Battle Over Ohio’s Forced Pooling Bill Intensifies With Opposition Hearing Set For This Week
Posted June 22, 2021
CARROLLTON, OHIO (PR NEWSWIRE) – An industry backed bill that would allow oil and gas operators to deduct outsized costs from oil and gas royalties paid to Ohio mineral owners who are forced-pooled is quickly moving forward in the House Energy Committee. The Committee’s Chairman, Representative Jason Stephens, has scheduled a hearing at which opponents of the bill can voice their objections. The hearing is set for Thursday, June 24, 2021, at 10:00 AM EST in Room 017 in the Ohio State House in Columbus.
Chris Oldham, the president of Gateway Royalty, which invests in oil and gas production by buying a portion of the royalty interest, says the substitute bill, Sub. H.B. No. 152, “doesn’t stop operators from taking huge cost deductions that can cut the monthly royalty payments to almost nothing.”
The current version of the substitute bill provides that the royalty paid to forced- pooled mineral owners will be on the “gross proceeds” of the sale of the oil and gas, but Oldham says operators have devised clever ways to deduct costs from gross proceeds royalties by using sales to affiliates, “market enhancement” clauses and other devices.
“The only way to prevent the cost deductions,” Oldham says, is for the royalty to be on the gross proceeds paid by the first unaffiliated buyer in an arms-length transaction with no deduction of any costs.”
Gateway Royalty has examined the financial statements of operators and discovered that, in some cases, the parent company of the operator also owns, or has an interest in, the midstream companies that are paid the costs deducted from the royalties. “The parent company makes money on both ends,” he says. “The operator pays less royalties by deducting costs and the midstream company banks the costs deducted.”
“Market enhancement clauses in oil and gas leases lull unsuspecting mineral owners into thinking no costs will be deducted,” Oldham says. “The lease will say the royalty will be on the gross proceeds and list all the costs that can’t be deducted. The lease will then have a ‘however’ clause that says costs can be deducted if they enhance the value of an already marketable product. The operator then says that the oil and gas was in marketable condition the moment it left the ground, meaning that all costs between the well and the point of sale can be deducted, including the long list of costs the lease just said would not be deducted.”
The Ohio Department of Natural Resources, the state agency that approves operator applications for forced pooling, started issuing forced pooling orders in 2018 that included a market enhancement clause on the royalties to be paid to unleased mineral owners, which is still being used today. Prior to 2018, the forced pooling orders issued did not include the market enhancement clause on the payment of royalty.
Again, Oldham emphasizes, “Unleased mineral owners will only be protected from cost deductions if Sub. H.B. No. 152 includes the provision for the royalty to be on the gross proceeds paid by the first unaffiliated buyer in an arms-length transaction with no deduction of any costs, which Gateway Royalty has repeatedly urged the Committee to include in the bill.” “So far the industry has succeeded in keeping that bullet proof provision out of the bill.” Without that simple royalty language, Oldham says “the mineral estates of unleased mineral owners will be drastically devalued for generations to come.”
Oldham says Sub. H.B. No. 152 is bad for mineral owners in ways other than the cost deducts. It provides mineral owners who are forced-pooled “with only a 1/8th (12.5%) royalty when the norm in recent years is in the range of 16-20%.” In addition, the bill gives forced-pooled mineral owners “a one-time bonus payment of only fifty percent of the market rate.” According to Oldham, the royalty percentage and bonus should be the average of the leased mineral owners in the unit. “That’s fair,” Oldham says, “and plain common sense.”
Oldham urges every unleased mineral owner in the state of Ohio to contact their Representative (https://ohiohouse.gov/members/directory) immediately to endorse Gateway Royalty’s recommended changes to the substitute bill for Sub. H.B. No. 152.
Gateway Royalty (www.gatewayroyaltyllc.com), founded in 2012, is a mineral and royalty acquisition company based in Carrollton, Ohio. Gateway owns minerals and royalties in the Utica in the following counties located in southeastern Ohio: Belmont, Carroll, Columbiana, Guernsey, Harrison, Jefferson, Monroe and Noble.
Chris Oldham, President