In one of the court’s final decisions of 2016, the Ohio Court of Appeals for the Seventh District considered what evidence was sufficient to demonstrate production satisfactory to maintain an approximately 121 year old oil and gas lease in Potts v. Unglaciated Industries, Inc., 2016-Ohio-8559. The suit in Potts involved the current landowners’ claims for quiet title, declaratory judgement, slander of title, and conversion.
The Plaintiffs/Appellants sought to have the court declare that the 1896 Monroe County lease made by a predecessor-in-interest was no longer valid due to historical periods of non-production. The Lessee claimed that wells on the property were productive and the lease was held in its secondary term.
One hundred year old wells are common in Eastern Ohio, and those that still produce can be extremely valuable to the current lessees as they often control substantial acreage at producer-friendly royalty rates. Some of those wells have actually produced for their entire lifetime. Some may be currently productive, but may also have experienced periods without production. Landowners have an interest in terminating existing leases and collecting the bonuses and increased royalties on modern lease terms. Lessees have an interest in preserving their investment in these old leases, making assignments of the deep rights to horizontal producers, and profiting from the sale value and overriding royalties.
Despite the record showing that no production was reported to the Ohio Department of Natural Resources (as required by Ohio law) for any year, the court found that an affidavit made by the President of the Lessee, in which he stated that the well had produced in paying quantities since at least 1962, was sufficient to support holding the lease in secondary term. Plaintiffs did not affirmatively proffer evidence of a lack of production. Although the court specifically declined to set any precedent, it found that, absent any evidence of lack of production presented by the landowners, the statement of the company president and some evidence of payments made by a third party oil purchaser was sufficient to support summary judgement on the declaratory judgement claim on behalf of the lessee. Applying this decision, landowners have a significant burden of proof to overcome evidence of production presented by the lessee.
Case law regarding these “ancient” lease interests is very thin in Ohio. Contrary to other major production states, Ohio does not have a statute or clear precedent defining the requirements to hold leasehold acreage either horizontally or vertically. This will likely be a matter for the courts to decide now that multiple Dormant Mineral Act questions have been addressed.