Ohio Is the New Hot Spot for Oil and Gas Leasing

Oil and gas wells are nothing new in Ohio. For decades, operators have drilled throughout the state in search of oil and gas. Recently, however, the application of hydraulic fracturing has made it feasible to drill into the deep Marcellus Shale layer under eastern Ohio and parts of New York, Pennsylvania and West Virginia.

The hydraulic fracturing process involves drilling horizontally into the Marcellus Shale. Millions of gallons of water and sand are then pumped into the rock to fracture it and allow the trapped gas to be released.

In most areas, the shale lies a mile or more below the surface, making it very expensive to initiate a drilling operation; however, the rewards may make it worthwhile. By some estimates, the Marcellus Shale may contain up to 500 trillion cubic feet of gas, of which ten percent may be recoverable. The wellhead value of this amount of gas could be as much as one trillion dollars!

A few thousand feet below the Marcellus Shale lies the Utica Shale, which is thicker and more geographically extensive. The Utica Shale layer may also have great commercial significance in the years to come.

Because of the great potential, operators have been aggressively pursuing oil and gas leases with land owners in the areas where the Marcellus Shale is found. The lease compensation to the land owner typically consists of an initial per-acre signing bonus, which has increased dramatically over the past several years, plus a royalty in the event a producing well is ever drilled.

The customary royalty amount is 1/8 or 12.5%. Although there are many customary terms in oil and gas leases, any lease should be reviewed by an attorney before signing it. Terms can always be negotiated, and the customary terms are not necessarily appropriate or reasonable in every situation.

Due to low natural gas prices, 2010 was an historically slow year for new oil and gas wells in Ohio, but that is expected to change as operations begin to ramp up in Eastern Ohio.  Many see the drilling as an economic boon to the state, providing money to landowners as well as jobs to those in the oil and gas and related industries.  Governor Kasich’s office estimates that shale drilling will create over 200,000 new jobs in Ohio while bringing in an additional 500 million dollars in revenue.

While there is still a great deal of uncertainty about the economic impact of this new oil and gas boom, it is clear that the industry is moving ahead and that new wells will be drilled. The success of these new wells, and fluctuations in gas prices, will determine how extensive new drilling operations become. Both operators and landowners are dealing with variables beyond their control, so it will pay to stay up to date on the latest developments and negotiate leases accordingly, rather than simply relying on standard form documents.

The Ohio Department of Natural Resources website gives further information on Ohio oil and gas leasing activity and regulation.

Contact attorney David Lindner for more information.