative bonus and a higher royalty.
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Hence the significance of whether a lease is being held operating of the well at issue. These operating costs were by production from a well that is producing in “paying previously allocated in prior years. In other words, by quantities.” not charging internal operating expenses it had charged in earlier years, the producer was artificially deflating The Ohio Supreme Court has already defined “paying operating costs to its benefit. When these internal quantities” in Blausey v. Stein as: “quantities of oil or expenses were added back in, there was no question the gas sufficient to yield a profit, even small, to the lessee well in question was not producing in paying quantities over operating expenses, even though the drilling costs, sufficient to hold the lease in its secondary term. or equipping costs, are not recovered, and even though the undertaking as a whole may result in loss.” Finally, the Paulus Court tackled the issue of market conditions and the good faith efforts by the producer to The Paulus ruling elaborates on this test by providing continue production in paying quantities in a depressed guidance on what may be considered when determining commodities market. The Court found that market paying quantities and lack of production in Ohio. First, conditions are irrelevant, and that “profitability, under the Court examined what items may be deducted from the income minus operating expenses, is the standard in oil and gas income before determining profit. A producer Ohio.” The fluctuation of market conditions may be used cannot report income under the Blausey test without first to consider a base period for the profitability calculation, subtracting the landowner royalties paid to the lessor. but it is not a consideration that must be weighed when A royalty paid to the lessor from the well’s production evaluating paying quantities and lack of production. cannot qualify as “profit to the lessee over operating Moreover, the producer ’s good faith judgment does expenses.” become a factor unless and until the well is profitable. Significantly, the Court declined to apply a good faith Next was the issue of operating expenses. In the Paulus factor that would possibly allow a producer to continue a case, Beck Energy had stopped allocating internal lease in perpetuity at the producer ’s “sole and arbitrary operating expenses related to a salaried employee for discretion” based on speculation that the market may improve.
The Paulus case is another important decision in the current legal battleground over the ownership of the valuable mineral rights in Ohio. This ruling elaborates on how “production in paying quantities” is defined under Ohio law. This case also illustrates why a mineral owner cannot rely upon royalty statements from a producer to determine whether a lease is valid because the producer controls all of the information related to expenses. And given the recent downturn in commodity pricing, producers are facing ever increasing challenges to operate wells profitably in order to continue to control ownership of the valuable mineral rights. This opens the door for mineral owners to challenge lease validity. Mineral owners are encouraged to seek counsel from an experienced oil and gas attorney to help determine whether a case exists against a producer who is attempting to operate a well in “paying quantities” to hold a lease in its secondary term, and thereby deprive the mineral owner of lucrative lease bonuses and higher royalties.
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David J. Wigham is a second-generation oil and gas attorney at the firm of Roetzel & Andress, with more than 25 years of experience in the industry. He maintains offices in Akron and Wooster, Ohio, and can be reached at 330-762-7969.
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Plans Progressing for Ohio River
Ethane Cracker Plant
Jackie Stewart • Energy In Depth-Ohio hailandbased f i r m P T T Global Chemical (PTTGC) America has announced it would purchase land along the Ohio River in Belmont County for $13.8 million to build a proposed $6 billion ethane cracker plant. The processing plant will support the record-breaking natural gas production coming out of Ohio by allowing a Although a ﬁnal decision to build the plant has not been announced, there is support for the valuable component of the project, which has been almost three years in the making as this timeline shows. natural gas, ethane, to be “cracked” locally into ethylene, a feedstock source for the petrochemical industry. To date, a total investment made by possible from revenue generated by Ohio liquor sales and private investment by this company totals approximately $130 million invested over the past 28 months to bring a multi-billion ethane cracker to the Ohio. Although a fi nal decision to build the plant has not been announced, the project would be a game changer for the manufacturing of petrochemical products along the Ohio River. If a look at the development of the Monaca, Pennsylvania Shell ethane cracker is any indicator of things to come in Ohio, the PTTGC is well on its way to moving the project forward.
