mineral rights‐real property disputes · a. c.marcellus i. general ii. ohio b. utica i. general...

MineralRights‐RealPropertyDisputes

PresentedinCincinnati,ColumbusandClevelandforNorthAmericanTitleInsuranceCompany

February7th,8th,and10th

141E.TownStreetSuite200Columbus,Ohio43215(614)228‐6888Fax(614)228‐6878Cell(614)496‐3500jhavens@havenslimited.comwww.havenslimited.com

Oil‐GasMineralRightsPropertyDisputes

•  Ohio Overview I.  History of Mineral Industry II.  Current Statistics III.  Regulatory Framework

•  Natural Gas I.  Current Statistics II.  Geology of Natural Gas/Shale III.  Drilling

A.  What is Horizontal Drilling? B.  What is Fracking?

IV.  Shale “Plays in Ohio A.  Marcellus

I.  General II.  Ohio

B.  Utica I.  General II.  Ohio

•  Ohio Investment/Economic Impact/Politics I.  Big Business II.  Taxes and Jobs III.  Environmental Issues

•  Oil and Gas Lease Terms I.  Key Provisions II.  Legal Issues III.  Environmental Issues

•  Title Defects I.  Ohio Law II.  Current Issues III.  Potential Cures IV.  Endorsement Changes

•  Valuation I.  Coverage

A.  Title Policy Terms B.  Underwriter Options

II.  Who Determines A.  Rule 702 B.  MAI-OH Licensed Appraiser-Realtor

III.  Appraisal Methodology A.  Highest-Best Use B.  Cost C.  Income Capitalization D.  Sales Comparison

IV.  Geological Considerations A.  Close up of Plat Map Showing Location of Tract

in question B.  Well Location Map. Tract in Question Located

Here C.  Plat Map of Gilead Township,

Morrow County, Ohio D.  Cross Section Map showing Erosion al Remnants

along Knox Unconformity in Ohio. E.  The Oil Production for the Wells Located in the

Yellow Circle range form 40,000 BO to 70,000 BO. The dry holes that were drilled along the green oval trend contained > 40 feet of Glenwood Shale. Tract in Question is red circle.

F.  Old Shot Point Base Map Shows Location of Seismic and Possible Oil Well located on the Tract in Question.

OhioOilandGasIndustryOverview

•  History/Statistics

•  TotalMarketValue:$718,089,496(roughlyevenlysplit)–  Non‐fuel:another1.27billion

•  NumberofWellsDrilled:LeadingStates 1. Texas.Nosurprisehere. 2. Oklahoma.Makessense. 3. Pennsylvania.O.K. 4. Ohio.Yep.274,733welldrilled.

•  Regulations

NaturalGas

•  Characteristics

– “WetGas”(ethane,methane,propane,butane)

•  Geology

– “Conventional”Play

Shale

•  Geology

•  Domestic“Plays”– Haynesville(TX/LA)– Barnett(TX)– Fayetteville(AR)– MarcellusandUtica(OH/PA)

ShaleDrilling

•  HorizontalDrilling

•  “Fracking”

ShaleDrilling(Cont…)

•  EconomicsofShaleDrilling

– GreaterCost/ReturnfromTechnology

•  WhyOhio?– Shallowdepthofformations

– NGL’s

Shale“Plays”inOhio:Marcellus

•  Area:95,000squaremiles(estimated)– KY,MD,NJ,NY,OH,PA,TN,VA,WV

•  Depth:4,000–9,000feet

•  MostdrillinginPennsylvania

Shale“Plays”inOH:Marcellus(Cont…)

•  SoutheastCounties:

–  Belmont–  Carroll–  Columbiana–  Guernsey–  Harrison–  Jefferson–  Mahoning–  Monroe–  Noble–  Washington

•  ShallowerinOH(3,000–4,000feet)butthinner

Shale“Plays”inOH:Marcellus(Cont…)

•  Permits:2010(5);2011(11)

