Forced into Fracking: Mandatory Pooling in Ohio

• Author: Lucas P. Baker
• Pages: 215-248

FORCED INTO FRACKING:

MANDATORY POOLING IN OHIO

LUCAS P. BAKER*

I. INTRODUCTION

Ohio is in the midst of a shale natural gas boom.1 The production of

shale natural gas through the use of hydraulic fracturing is taking place in

the Marcellus and Utica Shale regions that encompass the eastern portions

of Ohio. Many landowners in those regions are eagerly participating in the

production of the shale natural gas by leasing their tracts of land to oil and

gas developers.2 However, there are also landowners who are opposed to

participating in the production of shale natural gas due to the risks

associated with hydraulic fracturing.3 Despite this opposition to hydraulic

fracturing, might these landowners be forced to participate in the shale

natural gas production anyway?

The answer to the question can be found in a set of laws that the Ohio

General Assembly enacted to respond to an oil boom in the 1960s.4 Ohio

Revised Code § 1509.27 provides a mechanism to force Ohio landowners

to participate in oil and gas development without their consent.5 This

process is known as “mandatory pooling.”6 Mandatory pooling is an anti-

holdout law that ensures the efficient production of natural resources.7 In

order to develop oil and gas in Ohio, one must own enough land to exceed

Copyright © 2014, Lucas P. Baker.

* Capital University Law School, J.D. Candidate, May 2014; Capital University, B.A. in

Political Science and Public Administration, May 2011. I would like to thank my family

and friends for their support and encouragement through the writing process.

1 See, e.g., Ryan Dezember, Ohio Shale Sparks Deals, WALL ST. J., Sept. 27, 2011, at

C9; Dan Gearino & Spencer Hunt, Utica Shale Producing but What’s the Ceiling?,

COLUMBUS DISPATCH, May 17, 2013, at A1.

2 See Mary Vanac, Farmers in Ohio Divided on ‘Fracking,’ COLUMBUS DISPATCH, Feb.

2, 2013, at D1.

3 See id.; see also Spencer Hunt, No to ‘Fracking’ Doesn’t Mean No, COLUMBUS

DISPATCH, July 29, 2012, at A1; Julie Carr Smyth, Ohio Laws Allow Drilling Even Where

Owners Object, CHARLESTON GAZETTE (W. Va.), Apr. 23, 2012, at 9A.

4 See J. Richard Emens & John S. Lowe, Ohio Oil and Gas Conservation Law—The

First Ten Years (1965–1975), 37 OHIO ST. L.J. 31, 35 (1976).

5 OHIO REV. CODE ANN. § 1509.27 (West Supp. 2013).

6 See id.

7 See infra Part II.C.3.

216 CAPITAL UNIVERSITY LAW REVIEW [42:215

the state’s minimum acreage requirements.8 If landowners, or oil and gas

developers, fail to own or control the required acres and are unable to form

voluntary agreements with adjoining landowners, they may apply to the

Ohio Department of Natural Resource’s Division of Oil and Gas Resources

(Division of Oil and Gas) for a mandatory pooling order.9 After a lengthy

hearing process and, if all the required conditions are satisfied, the Chief of

the Division of Oil and Gas (Chief) may issue a mandatory pooling order.10

The Chief’s order would require the landowners of the adjoining tracts of

land to participate in the oil and gas development.11 Therefore, the short

answer to the question posed above is yes. Through the issuance of a

mandatory pooling order, Ohio law may force Ohio landowners to

participate in the shale natural gas development without their consent and

over their opposition to hydraulic fracturing.

The mandatory pooling process has rarely been used since it was

enacted in 1965. However, in the past few years there has been an

increased use of mandatory pooling. As the shale natural gas boom

continues, mandatory pooling orders will likely be utilized more

frequently.12 In light of the likely increased use of mandatory pooling, it is

vital to ensure that § 1509.27—the statute that allows mandatory pooling—

adequately responds to the demands and risks posed by hydraulic

fracturing and is equitable to both those who wish to develop shale natural

gas and those who wish to refrain due to the risks of hydraulic fracturing.

When the Ohio General Assembly enacted the mandatory pooling law

in 1965, the legislature was responding to the demands posed by traditional

vertical drilling and migrat ory black oil.13 However, shale natural gas is

the natural resource driving today’s demands. Unlike migratory black oil,

shale natural gas is nonmigratory and is extracted using hydraulic

fracturing.14 The nonmigratory property of shale gas and its extraction

8 OHIO REV. CODE ANN. § 1509.24 (West Supp. 2013).

9 Id. § 1509.27.

10 Id.

11 Id.

12 See Hunt, supra note 3, at A4; Mandatory Pooling, OHIO DEP’T OF NATURAL RES.

DIV. OF OIL & GAS, h ttp://oilandgas.ohiodnr .gov/Industry/Mandatory-Pooling (last visited

Mar. 4, 2014).

13 See Emens & Lowe, supra note 4, at 36.

14 Extracting shale natural gas requires a two-step pro cess:

To start, a production well is drilled thousands of feet downward and

then gradually angled out horizontally through the shale deposit. The

(continued)

2014] FORCED INTO FRACKING 217

method pose different demands and create new concerns compared to those

driving the creation of the oil and gas conservation laws of the 1960s. As a

result, many of Ohio’s laws, including § 1509.27, became outdated. For

this reason, the Ohio General Assembly made substantial changes to the

original oil and gas conservation laws over the past several years.15

However, the language of § 1509.27 has substantively stayed the same.

The current language of § 1509.27 is not equitable for landowners

subject to a mandatory pooling order. After being forced to participate in

the drilling unit, the landowners will receive their pro rata share of the

production minus the costs of production and a risk penalty.16 The risk

penalty is assessed against the nonconsenting landowner to reward the oil

and gas developer for taking the risks associated with drilling. The risk

penalty can be up to 200% of the costs of production.17 Thus, under

Ohio’s approach to mandatory pooling, landowners who do not consent to

the development of shale natural gas can be forced to participate and pay a

penalty.

This Comment explains Ohio’s approach to mandatory pooling. There

are different approaches to mandatory pooling. The approaches can be

grouped into three categories. The first approach is the free-ride approach,

where the nonconsenting owner will only be held liable for the costs of

production if the well operation is successful.18 The second approach is the

risk-penalty approach—Ohio’s current approach to mandatory pooling—

which is where the nonconsenting owner is subject to a penalty to reward

the well operator for taking the risk of drilling the well if the well is

successful.19 The third approach is the enumerated options approach, by

which nonconsenting owners can choose an alternative from a list of

options that best fits their own specific circumstances upon receiving a

well is drilled horizontally to maximize the ability to capture natural gas

once the shale is hydraulically fractured.

After the well is drilled, a mixture of water, sand and chemical

additives is injected at very high pressure to fracture the shale. This

part of the process [is] called hydraulic fracturing . . . .

Drilling for Natural Gas in the Marcellus and Utica Shales: Environmental Regulatory

Basics, OHIO EPA 1 (Nov. 2012), http://www.epa.ohio.gov/portals/0/general%20pdfs/

generalshale711.pdf.

15 See infra Part II.C.2

16 OHIO REV. CODE ANN. § 1509.27 (West Supp. 2013).

17 Id.

18 See infra Part IV.A.

19 See infra Part IV.B.