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According to the Pittsburgh Post-Gazette, Royal Dutch Shell announced it would consider building an ethane cracker in 2011, and five years later the company announced a fi nal decision had been made. Looking at Shell’s timeline, it’s clear that the path PTTGC timeline is strikingly similar. If announced as planned, the decision would come a year sooner than then Shell project. Raise a glass and build an ethane cracker To date, Ohio’s more than $1 billion in annual liquor sales have poured $17 million into securing PTTGC’s fi nal investment decision. Here’s how that works: In 2013 Ohio created a private nonprofit, JobsOhio, to entice business development and provide incentive packages for companies like PTTGC to come to the state. JobsOhio acquired Ohio’s liquor sales business to gain a revenue stream and GasandOilMag.com
fund these efforts. Operating income from liquor sales made it possible for the state to provide an “aggressive incentive package.” Therefore every mixed drink or shot that’s taken in bars across the Buckeye State have quite literally supported the advancement of this project.
The Buckeye State should see the decision for this multi-billion dollar project to secure the ethane cracker later this year.
When It Comes to Pipelines,
Kindness Works Best
Steven A. Davis • Principal Member of Sitterley, Vandervoort & Davis, Ltd. hese days, rather than go it alone with At Sitterley, Vandervoort & Davis, Ltd., we always ask whether a personal attorney, most landowners we have the ability to meet the landowner’s expectations. If band together as a group, choosing he comes to our firm wanting to receive a million dollars for one law firm to represent them with a very short run across his land, then we know we can never pipeline companies looking to acquire a right- achieve that for him. We cannot meet those expectations, of-way across their lands. Understandably, this can be an and, in the end, the landowner will be disappointed with our emotional, even painful, time. It is unsettling to think that a firm. Instead, we are frank with potential clients, letting them pipeline company can exert the power of eminent domain, know how we work, explaining that the key to our success is and just come in and take your land, very often failing to in the way we negotiate on their behalf. provide “just compensation” in line with the property’s true market value. The impression is that these companies are Past experience – more than two decades worth – has taught looking to make even more money for their billion-dollar us that our approach DOES work. We recommend a “pleasebusiness, leaving you, the little man, out in the cold. and-thank-you” tactic initially, recognizing that there is plenty of time to switch gears and change strategies. This approach For the landowner, this is an infuriating situation. While the sets landowner expectations, but, more importantly, gives the knee-jerk reaction may be to fight, to make it as difficult as pipeline company the opportunity to do the right thing right you can for the pipeline company, employing a “take-no- off the bat. It demonstrates that if we, the landowners, treat prisoners” attitude that is aggressive may not be the best you, the company, well, then you will treat us well, and with decision. respect. This avoids contentious, prolonged negotiations that, more often than not, please no one. Agricultural & Industrial Service & Repair Hoses
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We usually pose it this way, on our very first group meeting. “We know that you are frustrated, scared, even angry. But let’s put emotions aside and look at this in a way that will be most profitable for everyone. Are we going to the pipeline company and asking it to pay us for being rude and aggressive, or are we asking it to pay us for being cooperative?” The landowners accepted to our group, once they put emotions aside, usually decide that our way is the most logical and honest approach, and will get them the best possible deal. We have a lot of examples to back up our claims. Recently, these two basic, yet different, approaches stood out in stark contrast during negotiations with the Utopia pipeline in Ohio. Our landowners settled quickly on a reasonable rate per foot. Other groups in the same, or adjacent, counties, elected to aggressively litigate over the company’s power of eminent domain, some wanting more money, others just wanting the pipeline to go away. In the end, it was determined that Utopia did not have eminent domain, so rather than electing to pay off the litigants, the company decided to reroute its pipeline. This pleased everyone. However, since our landowners had cooperated and come to terms early on, they avoided months of stress and aggravation and were rewarded with settlements at the negotiated price, even though the pipeline was not crossing their land. Not so with the litigants. Many wound up with nothing.