•  Permits:– Monroe=8–  Belmont=6

•  StatusofWells:–  Drilling=1–  Drilled=5–  Producing=3

Shale“Plays”inOH:Utica

•  Area:170,000squaremiles(estimated)– NY,KY,MD,OH,PA,TN,WV,VA(noNJ)

•  Depth:2,000–7,000feetbelowMarcellus

•  GeographicallymoreexpansiveandthickerthanMarcellus

Shale“Plays”inOH:Utica(Cont…)

•  ShallowerinOH(6,000–9,000feet)

•  ClosertoMarcellus(3,000vs.7,000feet)

•  MoreNGL’sandOilthanMarcellus

Shale“Plays”inOH:Utica(Cont…)

•  Permits:2009(1);2010(2);2011(147)

•  Permits:(Actionintheoverlap)– Carroll=47–  Jefferson=21– Columbiana=17– Mahoning=13– Noble=12– Guernsey=10

Shale“Plays”inOH:Utica(Cont…)

•  WhoisBuying?– ChesapeakeExplorationLLC=112

•  2477filingsinCarrollsince11/2010– AnadarkoE&PCo.LP=18

•  StatusofWells:–  Drilling=26–  Drilled=31–  Producing=4

UticaImpact

•  Economic•  Revenue/Taxes/Investment

–  ChesapeakeandHessCorpover1bil.each–  34billion(estimated)

•  Jobs(whereneededmost)(204,000estimated)•  State/Countiesaslessors?

•  Environmental/Political– ProposedmoratoriumuntilEPAstudydone– Groundwater/Earthquakes

OilandGasLeases•  Signingbonus

–  Recent:$2,000‐$4,000/acre

•  Royalties–  Production:usually12.5%(1/8)–  Delay–  Shut‐in(royaltyorrental)

•  Term–  Primary–  Secondary(“producing”“payingquantities”)

•  Pooling/MinimumAcreage

TitleDefects

•  OhioLaw–  Conveyance(deed;reserve;lease)

•  Mineralsseparatepropertyright(royaltytoo)•  Defaultrule:movewiththesurfacerights

–  Execution/Recording/Assignments•  RC5301.01;5301.09;1509.31

– Whatdoes“minerals”mean?

•  CurrentIssues–  Reservation(separatechain)=needtoreadthedocs– Mechanics’liens(RC1311.021)–  UCCliens(RC1309)

TitleDefects:CuresDormantMineralAct(RC5301.56)

Background:MarketableTitleAct(RC5301.47‐.56)

Doesnotapplyto: Coal Publicbodies

Rights“abandoned”and“vest”insurfaceownerifchainsilentfor20years

Chainnot“silent”if: Partofarecoded“titletransaction” Actualproduction/withdrawal Usedinundergroundgasstorage Adrillingorminingpermithasbeenissued Apreservationnoticehasbeenfiled Aseparatetaxnumberhasbeencreated

TitleDefects:Cures(Cont…)DormantMineralAct(Cont…)

Theprocedure/contentsofapreservationnoticearelaidoutinSubsectionC.

Theabandonmentprocedurehastwosteps:

1.  Servicenoticebycertifiedmailtothelastknownaddressoftheholder(ortheirsuccessors/assignees).Ifservicecan’tbemadethisway,publicationisused.TherequiredcontentsaredescribedinSubsectionF.

2. Fileanaffidavitwiththerecorderbetween30and60daysafterthenoticeisgiven.TherequiredcontentsaredescribedinSubsectionG.

Inresponsetothenotice,iftheholder(ortheirsuccessors/assignees)claimstheirinterest,thenithas60daystofilecertainthingswiththerecorderunderSubsectionH(1).Ifnot,thesurfaceownercanhavetherecordermemorializetheabandonmentinthechainoftitleunderSubsectionH(2).Itisthisfilingthatcreatestheabandonment.

