Oil and Gas Well Regulations in Ohio

1. UTICA UPDATE Presented By: John K. Keller Vorys, Sater, Seymour and Pease LLP 614.464.6389 | jkeller@vorys.com April 28, 2015

11. ORC 1509.02 • 1509.02 Division of oil and gas resources management – chief – oil and gas well fund. • There is hereby created in the department of natural resources the division of oil and gas resources management, which shall be administered by the chief of the division of oil and gas resources management. The division has sole and exclusive authority to regulate the permitting, location, and spacing of oil and gas wells and production operations within the state, excepting only those activities regulated under federal laws for which oversight has been delegated to the environmental protection agency and activities regulated under sections 6111.02 to 6111.028 of the Revised Code. The regulation of oil and gas activities is a matter of general statewide interest that requires uniform statewide regulation, and this chapter and rules adopted under it constitute a comprehensive plan with respect to all aspects of the locating, drilling, well stimulation, completing, and operating of oil and gas wells within this state, including site construction and restoration, permitting related to those activities, and the disposal of wastes from those wells. Nothing in this section affects the authority granted to the director of transportation and local authorities in section 723.01 or 4513.34 of the Revised Code, provided that the authority granted under those sections shall not be exercised in a manner that discriminates against, unfairly impedes, or obstructs oil and gas activities and operations regulated under this chapter.

12. ORC 5301.09 • 5301.09 Recording lease of natural gas and petroleum. • In recognition that such leases and licenses create an interest in real estate, all leases, licenses, and assignments thereof, or of any interest therein, given or made concerning lands or tenements in this state, by which any right is granted to operate or to sink or drill wells thereon for natural gas and petroleum or either, or pertaining thereto, shall be filed for record and recorded in such lease record without delay, and shall not be removed until recorded. No such lease or assignment thereof shall be accepted for record after September 24, 1963, unless it contains the mailing address of both the lessor and lessee or assignee. If the county in which the land subject to any such lease is located maintains permanent parcel numbers or sectional indexes pursuant to section 317.20 of the Revised Code, no such lease shall be accepted for record after December 31, 1984, unless it contains the applicable permanent parcel number and the information required by section 317.20 of the Revised Code to index such lease in the sectional indexes; and, in the event any such lease recorded after December 31, 1984, is subsequently assigned in whole or in part, and the county in which the land subject thereto is located maintains records by microfilm or other microphotographic process, the assignment shall contain the same descriptive information required to be included in the original lease by this sentence, but the omission of the information required by this section does not affect the validity of any lease. Whenever any such lease is forfeited for failure of the lessee, the lessee’s successors or assigns to abide by specifically described covenants provided for in the lease, or because the term of the lease has expired, the lessee, the lessee’s successors or assigns, shall have such lease released of record in the county where such land is situated without cost to the owner thereof. • No such lease or license is valid until it is filed for record, except as between the parties thereto, unless the person claiming thereunder is in actual and open possession. Amended by 130th General Assembly File No. TBD, HB 9, §1, eff. 3/23/2015. Effective Date: 09-20-1984.

13. ORC 2305.041 • 2305.041 Action for breach of oil or gas lease or license. • With respect to a lease or license by which a right is granted to operate or to sink or drill wells on land in this state for natural gas or petroleum and that is recorded in accordance with section 5301.09 of the Revised Code, an action alleging breach of any express or implied provision of the lease or license concerning the calculation or payment of royalties shall be brought within the time period that is specified In section 1302.98 of the Revised Code. An action alleging a breach with respect to any other issue that the lease or license involves shall be brought within the time period specified in section 2305.06 of the Revised Code. Effective Date: 04-06-2007.

14. ORC 1302.98 • 1302.98 Statute of limitations in contracts for sale – UCC 2-725. • An action for breach of any contract for sale must be commenced within four years after the cause of action has accrued. By the original agreement the parties may reduce the period of limitation to not less than one year but may not extend it. • A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. A breach of warranty occurs when tender of delivery is made, except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance, the cause of action accrues when the breach is or should have been discovered. • Where an action commenced within the time limited by division (A) of this section is so terminated as to leave available a remedy by another action for the same breach, such other action may be commenced after the expiration of the time limited and within six months after the termination of the first action unless the termination resulted from voluntary discontinuance or from dismissal for failure or neglect to prosecute. • This section does not alter sections 2305.15 and 2305.16 of the Revised Code on tolling of the statute of limitations, nor does it apply to causes of action which have accrued before July 1, 1962. Effective Date: 07-01-1962.

