Forced to lease
When Karl Zerovich decided last year to sign a lease giving BP America the right to drill for oil and natural gas below his 100 acres, he had some reservations.
His aging mother, Harriet Zerovich, had similar reservations. But hers were so strong she decided to forgo any opportunity at oil and gas riches and opted not to lease the minerals under her adjacent 64 acres.
She was one of five property owners in a 653-acre area known as a “pooling unit” who exercised their rights not to lease their minerals.
“Her concerns were more with the practicality of how they could fit in with what’s already on the surface,” Karl Zerovich said last week as he stood outside the rural Mecca home where he has lived all his life. “The problem is there’s a tile system in the fields.”
It was the tile system that Harriet Zerovich, 79, feared would be damaged by drilling operations, he said.
So after several attempts by BP to obtain an agreement with Harriet and the other four reluctant land owners, the company exercised its rights and took the case to the Division of Oil and Gas Resources Management, part of the Ohio Department of Natural Resources, seeking a ruling to force the recalcitrant property owners to allow extraction of minerals. Their property made up about 70 of the 653 acres mostly east of state Route 46 in Mecca.
The legal process commonly referred to as a form of “forced pooling” has been on the books since 1965 and allows companies like BP America or Halcon Resources to force the lease.
In a March 5 hearing in Columbus, BP argued that without the unsigned acreage, profits from the planned horizontal well would suffer greatly.
BP scientists described a unit pool as an underground accumulation of oil or gas in the pores of rocks.
“BP estimates that the ultimate recovery from this unit development, if all five unit wells are drilled, could be as much as 6.8 billion cubic feet of natural gas, 1.13 million barrels of oil, and 0.7 million barrels of natural gas liquids from the Unitized Formation,” BP wrote in its argument. “Absent unit development, that recovery would be substantially less.”
In fact, the company projected the unsigned acreage could mean the loss of as much as 63 percent of the pool’s potential.
Attempts last week to reach a BP spokesman for comment on the issue of unitization were unsuccessful.
Oil and Gas Resources Management Chief Richard Simmers agreed and granted BP the right to “unitize” or force the unsigned property owners to give up their mineral rights.
The ruling did not surprise local attorney Alan D. Wenger of Youngstown-based Harrington, Hoppe and Mitchell, who specializes in oil and gas issues.
“If all the conditions are met for unitization, those who don’t want to lease could be forced in,” Wenger said, but only on two conditions.
“Their surface would not be used. In a literal sense, the drilling company could not set foot on the property,” Wenger said. “And two, they aren’t put out financially.”
In the case of the Zerovich well in Mecca, in fact, Simmers made an unprecedented move and ordered BP to pay the unwilling landowners not only a generous 15 percent royalty for the extracted minerals, but also a signing bonus of $2,000 per acre.
The money meant little to Harriet Zerovich, though, who died just a month after the ruling.
“They made it financially good for them,” Karl Zerovich acknowledged. “I don’t personally know the other neighbors who were forced into the unit, as it were. I can’t really speak to how they would feel about it.”
Attempts to reach those landowners through visits to their homes and phone messages were not successful.
“ODNR, to its credit, has treated the noncorporate landowners fairly,” Wenger added.
He noted that the oil and gas chief has reacted differently in other cases involving mineral rights previously leased to other drillers.
Public records obtained from ODNR show that mineral rights for one of the properties, 2.8 acres on Warren Road, had previously been leased to Halcon Resources, which had been refusing to sign the rights over to competing energy company BP.
ODNR spokesman Mark Bruce, speaking on behalf of the Oil and Gas Division chief, last week called forced unitization “a last resort process” used only after the company demonstrates it has made every reasonable effort to secure the leases. In addition, Ohio law requires that at least 65 percent of the unit be leased amicably before others are forced to join the unit.
Other forced unitization attempts
In a separate case involving the Lennington Well in Johnston Township, BP also in recent months sought and obtained a forced unitization ruling when agreements could not be reached with eight property owners representing about 30 acres of a 500-acre unit.
In that case, however, the oil and gas chief granted no signing bonus nor specific royalty amounts.
“In the case of the Lennington, they were all uncommitted working interests,” Bruce said, meaning each of the eight landowners had previously leased with another driller who was refusing to sell the lease to BP.
Attempts to reach several of those rural property owners for comment also were unsuccessful.
A third Trumbull County application for forced unitization, filed March 28 by Halcon Resources for land surrounding the successful Kibler Well in Lordstown, was withdrawn July 30.
The effort had been opposed by Wenger and a group of Lordstown landowners he represents. The group did not necessarily oppose to the prospects of deep-well drilling, but rather was more focused on receiving compensation from Halcon to amend older existing leases.
Among the property owners included in the March 28 forced unitization application was BDM Warren Steel Holdings, the owner of the former RG Steel property in Warren. BDM owns the mineral rights on about 13 acres near Halcon’s Kibler well. Also included was about 40 acres owned by Ohio Edison along Highland Avenue.
Halcon withdrew the unitization request the same day a mineral rights lease between Halcon Resources and BDM Warren Steel Holdings was recorded in the Trumbull Recorders office. Dollar figures are not included in the public document.
Halcon declined to comment about unitization attempts for this story.
On Friday, Wenger said the negotiating process among the Lordstown landowners group and Halcon officials is still under way.
“I believe the group has had some significant impact because, in general, Halcon has started to make some reasonable offers to folks in return for getting their leases amended,” Wenger said. “It’s a pretty dynamic situation and all sides are doing the right thing. No one wants to thwart or stop development. I think there are productive discussions going on.”
In the end, Harriet Zerovich passed away too soon to see results of the drilling or to collect any of the royalties. Her son said ultimately she wasn’t too upset with the ruling, largely because she realized BP would receive no right to access the surface of her land, easing her concerns.
For now, about 10 acres of Karl Zerovich’s farmland where hay had been raised now holds a deep well awaiting hydraulic fracturing.
And as for royalties that may make the very long process worth it, Zerovich said he is not yet convinced it will turn out to be profitable.
“We don’t know yet. This is an assessment well,” a thoughtful Zerovich said. “It may be the last.”