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Chesapeake Unloads Leases in Columbiana to Hilcorp
LISBON, Ohio -- Chesapeake Energy Corp., the largest leaseholder in the Utica shale and the first major energy company to recognize the potential of the play, has ceded its rights to future drilling in portions of Columbiana County, records show.
Documents obtained from the Columbiana County recorder’s office show that Chesapeake has assigned nearly 1,100 leases in six townships to Hilcorp Energy Co., a competitor that is accelerating exploration and production in southern Mahoning County, western Pennsylvania and northern Columbiana County.
“It would fit with their [Hilcorp’s] strategy of developing southern Mahoning County and northern Columbiana County,” observes Alan Wenger, an attorney at Harrington, Hoppe & Mitchell, where he heads the firm’s oil and gas division. “We received lots of calls, and a number of them were from fairly sizeable landowners.”
Wenger says many clients were concerned about the transfer since few were familiar with Hilcorp. “I assured them that they were a good company,” he said, “and it quieted down after that.”
A bulk assignment that included 1,097 leases in Salem, Elk Run, Fairfield, Unity, Center and Middleton townships in the northeastern section of the county was negotiated Jan. 23 between Hilcorp and Chesapeake, and the transaction was notarized Feb. 15.
Landowners in those areas began receiving letters about the transfer last December.
No other details regarding the nature of the transaction – whether it is a land swap or outright purchase – were available. A Chesapeake spokesman declined comment and Hilcorp did not respond to requests for comment.
However, the deal does exclude nine wells to which Chesapeake retains the rights and wells the Ohio Department of Natural Resources lists as already drilled by Chesapeake. These units comprise the Grubbs, Morris, Westover and Reed wells in Elk Run Township; the Chamberlain East and Wallace wells in Fairfield/Elk Run townships; the Hartz well in Salem/Fairfield townships; the Weaver well in Salem Township; and the Lehman South well, which straddles Fairfield and Unity townships.
Much of the acreage involved in the transaction lays in or around the Brinker Storage Field, a 30,000-acre natural gas reserve carved out of the Clinton Sandstone strata 3,000 to 6,000 feet below the surface of the earth. These storage areas – Ohio has 16 – are connected to major pipeline networks that pump natural gas to and from the underground fields.
Columbia Gas, a subsidiary of NiSource Gas & Transmission, owns the Brinker. Last year, NiSource and Hilcorp struck up a partnership to explore and transport natural gas in the Utica.
One aspect of the joint venture is the development of a $150 million cryogenic gas processing plant in Springfield Township in Mahoning County and another $150 million of pipeline infrastructure that stretches from western Pennsylvania through Mahoning County and into northern Columbiana County.
At first, Wenger says, Chesapeake negotiated a patchwork of leases with landowners in the Brinker, but many of these acres were surrounded by land governed under older agreements that were signed as far back as the 1930s for gas storage and now owned by Columbia Gas. Therefore, it was unlikely that Chesapeake would drill there.
However, the lease assignments to Hilcorp could allow drilling to occur.
“I received a letter in the first week of January,” says Jeffrey Dick, chairman of the geology department at Youngstown State University who lives in Columbiana County and owns 20 acres in the Brinker Field. The letter from Chesapeake informed Dick that his lease had been reassigned to Hilcorp.
“It’s clear they want unitization,” Dick observes, noting Hilcorp has built in some amendments that would allow the company to drill in his unit within a five-year window. “I don’t think Chesapeake was going to drill it, so hopefully it works out for me.”
Others in the Brinker Field not signed by Chesapeake were offered amended leases from Hilcorp that increased their royalty percentage on natural gas production to 15% from 12.5% while others are challenging in court Columbia Gas’ assertion that some landowners be held to old leases that it says awards NiSource the deep drilling rights in the Utica.
Those old leases in question call for flat-rate compensation of $200 a year for natural gas and the production of natural gas liquids, 12.5% royalties on any oil found, and vague language on the company’s use of resources on the property. Since the Utica is emerging as a natural gas and natural-gas liquids play, these landowners stand to gain little if left to the decades-old agreements.
Jill McNicol of Leetonia, one of the plaintiffs in the Brinker lawsuit, reports that the case is now going to mediation. “We’re pleased at this point,” she says. “Mediation means that at least we’ll settle this thing.” About 100 landowners have signed on to the complaint, she reports. “The old leases were horrible.”
Since McNicol’s lease is in litigation, NiSource and Hilcorp did not proffer any amendments, but she expects the issue to be resolved soon. “If we end up in a unit with Hilcorp, I’d be comfortable with that,” she says.
Hilcorp has also become the most active lessee in Mahoning County, notes Mahoning County Recorder Noralynn Palermo. Since 2011, the county has recorded 2,530 leases under Hilcorp. “They’re about the only ones filing leases lately,” she reports. “They filed 60 yesterday [May 22].”
Hilcorp has drilled a single well at the Carbon Limestone pad site in Poland Township, and has a permit to drill a second well at the site, ODNR records show.
And, land agencies prospecting for leases in Mahoning County are still active, Palermo notes. “It’s not like it was a year ago, but we got a whole group of people in last week,” she said. “I don’t know where they’re from, but they’re still doing business.”
In other parts of the Mahoning Valley, energy companies are gearing up for what appears to be an active season of exploration.
CNX, a subsidiary of Consol Energy, has drilled three wells in Mahoning County, one in Ellsworth Township on the Hendricks property two others at the Cadle farm in North Jackson.
Halcon Energy reports that one of its wells, the Phillips 1H well in Mercer County, Pa., is now in production. The company measured the first hydrocarbons from this well April 14.
“We’ve maintained continuous flowback on the well and rates continue to increase,” Halcon said in a statement. “While it’s still early, flow-rate data on this well is encouraging.”
Four of its wells in the region are drilled and in the resting stage, one other well is being completed, and two others – one in Mercer County and another in Mahoning County – are being drilled.
“Our focus in this region is to build an inventory of permitted well pads in preparation for a full-scale development program to optimize drilling and completion costs,” the company said.
BP America is also moving forward with its plans to develop the far northern edge of the Utica.
“We’ve drilled two wells so far, one in Johnston Township and another in Kinsman,” reports Curtis Thomas, spokesman for BP America, which has leased more than 80,000 acres in Trumbull County. “We remain excited about the opportunity in the Utica/Point Pleasant and look forward to pressing our appraisal and development program in 2013.”
BP began its drilling program in April, Thomas reports, and says the company plans to drill “several additional wells by year-end.”
It’s very early in the development of the Utica and information collected from well results in Trumbull County will help guide future drilling programs for BP, Thomas notes. “The core sample and log data acquired through the appraisal program will help BP determine our development activity here in the Utica play.”
Copyright The Business Journal, Youngstown, Ohio.
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