This underscores the fact that beating one’s chest and butting heads with a large company can turn out to be a nonproductive strategy. The outcome could have gone several ways for the combative litigants. The pipeline might have followed the original route, yet the litigants received only a fraction of the cost-per-foot we negotiated. True, these litigants might have gotten more money, but the point is, landowners must be aware that the overly aggressive approach has significant risks associated with it. Our landowners were winners no matter the outcome. The much safer approach we used – from a risk-reward standpoint – was to begin negotiations in a much more positive way. If the company had demonstrated an unwillingness to work with us, then another option could have been explored. Here’s another example of a situation in which being nice was the best approach. Recently, in a negotiation with a large pipeline company, many of our landowners settled on a price-per-foot price early in the process. Some of our landowners, negotiated successfully for a higher price. We went back to the pipeline company and reminded it that our early landowners were cooperative. We thought they deserved the opportunity to be paid at the higher rate. The company consulted its internal files – where the prior deals were signed, sealed and delivered – and recognized that
our landowners had been agreeable and responsive. The company ultimately decided that our prior group, which did not go back on its word, should be compensated at the higher price. Our landowners were, of course, pleasantly surprised and delighted. Our job at Sitterley, Vandervoort & Davis is to decide when to push, when to pull, when to be nice, and when to question whether the please-and-thank-you approach is working or whether the strategy needs to be adjusted. We do this on a case-by-case basis to determine the most profitable route for our clients. While I’m not saying that an aggressive approach has never worked, in the decades I have been representing landowners, I have discovered that being cooperative rather than thumping one’s chest is the better way to go, at least initially. It is counterproductive to pretend that you are going to beat up on a 10 billion dollar pipeline company. The firm you choose should fight to get you the best deal possible, of course, but we are saying that you have nothing to lose by starting negotiations cordially and cooperatively, putting your best foot forward. You can change strategies if this approach doesn’t work. But give it a chance; it’s a very simplistic yet powerful way to do business.
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Bayesville Developing Plan to
Protect Source Water
John Lowe • GateHouse Ohio Media he Village of Because of the planned power facility Byesville, because development, the village will have to it will be supplying expand its production capacity from 2.25 water in the million gallons of water per day to 3.5 relatively near future to the million, Weisend said. proposed Guernsey Power Plant, will need to expand the capacity of its water The village source water protection area plant, officials said. runs, roughly, from the Interstate 70-77 interchange to Leatherwood Road, along As a result of that expansion, the Ohio Trail Run Road and back to I-77, he said. Environmental Protection Agency Why the need for a plan? is requiring the village to develop a source water protection plan, Water Superintendent Kendal Weisend Weisend offered the example of a spill explained to council during a July from a brink truck. The plan would spell out who is contacted, what measures are council meeting. taken and how tests are performed.
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will help him get out the word to farmers and other landowners about measures that may be need to be taken in the event of a contingency. Signs also will be posted along area highways such as Conquer Hill Road. Administrator Brennan Dudley said others who would need to be informed of a contingency would include the Ohio Department of Natural Resources and any public individual or company that might be doing something that would affect the village’s source water.
“This would be something on file that they could reference and know that we are using ground water out of [the given] “Basically, it’s a area,” Dudley said. contingency plan just for the source “Is there any way we can keep these water,” he said. certain trucks off of our roads?” Councilman Bill Albright asked. “If The EPA wants the one of them does have a wreck, the council to adopt a brine goes into our ditches, the ditches resolution saying go into our mines and that’s where we that whoever is get our water. We’ve got to have some in charge of the kind of protection there, too. We don’t water department need those trucks on our roads close to has the backing of Byesville.” council to carry out the plan, he said. The village’s legal counsel, Atty. Bill Ferguson, said the village could not Weisend will be prevent such traffic. working with officials from “State law prohibits us from restricting the Guernsey brine trucks,” he said. “Only the state Soil and Water can govern oil and gas production and C o n s e r v a t i o n what it takes to produce it. We can’t pass District in a law prohibiting it, even if we wanted formulating the to.” plan which he expects to have At the end of the discussion, council completed by unanimously voted to adopt the mid-August. The resolution of support of Weisend’s plan. District personnel
