Ohio's H.B. No. 152 Sponsors Amend Forced-Pooling Bill, But Gateway Royalty Says Not Enough

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Jun 14, 2021, 08:54 ET

CARROLLTON, Ohio, June 14, 2021 /PRNewswire/ -- After sounding the alarm, in a press release dated May 25, 2021, concerning an industry backed bill before the Ohio House Energy and Natural Resources Committee that would have required forced-pooled mineral owners to accept large cost deductions from their monthly royalties, Gateway Royalty is following up with a second press release today.

These cost deductions, which are sometimes paid to affiliates of the oil and gas producers, "are as much as 95% of the sale price and can reduce the royalty payments to almost nothing," says Chris Oldham, the president of Gateway Royalty LLC, a company that invests in oil and gas by buying a portion of mineral owners' royalty interests.

Facing public outrage over forcing out-sized costs on mineral owners, oil and gas producers have backed away from the bill, and Ohio's sponsors of H.B. No. 152 have put forward a substitute bill that requires the royalties to be paid on the gross proceeds of the sale of the oil and gas.

Gateway Royalty has been advised on very short notice that there will be a hearing on the substitute bill this week before the House Energy and Natural Resources Committee on Wednesday, June 16, 2021, at 10:30 AM, in Room 116 of the Ohio State House.

"The new bill is certainly better than the original," says Oldham, "but unleased mineral owners can still get stuck with huge cost deductions because operators have figured out clever ways to deduct costs, even if the lease says the royalties will be paid on the gross proceeds."

One way, Oldham says, is by selling the oil and gas to a marketing affiliate. "The operator sells the oil and gas to the affiliate at the well, the affiliate processes the oil and gas and sells it downstream of the well, and then the affiliate pays the operator the price it receives less all costs between the well and the downstream point of sale." Oldham says. "This two-step marketing gambit allows the operator to say it deducted no costs," Oldham says, "when in fact costs were netted out of the true gross sale price by the affiliate."

Another ploy used by operators, Oldham says, is to add a "market enhancement" clause to a gross proceeds lease. "The lease will say the royalty will be on the gross proceeds and list all the costs that can't be deducted but will then have a clause that says costs can be deducted if they enhance the value of an already marketable product," Oldham explains. "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."

Oldham says the only way a mineral owner can be sure no costs will be deducted from the royalties is for the lease to say that the royalties will be on the "gross proceeds paid by the first unaffiliated third-party buyer in an arms-length transaction with no deduction of any costs." According to Oldham, "this one sentence royalty provision prevents operators from taking costs through affiliate sales and market enhancement clauses."

Oldham sees other big problems with the new version of the bill. One is that the bill provides for a 1/8th (12.5%) royalty. Oldham emphasized, "A 12.5% royalty was the norm before the beginning of the Utica shale boom in 2010, but oil and gas leases today typically provide for royalties between 16 and 20%. The royalty percentage for forced-pooled mineral owners should be the average in the leases of the other mineral owners in the unit. This would treat forced-pooled mineral owners, both large and small, the same as their neighbors."

The bill also provides for a bonus payment per acre of 50% of the market rate. According to Oldham, the bonus should be the "average bonus paid for all acreage in the unit, excluding acreage held by production." Oldham says this would put the forced-pooled mineral owner "on the same footing as other mineral owners in the unit, large and small."

According to Oldham, another problem with the bill is that it allows an oil and gas producer to submit an application for unit operation if 65% of the acres in the proposed unit are under lease. Oldham stated, "65% is a failing grade. The oil and gas producer should be required to have at least 85% of the acreage under lease. This will require the oil and gas producer to negotiate with more mineral owners and will create a more accurate market value for calculating the royalty percentage and the amount of the bonus. Usually, the oil and gas producers will lease the large mineral owners first and the small mineral owners last. Many times, the small mineral owners are offered lesser lease terms than the large mineral owners and are threatened to either take the deal or be forced-pooled."

Oldham says Gateway has reviewed the applications filed by operators for forced pooling and that they show that the operators typically have more than 85% of the acreage in the proposed unit under lease before submitting their application. He provided the Table below for support.

