Ohio Department Of Natural Resources Unitization Orders Take Center Stage In Battle Over Ohio’s Forced Pooling Bill
Posted July 20, 2021
CARROLLTON, OHIO (PR NEWSWIRE) – In follow-up to its recent press releases and opposition testimony regarding Ohio’s forced pooling bill, Sub. H.B. No. 152, and the bill’s negative impact on Ohio’s unleased mineral owners, Gateway Royalty has also reached out to the Ohio Department of Natural Resources (ODNR) regarding market enhancement clauses, which are now included in the ODNR’s forced pooling unitization orders. Gateway Royalty opposes these unfair market enhancement clauses, which need to be eliminated from the ODNR’s forced pooling unitization orders, just as they need to be prevented by the use of proper royalty language in Ohio’s Sub. H.B. No. 152.
The ODNR’s forced pooling unitization orders establish the royalties to be paid to unleased mineral owners who are forced-pooled into drilling units, usually because the unleased mineral owners could not negotiate agreeable terms with the operator of the drilling unit. For years, the ODNR’s forced pooling unitization orders granted the unleased mineral owners a royalty on the “gross proceeds” of the sale of the oil and gas production, but that has changed in recent years.
Since February 13, 2018, a “market enhancement” clause has been included in the ODNR’s forced pooling unitization orders, which allows the unit operator to deduct post-production costs from the royalties owed to mineral owners. These post-production costs are sometimes as much as 95% of the gross sale price. Through research on the ODNR website, Gateway Royalty has learned that the ODNR has issued 149 unitization orders since February 13, 2018, all of which include the “market enhancement” clause in the second sentence of the definition of “gross proceeds,” as follows.
“Gross Proceeds” means a share of the gross production of oil, gas, condensate, and natural gas liquids free of any and all cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, marketing, or pipeline construction and maintenance. “Gross proceeds” does not include costs that result in enhancing the value of marketable oil, gas, condensate, natural gas liquids, or other products to receive a better price so long as the costs are the actual costs of such enhancement and an unleased mineral rights owner’s pro rata part of such cost is less than the amount of the enhanced value of the product.(emphasis added)
Chris Oldham, President of Gateway Royalty, commented, “The market enhancement clauses whittle the mineral owners’ monthly royalties down to almost nothing. Market enhancement clauses allow operators to deduct all costs incurred between the well and the downstream point of sale, costs referred to in the industry as ‘post-production costs.’ A lease can say it’s a ‘gross proceeds’ lease, but the market enhancement clause converts the ‘gross proceeds’ lease to a ‘net proceeds’ lease. The market enhancement clause is a classic bait and switch, which dramatically devalues the mineral estates that have been in many of Ohio’s families for generations.”
Oldham further explained, “The market enhancement clause lists all post-production costs that cannot be deducted from the gross sale price when calculating oil and gas royalties, but then it states that costs which enhance the value of “marketable” oil and gas can be deducted. Operators then take the position that oil and gas is “marketable” at the well. This allows the operators to determine that all costs incurred between the well and the point of sale are deductible, meaning the operators can deduct all post-production costs, including those just listed as being not deductible.”
Gateway Royalty wants to know how and why market enhancement clauses were inserted into the ODNR unitization orders, which define a “gross proceeds” royalty in a way that converts it to a “net proceeds” royalty. Chris Oldham recently met with two senior ODNR officials. Neither official could explain how and why the ODNR inserted market enhancement clauses in its unitization orders. “The language did not magically appear,” says Oldham. “The public has a right to know how and why this clause got inserted, given the devastating effect it has on the value of mineral estates.”
Gateway Royalty has filed a request with the ODNR under the Ohio Open Records Law, R.C. ⸹149.43, et seq., requesting all ODNR documents, including internal and external emails, that relate or refer to the ODNR’s decision to add a market enhancement clause to its unitization orders. A copy of Gateway Royalty’s request is available at https://gatewayroyaltyllc.com/odnr-request/.
Oldham stated, “The ONDR’s orders make clear that a forced pooling bill now before the House Energy and Natural Resources Committee needs to be fixed to prevent the ODNR from sticking forced-pooled mineral owners with a net proceeds royalty.”
The bill, Sub. H.B. No. 152, originally provided forced pooled mineral owners with a royalty equal to “1/8th of the net proceeds.” The sponsors of the bill changed the royalty to “1/8th of the gross proceeds.” The “gross proceeds” language does not prevent operators from deducting costs using market enhancement clauses, sales to affiliates and other clever devises. Because of this, Gateway Royalty has repeatedly urged the sponsors to amend the bill to provide the forced-pooled mineral owner with a royalty equal to a percentage of “the gross proceeds paid by the first unaffiliated buyer in an arms-length transaction with no deduction of any costs, including, but not limited to, the costs of gathering, compressing, processing, dehydrating, separating, transporting and marketing.”
Rather than adopt Gateway Royalty’s recommended royalty language, the sponsors have now deleted the gross proceeds royalty language from the bill. Under their current version of the bill, a forced-pooled mineral owner has no right to any royalty. The mineral owner is required instead to become a working interest owner under terms that will yield little, if any, return to the unleased mineral owner.
In a final comment Oldham stated, “Unleased mineral owners should have the option to receive a true gross proceeds royalty, and for this to happen, Sub H.B. No. 152 and the ODNR’s forced-pooling unitization orders should include the ‘bullet proof’ gross proceeds royalty language recommended by Gateway Royalty.”
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