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Paczewski v. Antero Resources Corp.

Court of Appeals of Ohio, Seventh District, Monroe

June 19, 2019

JEFFREY PACZEWSKI ET AL., Plaintiffs-Appellants,

          Civil Appeal from the Court of Common Pleas of Monroe County, Ohio Case No. 2018-151

          Atty. Craig Wilson, C.J. Wilson Law LLC, for Plaintiffs-Appellants and

          Atty. Gregory Russel, Atty. Peter Lusenhop, and Atty Ilya Batikov, Vorys, Sater, Seymour and Pease, Atty. Ryan Regel, Atty. Gerald Daily, and Atty. Scott Myers, Asst. Attorney Generals, Environmental Enforcement Section, for Defendants- Appellees.

          BEFORE: David A. D'Apolito, Gene Donofrio, Carol Ann Robb, Judges.


          D'APOLITO, J.

         {¶1} Appellants Jeffrey and Chanda Paczewski appeal the judgment entry of the Monroe County Court of Common Pleas granting the motions to dismiss filed by Appellees, Antero Resources Corporation ("Antero"), G-R Contracting, Inc. ("G-R"), and Richard Simmers, Chief of the Division of Oil and Gas Resources ("Division") in this action for termination of an oil and gas lease and damages. Appellants also appeal the trial court's denial of their subsequent Civ.R. 60(B) motion.

         {¶2} Appellants concede that the unitization order issued by the Division pursuant to R.C. 1509.28 ("Order) is valid, but argue nonetheless that the Order constitutes a breach of the oil and gas lease at issue in this case, as well as an unconstitutional taking of the property and minerals subject to the lease without just compensation. For the following reasons, the judgment of the trial court is affirmed.

         UNITIZATION AND R.C. 1509.28

         {¶3} Under the common-law rule of capture, a landowner always has an incentive to quickly drill his own well, regardless of the waste, because if he fails to capture the resources, his neighbor will drill his own well and licitly take the minerals for himself. With each new drill site the reservoir loses pressure, leaving much of the oil unobtainable. Conflicting hydraulic fracturing operations can likewise result in unnecessary drilling with less overall output. Kerns v. Chesapeake Expl., LLC, ____ Fed.Appx. ____, 2019 WL 423140 (2019 6thCir.).

         {¶4} "Unitization" refers to the consolidation of minerals or working interests covering all or part of a common source of supply. Kramer and Martin, THE LAW OF POOLING AND UNITIZATION, § 1.02 (LexisNexis Mathew Bender 2016). Unitization avoids disorderly and wasteful production practices by allowing the reservoir's characteristics, rather than man-made property lines, to govern development. Unitization minimizes surface disturbance and related environmental concerns. It also increases the ultimate recovery of oil and gas for all of the unit's owners, who share in the resulting production on a just and equitable basis. Champion, Forming the Unit Why Unitize? The Industry Perspective, Rocky Mtn. Min. L. Inst. 5A-1 (2006).

         {¶5} "Pooling" is the joining together of small tracts or portions of tracts for the purpose of having sufficient acreage to receive a well drilling permit under the relevant state or local spacing laws and regulations, and for the purpose of sharing production by interest owners in the pooled unit. Kramer and Martin at § 1.02. Under Ohio's statutory scheme, R.C. 1509.26 authorizes voluntary pooling agreements to form drilling units which conform to the minimum acreage and distance requirements.

         {¶6} In the event that an owner is unable to secure a voluntary pooling agreement, R.C. § 1509.27 authorizes the Division to issue mandatory pooling orders where an owner is unable to secure a voluntary pooling agreement. Similarly, R.C. 1509.28 authorizes the Division to make orders providing for unit operations when reasonably necessary to increase the recovery of oil and gas.

         {¶7} In enacting R.C. 1509.28, the General Assembly recognized that reaching voluntary agreement on a large-scale project often presents significant challenges, including self-serving opposition by minority interest owners. In a 1964 report to the General Assembly on the proposed conservation package, the Legislative Service Commission reasoned:

Seldom will one owner control all of the land area which overlies a pool, and selfish interests may keep multiple owners from joining with each other for their mutual benefit and for conservation. In order to meet this situation a number of oil producing states have adopted unitization procedures similar to these which we recommend so that a minority cannot keep the majority from proper development and producing practices.

         Ohio Legislative Service Commission, Report of Committee to Study Oil and Gas Laws in Ohio (Dec. 28, 1964).


         {¶8} In 1975, Appellants' predecessors signed an oil and gas lease ("Lease"), which covers over 700 acres in Monroe County, Ohio. The original contracting parties struck a single clause from the form lease. The stricken clause, reads, in pertinent part:

The Lessor hereby grants to the Lessee the right to consolidate the leased premises, or any part thereof, with other lands to form an oil and gas development unit of not more than six hundred forty (640) acres for the purpose of drilling a well thereon, but the Lessee shall in no event be required to drill more than one well on such unit.

         {¶9} Appellants purchased 77 acres of the leased property in 2010. G-R owns the working interest in the Lease, except for certain deep formations, which are owned by Antero. Sixteen wells are producing from the Lease at present, including the well on the Appellants' property.

         {¶10} Antero unsuccessfully attempted to negotiate a lease amendment with Appellants, which would have provided to Antero the right to include the Lease in a unit. As a consequence, on March 14, 2017, Antero applied to the Division for a statutory unitization order. Antero sought to develop a 743-acre development unit contemplating three horizontal wells and including 61 acres of the Appellants' property ("Peters Unit").

         {¶11} According to Antero's application, the Lease contains non-conforming provisions, which limit the amount of acreage that may be voluntarily consolidated by Antero into the Peters Unit. Unless the Division formed the unit pursuant to its statutory authority, Antero explained that it would be required to reduce the lateral length of two of the three wells proposed for ...

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