Analysis of all Horizontal Forced Pooled Units (FPUs) Filed in the Ohio Utica Shale

Based on all Permits as of April 2021

County

Number
of
Operators
per
County

Total
Number
of FPU
Applications
Filed

Total
Number
of Acres
in all
FPUs

Average
Number
of Acres
per
FPU

Average
Number
of
Tracts
in FPUs

Average
Tract
Size
in
Acres

% of
Mineral Acres
Leased
when FPU
was filed

% Royalty
Disclosed by
Operator
in FPU
Application

Belmont

49,932

561

7.06

88.78%

Carroll

7,507

938

160

5.88

76.63%

17%

Columbiana

2,064

516

10.93

81.43%

17%

Guernsey

11,411

761

9.91

84.45%

Harrison

20,410

729

11.23

86.79%

17-19%

Jefferson

25,246

573

6.73

88.58%

17-19%

Monroe

47,369

607

12.16

89.79%

Noble

4,449

742

13.09

89.31%

Grand Total

272

168,388

619

8.64

88.11%

"This shows that the operators can sign up more than 85% of the acreage before filing their application," Oldham says. "Now they want a lower percentage so they can threaten the holdouts with forced pooling if they don't accept the bad terms demanded by the operator."

"What makes this bill all the worse," Oldham says, "is that the counties in the Utica Shale field are among the most poverty stricken in the state. Each mineral owner in those counties, on average, owns less than 7 mineral acres and are probably unaware of H.B. No. 152 and the effect it has on devaluing their minerals. These are the last people the large oil and gas producers should try to short and take advantage of."

The demographic table below is based on census data that shows that the eight currently active Utica counties are below the Ohio average in terms of both per capita income and median household income, with all eight counties ranking low among the total 88 counties in the state of Ohio.

OHIO UTICA SHALE DEMOGRAPHICS (1)
8 COUNTIES IN THE OHIO UTICA SHALE			INCOME OF EACH COUNTY			SIZE OF EACH COUNTY
County	Population	Poverty Rate	Per Capita Income Ohio Average $31,552	Median Household Income Ohio Average $56,602	Rank out of 88 Counties	Area Square Miles	Total Possible Mineral Acres	Theoretical Avg Mineral Acres per person in County (2)
Belmont	67,006	11.6%	$27,580	$50,904	64th	532	340,563	5.1
Carroll	26,914	11.3%	$29,518	$55,267	47th	395	252,550	9.4
Columbiana	101,883	13.2%	$26,489	$48,345	70th	532	340,410	3.3
Guernsey	38,875	15.5%	$24,742	$45,917	74th	522	334,240	8.6
Harrison	15,040	14.5%	$24,940	$49,689	73rd	402	257,498	17.1
Jefferson	65,325	17.1%	$26,391	$46,581	63rd	408	261,331	4.0
Monroe	13,654	14.0%	$26,476	$45,289	81st	456	291,661	21.4
Noble	14,424	14.2%	$24,440	$46,897	67th	398	254,726	17.7
TOTAL	343,121					3,645	2,332,979	6.8
(1) Data provided by www.census.gov and was calculated using the 2015-2019 American Community Survey that incorporates data over the previous five years to reach an acceptable estimate of data until the 2020 Census numbers are released.
(2) The theoretical average mineral acres per person in the County includes all mineral owners, large and small, including Ohio Department of Transportation and nature preserves.

One of the sponsors of the bill, Representative Tim Ginter, who is not on the Energy and Natural Resources Committee, represents Columbiana County, where the per capita income is only $26,489, the poverty rate is 13.2%, and the average mineral owner owns only 3.3 acres. "It's disgraceful," Oldham says, "that Representative Ginter seems more interested in doing the bidding of the large oil and gas producers than in protecting the mineral rights of his constituents, including large and small mineral owners."

The Ohio House Energy and Natural Resources Committee is comprised of thirteen members (https://ohiohouse.gov/committees/energy-and-natural-resources). None of the thirteen committee members is a Representative for the eight currently active Utica counties noted in the demographic table above. 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 H.B. No. 152.

As Oldham stated in Gateway Royalty's May 25, 2021, press release (www.gatewayroyaltyllc.com/news), "This bill weakens the negotiating position of all unleased mineral owners in Ohio and will diminish the value of their mineral estate for generations to come." Mr. Oldham noted that large mineral owners typically hire an attorney to review and negotiate leases, but small mineral owners, in most cases, don't have the financial means to hire an attorney.

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.