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Family Law Firm Strikes Oil and Gas
CANFIELD, Ohio -- After billions of dollars spent and a good year into the oil and gas frenzy that's gripped eastern Ohio, giant energy companies exploring the Utica shale are still trying to figure out what it all means.
So too are landowners. With little notice, they're confronted with decisions that could make or break deals that in the long run could prove very lucrative for their families.
With more questions than answers at the moment, a Canfield law office is taking on about as much business as it can handle, and is expanding because of the growing need for representation in an industry they say few understand.
“We're drinking from a fire hose right now,” says Nils Johnson, partner in the law firm of Johnson & Johnson. "We're pretty overwhelmed, as are all of the oil and gas attorneys in the state."
The small family firm recently hired two new oil and gas attorneys and expects to hire another five to six more in the coming years to meet the volume of cases expected as a result of the shale rush, Johnson says. The firm, housed in a remodeled 19th century house in Canfield, is adding offices to accommodate future employees.
Johnson and his brother, Eric, have practiced oil and gas law for decades, long before the likes of Chesapeake Energy and BP started knocking on doors in the Mahoning Valley.
"Oil and gas law is a specialty," Johnson says. When he was graduated from law school in the late 1970s, Johnson says he was interning at a firm when a case involving an oil and gas lease crossed his desk. "It was dumped on my lap. So I researched it, figured it out and then sort of became the go-to guy on oil and gas matters," he recalls.
At that time, the industry in the region was enjoying a strong exploratory market because of natural gas pockets in the Clinton sandstone formations. Smaller drilling companies canvassed the region and signed mineral leases with landowners, many of which remain in force.
"It was good until 1984, when the market collapsed," Johnson recalls. "For the next dozen years, it was very slow."
The market rebounded in the late 1990s, but the current level of exploration in the Utica shale over the last 1½ years across eastern Ohio dwarfs anything he's seen here.
"In the past, a big Ohio oil company would drill 30 Clinton wells a year at a cost of $150,000 each," an investment of between $4 million and $5 million a year, Johnson reports. Today, companies such as Exxon-Mobil, Chesapeake, BP, Hess and Devon are pumping billions of dollars into the Utica/Point Pleasant formations and spending an average of $5 million to $8 million to develop a single well.
"These are big players that haven't been here in a century," Johnson says. "When British Petroleum is knocking at your door, you know it's the real deal."
By 2014, Johnson projects, companies could be spending between $6 billion and $7 billion a year in developing the Utica play. That includes companies that provide support services to the industry.
"If you go into Midland, Texas, you pass machine shops, supply yards, equipment suppliers, construction companies – it's exciting," he says. "The same thing could happen here."
The market, cyclical and driven by price, has experienced its share of roller coaster rides over the last century, cautions partner Eric Johnson. Moreover, the play is still in its infancy. Although early results in some wells drilled by Chesapeake are encouraging, it’s not a done deal.
"They're kind of struggling to figure this whole thing out," he says of the big energy companies. Chesapeake's Buell well in Harrison County is an impressive find, he notes, but no one he's talked to in the industry is "particularly blown away" at the numbers of the four other wells also producing in the play.
That doesn't mean the Utica isn't capable of turning out greater numbers, Eric Johnson adds. Instead, it underscores how fickle the geology of the Utica and other shale plays are. One well, for example, could be gushing out thousands of barrels of liquid gas or oil per day, while a well drilled next to it could come up dry.
All of these variables are factored into advising clients and helping to negotiate for them fair, productive lease agreements, he says.
"We've represented hundreds of landowners in the Utica," he reports, spanning Trumbull County in the north to Belmont County in the south. The challenge is to present all sides of the issue and provide clients with as much information as possible so they can make the best decisions regarding their land.
Upfront bonus payments and future royalties are traditionally the two major issues for new leases for landowners, Johnson says. However, when an energy company acquires an existing lease that may have been signed decades ago, thereby binding the landowner to the terms of the old lease, the real challenge begins.
"A lot of the old leases were never intended for Utica wells," he says. Some have stipulations that the land can't be included in units larger than 160 acres, which is a problem for energy giants such as Chesapeake, which has gobbled up acres by the thousands. For Chesapeake to drill, the company would probably need to secure units with about 600 acres each.
Eric Johnson says the older leases need to be amended so that these landowners could be included in the drilling unit. However, many landowners see this as an opportunity to renegotiate their entire leases, including the terms of up-front payments and royalties.
Many of the old leases call for royalties of 12.5% and lease payments of $2 an acre. During the peak of the land rush, some farmers grabbed bonus payments of $6,000 an acre plus 20% royalties.
But Johnson cautions that tampering too much with these provisions could cause the company to walk away, leaving the landowner with nothing in the end.
"Of all the things I do, this is the most difficult," he says. Even under the terms of the old lease, the landowner could still become very wealthy because of future royalty payments should a productive well be drilled in the unit.
"Those could dwarf the signing bonuses we've been hearing about," he says. "You could really shoot your clients in the foot if you didn’t know this stuff and told them to hold out."
In other cases, Johnson says, he's advised clients to refrain from suing or joining a collective complaint against oil companies such as Chesapeake. "The issue is whether you want to be tied up for another two or three years," he says. "In the meantime, some of your neighbors are getting wealthier. It doesn't necessarily help the landowners."
Nils Johnson adds that these giant oil companies have deep pockets and have the ability to draw cases out until the issue is resolved. "We try to be fair and reasonable with our clients," he says.
And, he suspects that these companies are here for the long haul, noting that most of the preliminary work through core sample analysis shows the geology is ripe for extracting natural gas liquids from the Utica. "But, you've got to come up with the right formula," he says. "They're likely to figure it out and make it work."
The large energy companies are accelerating exploration in unconventional plays such as the Utica shale because the oil-rich regions in South America, the Middle East and the Gulf of Mexico are becoming less accessible to U.S. companies. "They're desperate to find big reserves, even difficult to develop reserves," he says.
As oil and gas companies develop new efficiencies in hydraulic fracturing and horizontal drilling, and production costs decrease, Johnson says exploration in the Utica should continue for decades.
"I'm encouraged because there are so many big names here," interjects Eric Johnson. "Would Shell spend $2 billion on a cracker plant? Would BP be leasing 85,000 acres? They must see something."
EDITOR'S NOTE: This story was first published in the MidJune edition of The Business Journal. CLICK HERE to subscribe.
Copyright 2012 The Business Journal, Youngstown, Ohio.