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Did MVSD Drilling Ban Fuel Halcon's Decision?
YOUNGSTOWN, Ohio -- Oil and gas exploration in this part of the Utica shale was never a boom, nor is it yet a bust.
Halcon Energy Corp.’s announcement that it would halt new drilling operations this year in the northern tier of the Utica shale has fueled speculation about the future of this portion of the play, which consists of Mahoning and Trumbull counties in Ohio and Mercer County in Pennsylvania. The reasons for the Houston company’s decision range from poor production at the wells it has drilled in northern Trumbull County and northern Mercer County, the still depressed price of natural gas, the lack of appropriate pipeline infrastructure here, or, as some have suggested, the backlash against Halcon’s proposal to drill beneath the Meander Reservoir.
In a letter dated Feb. 19 obtained by The Business Journal and sent to Youngstown Mayor John McNally, Matt Blair, president of the Mahoning Valley Sanitary District Board of Directors, reiterates his board’s position that the sanitary district would prohibit drilling under the reservoir. Meander furnishes drinking water to the cities of Youngstown and Niles and the village of McDonald. It is under the jurisdiction of the sanitary district.
The purpose of the letter was to apprise McNally of a conversation Blair had with Youngstown’s economic development director, David Bozanich, while former Mayor Charles Sammarone, McNally’s predecessor, was still in office.
In the letter, Blair says that Bozanich “is apparently very interested in the prospect of oil and gas well drilling under MVSD property. He is convinced, after talking to the oil and gas companies, that there is no risk in drilling under the Meander Reservoir” and that MVSD is obligated to abide by the leases it signed with other entities in the 1960s and 1970s. Those leases have since been assigned to Halcon.
“You should also note that these leases were awarded by the then-directors without the required public meetings or debate and without any official board action,” Blair’s letter continues. “The current board, as you might imagine, questions the validity of these leases.”
Blair’s letter also cites the presence of fault lines and abandoned coal mines that surround the MVSD property, which he says future drilling could disturb.
The letter exemplifies the division between those who see the MVSD board’s position as an impediment to future development of the oil and gas industry here, and those who believe that drilling beneath the reservoir could lead to permanent harm to one of the region’s largest supplies of potable water.
“Mr. Bozanich apparently believes that I have somehow imposed my will on the board and that I have joined the anti-frackers in taking some extreme position against drilling,” Blair writes McNally.
“I assure you, that is not the case, but unfortunately regardless of my political and personal positions, which favor drilling, my primary concern, like every other board member, is the protection of the water source of 300,000 people.”
Calls to Blair and Bozanich were not returned.
The MVSD has hired the Youngstown law firm of Comstock, Springer & Wilson Co. L.P.A., to represent the water district, and has also retained Squires, Sanders LLP in Columbus as special counsel on oil and gas issues.
As of now, Halcon lacks a permit to bore a horizontal well beneath the Meander Reservoir, says Thomas Wilson, who is handling the MVSD case for Comstock Springer. “There’s no permit from Halcon to drill onto or under MVSD property.”
Wilson also says that he’s not read the letter Blair sent McNally and so could not comment on its contents.
“MVSD is being responsible and doing what they’re supposed to do,” says Lynn Anderson, an activist opposed to the use of hydraulic fracturing, or “fracking,” in the drill completion process. “We’re happy that MVSD is fighting it.”
Halcon received a vertical well permit Dec. 13 to drill on the Liming Trust property in Lordstown Township near Meander. The company’s plan also called for a second permit for a horizontal lateral leg of the well that would extend beneath the reservoir.
However, Anderson says, she spoke with Blair in January when he told her that MVSD had no authority over a vertical well on private property, noting that at that time, there was no intention on the part of Halcon to drill on MVSD land or beneath the reservoir.
Wilson also assured Anderson and others opposed to hydraulic fracturing, she says, that the well was an exploratory well, not a production well.
Anderson, a member of FrackFree Mahoning Valley, says her organization was successful in obtaining records in October that show MVSD was discussing these issues with Halcon in July of last year.
According to a letter dated Oct. 11 from Comstock Springer’s Wilson, written in response to the organization’s records request, Halcon obtained leasing rights from NCL Appalachian Partners in July 2012 that encompasses 5,000 acres owned by MVSD. The leases were first issued in 1972 to Penn Industrial Energy Corp. and then sold to General Motors Corp. in 1976.
