Guest column/Bill unconstitutional, abuse of landowners
Under the U.S. and Ohio constitutions, private property may only be taken if its owner is paid fair market value. House Bill 152, sponsored by state Reps. Brian Stewart, R-Ashville, and Timothy E. Ginter, R-Salem, seeks to amend the force pooling process in Ohio by compelling landowners to give their minerals to oil companies for less than fair market value. It is, therefore, facially unconstitutional. It also is bad policy.
Under current law, once an oil company has leased at least 65 percent of the acreage within a proposed unit, it may apply to force pool the remaining unleased acreage. This prevents a minority of landowners from blocking oil and gas development around them. An owner of force pooled acreage then becomes a partial owner of the unit, bearing his proportionate share of the drilling costs and receiving his proportionate share of the unit’s profits.
The average landowner, however, does not have the money to participate in the massive costs of drilling a hydraulically fractured well. Such a non-participating landowner must be carried. This means the oil company will pay the entire cost of drilling up front, but then will deduct the landowner’s share of costs (plus reasonable interest) from the landowner’s share of profits once the unit starts producing, until the landowner’s costs are repaid. In this way, the landowner receives full value for his minerals, minus the cost of extracting them.
Under H.B. 152, however, a landowner may no longer be carried by simply repaying his share of the unit’s production costs plus interest. Instead, he will be forced to pay the oil company an additional, punitive non-participation charge equal to at least 200 percent of the amount carried. This penalty will transfer a huge amount of wealth from the landowner to the oil company, and it will result in the landowner receiving far less than his real share of the unit’s profits. In fact, in many cases, it will result in the landowner receiving almost no money at all for the minerals the oil company takes.
But the harmful effects of the bill do not end there. If passed into law, H.B. 152 will create a system of perverse incentives that undermines all Ohioans’ ability to get fair market value for their minerals. Oil companies will no longer have an incentive to negotiate leases with every landowner. Instead, they will only ink deals covering the minimum 65 percent of a unit’s acreage necessary to begin the force pooling process. The owners of the remaining 35 percent will then be stuck bearing H.B. 152’s non-participation charge.
To avoid the new penalty, landowners will have to sign leases with an oil company before it reaches its 65 percent acreage threshold. Desperate to get a deal done, they will start bidding against one another, and the going rate for lease bonus and royalty payments will plummet as Ohioans race each other to the bottom to avoid being in the unfortunate 35 percent. The market for oil and gas leases in Ohio will quickly crater, and oil companies will collect leases at bargain prices while landowners have their mineral wealth taken for pennies on the dollar.
H.B. 152 is a bad bill that forces landowners to give up their minerals for less than fair market value. Neither the U.S. Constitution nor the Ohio Constitution permits this. Moreover, the perverse incentives the bill creates will severely disadvantage Ohioans in their negotiations with oil companies, resulting in less money paid to Ohio’s landowners.
In short, H.B. 152 is unconstitutional and a bad deal for Ohioans. Kidder Law Firm urges all landowners in Ohio to reach out to their state legislators and demand that H.B. 152 be stopped.
(Anderson is an attorney at Kidder Law Firm LLC, with offices in Cadiz and Dublin.)