15. ORC 1509.31 • If a mortgaged property that is being foreclosed is subject to an oil or gas lease, pipeline agreement, or other instrument related to the production or sale of oil or natural gas and the lease, agreement, or other instrument was recorded subsequent to the mortgage, and if the lease, agreement, or other instrument is not in default, the oil or gas lease, pipeline agreement, or other instrument, as applicable, has priority over all other liens, claims, or encumbrances on the property so that the oil or gas lease, pipeline agreement, or other instrument is not terminated or extinguished upon the foreclosure sale of the mortgaged property. If the owner of the mortgaged property was entitled to oil and gas royalties before the foreclosure sale, the oil or gas royalties shall be paid to the purchaser of the foreclosed property.

16. Severance Tax • Current: Oil – $0.20 bbl Gas – $0.03 mcf • But … after CAT and ad valorem equals about 2% of gross • Administration proposal: 6.5% of “national index” gas/oil/NGL • Because of market discount in Ohio effective rate expected to be 9-11% actual proceeds • Removed by House from Budget Bill, not yet re-introduced • Potential outcome (unauthorized): • 2.5% actual proceeds (net of processing costs) • Cost recovery • Adjustment of CAT and ad valorem on production

17. House Bill Eight • House Bill Eight passed the Ohio House of representatives and is currently being considered by the Ohio Senate’s Energy and Natural Resources committee. The process of addressing House Bill Eight in the senate has stopped and may or may not restart depending on unrelated political matters. The main focus of House Bill Eight is § 1509.28. However, House Bill Eight will also make uniform the application of ad valorem taxes to only apply to oil and gas only once it has been extracted. The table below summarizes the impact of the bill on § 1509.28.

18. House Bill Sixty-Four • House Bill Sixty-Four is the budget bill which, passed the house as a three thousand page document effecting numerous statues. House Bill Sixty-Four does have some impact on oil and gas regulation in Chapter 1509, although, the majority of items impacting oil and gas were removed from the as introduced bill prior to it passing the Ohio House of representatives. The most significant items removed from House Bill Sixty-Four are the Lupo Language and a rewriting of § 1509.28. Section 1509.232 or the Notice Provision is the most controversial of Chapter 1509 items remaining in the bill, although there have been significant efforts by industry representatives and the ODNR to develop a mutually satisfactory draft what was passed by the house is far from a consensus version. The following significant items remain in the bill and impact Chapter 1509. • Clarifies the § 1509.01 definition of tract to allow for a portion of a tract of land. • Removes the exception allowing for a permit to plug back a well to another formation not to pay the permitting fee. • Removes emergency planning language from other 1509 sections and creates §1509.231 which; contains the existing community right to know requires and allows the chief to make rules to regarding what information shall be included in a database of community right to know act information. • Creates §1509.232 which requires an owner, a person to whom an order of the chief is issued, or holder of registration certificate or a contractor performing services for them to notify the chief via a toll free phone number maintained by the chief, within a half an hour of becoming aware of any of the following taking place at a facility regulated under chapter 1509. • A release of 100 mcf of gas; • A release of 210 gallons of oil; • A release of brine, drill cuttings or other drilling waste; • A release of hydrogen sulfide related to a production operation; • A release of a semi-solid substance from a production operation; • A fire or explosion; • The response of a fire department; • Gives the chief rulemaking authority necessary to administer the section. • Clarifies §1509.27 allows for multiple tracts, requires notice to mineral owners, specifies surface operations require the agreement of the surface owner. • Increases fines under 1509.33 to not more than ten thousand dollars, from either not more than four thousand or not more than two thousand. Penalties under § 1509.33 can apply for violations of a term or condition of a permit or order under chapter 1509. Also changes §1509.33 from not allowing for civil penalties under the section and criminal penalties to not allowing for fines under the section and fines under § 1509.99.

19. Litigation • Home Rule: Beck; Broadview Heights • Lease Challenges: • Notary • Paying quantities • Implied covenants • Fraud/unconsionability/lease divisibility • Dormant Mineral Act: • Issues pending Ohio Supreme Court • Is 1989 version self-executing • Is 1989 version fixed or rolling • Can 1989 version be claimed after 2006 amendment • What is “title transaction” • Execution of lease • Expiration of lease • DMA vs MTA • Perpetual Lease: Hupp • Royalty: Lutz

20. Induced Seismicity • Disposal • AWMS appeal • Completion • Status State position