GM drilled a single vertical well on the property, and wanted to drill a second but the MVSD board refused to consider future drilling on its land. In 1985, GM sued in federal court and won. MVSD appealed, and the 6th Circuit Court of Appeals sided with the water district, saying that under the terms of the lease, MVSD had the right to determine whether future drilling is allowed.
“This decision remains good law,” Wilson says.
Last July, Halcon said it intended to construct a well pad next to MVSD’s property, Wilson’s October letter says. Halcon wanted to drill a 7,000-foot vertical well and add another 7,000-foot lateral to access the Utica/Point Pleasant formation under Meander.
“The District believes pursuant to the terms of the 1972 lease with Penn Industrial Energy Corp. it has the authority to refuse any further drilling on or under District property,” Wilson wrote.
Anderson believes that MVSD’s position to protect Meander is one of the factors that deterred Halcon from pursuing further drilling in the Utica this year. “I only hope that’s why they made their announcement to go elsewhere,” she says.
But Alan Wenger, an attorney with Harrington, Hoppe and Mitchell in Youngstown who handles that firm’s oil and gas division, says other factors could have forced Halcon’s decision.
“There’s no question that natural gas prices are a factor,” Wenger says, much more so than lease agreements. Halcon, he relates, isn’t a “bellwether” of the industry in the northern tier, and often these companies use local conditions as scapegoats for other issues facing the company.
Halcon CEO Floyd C. Wilson remarked during a conference call with analysts Feb. 26 that some of the wells the company drilled in the more northern reaches of its Utica holdings were “not too wonderful.”
That may not be the case in southern Trumbull County and northern Mahoning County. As of March 6, a Halcon completion rig could be seen at its Kibler well pad in Lordstown, considered one of the company’s better wells in its Utica portfolio.
Halcon has three producing wells in Trumbull County, one each in Vienna, Hartford and Lordstown, according to Ohio Department of Natural Resources records. Another well at the Kibler Lordstown pad is being drilled, while a fifth well is being drilled in Warren Township.
The company also has a well in production in Jackson Township, Mahoning County.
“We’ve got one well flowing back and one well resting, and we’re just going to have to wait and see what the results are there,” Halcon’s CEO said Feb. 26.
As for issues such as MVSD, Wenger says it all comes down to the terms of the lease, and local control for oil and gas rights in water districts is not unheard of. “In Meander, the board is exercising what it considers local control,” he observes.
What is clear in the Utica is that drilling activity among major energy producers has shifted from the north to the proven lucrative gas fields further south that stretch from Carroll County to Noble County in eastern Ohio.
During the week ended March 1, the Ohio Department of Natural Resources issued 32 horizontal drilling permits for exploration in the Utica shale. None of these permits are for wells targeting the region north of Carroll County, the data show.
Indeed, permitting in this section of the Utica has slowed to a trickle, according to ODNR records. The last permit the state issued for Mahoning County was in October for two Halcon wells in Jackson Township. Last year, a total of 14 permits were issued for Mahoning County.
In Trumbull County, 13 permits were issued in 2013, records show. The last one issued for that county was in November at Halcon’s Kibler well pad in Lordstown.
“Things are pretty slow at the moment,” Wenger observes.
In addition to Halcon’s future decisions, Wenger says he’s interested in the next move of BP America, which has some 80,000 acres under lease in Trumbull County.
BP spokesman Curtis Thomas reports his company has concluded its Utica appraisal program and is reviewing data from exploratory wells drilled in Trumbull County.
“We’re analyzing the results to see whether this play fits into our business portfolio,” Thomas said in an email. A decision on BP’s presence in the Utica should come before the end of the second quarter, he says, “hopefully sooner.”
BP’s direction is more likely to point the way forward in this section of the Utica in the near-term, Wenger observes.
“That would be more definitive on how things are perceived in the Utica,” he says.
EDITOR'S NOTE: This story first appeared in MidMarch edition of The Business Journal as part of our year-long focus on Trending: Manufacturing.
Copyright 2014 The Business Journal, Youngstown, Ohio.
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