Ohio House Overrides
Brian Hickman • Director of Government Affairs for OOGA n July 6th, the Ohio House of Procedurally, once these appointments happen, several other Representatives overrode a total of 11 procedural dominoes must fall before the Commission begins line-item vetoes pertaining to House its work. Namely, the state must assess and determine which Bill 49, the state budget bill. One of tiers their properties fall under and the Ohio Department those veto overrides dealt with the Oil and Gas of Natural Resources (ODNR) must establish rules for the Leasing Commission, the state body that was Commission. So, when other interests claim that the language created to review state properties for potential oil and gas would “fast-track fracking in state parks and forests”, that’s leasing. Let’s take a look at current law and what the language simply not the case. The language would start the process to hold a rational, thoughtful process where the state could included in the state budget bill actually does. utilize its oil and gas resources in an effort to gain additional House Bill 133 (sponsored by State Representative John state resources, resources that would be beneficial to state Adams) was passed and enacted by the state legislature in parks and forests. June, 2011. It was signed into law by Governor John Kasich on June 30, 2011 and became effective law on September 30, 2011. If the Ohio Senate also overrides the Governor’s line-item The bill created the Oil and Gas Leasing Commission, which veto, then these appointments would happen within 30 days was charged with overseeing and facilitating the leasing of of the effective date of this amendment. Doing so would end land owned or controlled by state agencies and universities. the almost 6 years of inaction and begin the process in Ohio of These properties were classified into four distinct tiers. discussing the benefits of utilizing state properties for oil and However, it is important to note that state nature preserves gas exploration. were excluded from these tiers and, therefore, cannot be leased.
It is also important to point out that the State of Ohio included the following statement of policy when it comes to state-owned oil and natural gas resources (included in Ohio Revised Code Section 1509.71 (A)): “It is the policy of the state to provide access to and support the exploration for, development of, and production of oil and natural gas resources owned or controlled by the state in an effort to use the state’s natural resources responsibly.”
Visit GasandOilmag.com to get updates & insight on policy issues, trends, innovation & much more in the Ohio Gas & Oil industry.
The Commission itself would be chaired by the Chief of the Division of Geological Survey. The other four appointees would come from the oil and gas industry (2 appointees), real estate industry (1), and environmental interests (1). Per Ohio Revised Code Section 1509.71 (C), Governor Kasich had until October 30, 2011 to appoint these four members to the Commission. He has not, and that is where the budget language comes into play. The language included in House Bill 49 did not delve into any of the policy matters passed during the debate in 2011. The language simply allowed the Speaker of the Ohio House of Representatives to appoint two members of the commission and the Ohio Senate to appoint two members. That’s it. That is the extent of changes to the state’s oil and gas leasing program in the state budget bill. GasandOilMag.com
OHIO’S GAS & OIL INDUSTRY NEWS. BUSINESS. TECHNOLOGY.
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TOP COUNTIES WITH HORIZONTAL DRILLING ACTIVITY BY NUMBER OF SITES
1. Carroll County 519 2. Belmont County 497 3. Harrison County 391 4. Monroe County 369 5. Noble County 213 6. Guernsey County 203 7. Columbiana County 149 8. Jefferson County 121 9. Mahoning County 30 10. Washington County 22 11. Tuscarawas County 20 12. Portage County 15 Trumbull County 15 13. Stark County 13 14. Coshocton County 5 15. Morgan County 3 Muskingum County 3 Holmes County 3 16. Knox County 2 17. Ashland County 1 Astabula County 1 Geauga County 1 Medina County 1 Wayne County 1 WE L SIT WELL SITES ITES IIN N VAR V VARIOUS A OU AR US SS STA STAGES: T GES GES: PERMITTED, PERMITTED E M T ED D, D DRILLING DRILLING, LLING, DRILLED, D I LE LED, ED D, COM COMPLETED, PLETED PL LET ETED PRODU PRODUCING PRODUCING, PR RODUCING O UCING I G PLUGGED LUGG SOUR SOURCE: S OUR RCEE O OHIO H O DEP DEPARTMENT RTMENT O OF NA NATURAL URAL RESOURCES S U E A AS SO OF 7 7/15/17 7/1
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applications to optimize plant and pipeline operations, further enhancing the quality and breadth of Airgasâ€™ service and product offerings for our customers.
The Right Products. The Right Locations. The Right Expertise. WO-10561002 WO-10555484
Think Airgas, Your single source for supply, service and support.
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