TitleDefects:Cures(Cont…)LeaseForfeiture(RC5309.332)(breach)

When: Noproducingordrilling Lesseebreachedcovenantsinleaseorexpired

Servicenoticebycertifiedmailtothelastknownaddressofthelessee(ortheirsuccessors/assignees).Ifservicecan’tbemadethisway,publicationisused.Therequiredcontentsaredescribed.

Fileanaffidavitwiththerecorderbetween30and60daysafterthenoticeisgiven.Therequiredcontentsaredescribed.

Inresponsetothenotice,iftheholder(ortheirsuccessors/assignees)claimstheirinterest,thenithas60daystofilecertainthingswiththerecorder.Ifnot,thesurfaceownercanhavetherecordermemorializetheforfeitureontheleaseitself.Itisthisfilingthatcreatestheforfeiture.

TitleDefects:Cures(Cont…)

•  Lease“Expiration”(onitsownterms)–  EX.Noproductionin“payingquantities”

•  OSBAStandardsofTitleExamination(section4.4)

–  ProblemA:Shouldanoil,gasorcoalleasebeshownwhensatisfactoryevidenceisfurnishedthatrentalsareindefaultandthatmineralsarenotbeingproduced?

–  StandardA:No,providedfurtherthattheprimarytermoftheleasehasexpired.

TitleDefects:Cures(Cont…)•  Superpriority(R.C.1509.31(D))(effective6/30/10)

–  Preservesoilandgasleases(etc)frombeingextinguishedinaforeclosure

–  Onlyifrecordedafterthemortgage

•  NewexceptionforScheduleBinloanpolicies: “OilandGasleases,pipelineagreements,oranyotherinstruments

relatedtotheproductionorsaleofoilornaturalgaswhichmayarisesubsequenttotheDateofPolicy.”

AdditionalResources

•  OhioDepartmentofNaturalResources:DivisionofMineralResourcesManagement

•  OhioStateUniversity:TheSubsurfaceEnergyResourceCenter

•  Geology.com

•  TheOhioEnvironmentalProtectionAgency

•  TheOhioOilandGasAssociation

•  OhioOilandGasEnergyEducationProgram

•  U.S.DepartmentofEnergy/EnergyInformationAgency

•  U.S.GeologicalSurvey

SUBJECTTOTHEEXCLUSIONSFROMCOVERAGE,THEEXCEPTIONSFROMCOVERAGECONTAINEDINSCHEDULEB,ANDTHECONDITIONS,NORTHAMERICANTITLEINSURANCECOMPANY,aCaliforniacorporation(the"Company"),insures,asaDateofPolicyand,totheextentstatedinCoveredRisks9and10,afterDateofPolicy,againstlossordamage,notexceedingtheAmountofInsurance,sustainedorincurredbytheInsuredbyreasonof:

1.…………..2.AnydefectinorlienorencumbranceontheTitle………..

Underwriter’sfouroptions

5.DEFENSEANDPROSECUTIONOFACTIONS•  Litigateorlegalacttoresolve.7.  OPTIONSTOPAYOROTHERWISESETTLECLAIMS;TERMINATIONOFLIABILITY

•  Paypolicylimittoinsured.

•  Payfairmarketvalueoflosstoinsured.•  Paymoneydirectto3rdpartytoresolve.

Whoisqualifiedtocalculateorcomputetheamountofloss?

•  EvidR702Testimonybyexperts

•  Awitnessmaytestifyasanexpertifallofthefollowingapply:•  Thewitness'testimonyeitherrelatestomattersbeyondtheknowledgeorexperiencepossessedbylay

personsordispelsamisconceptioncommonamonglaypersons;

•  Thewitnessisqualifiedasanexpertbyspecializedknowledge,skill,experience,training,oreducationregardingthesubjectmatterofthetestimony;

•  Thewitness'testimonyisbasedonreliablescientific,technical,orotherspecializedinformation.Totheextentthatthetestimonyreportstheresultofaprocedure,test,orexperiment,thetestimonyisreliableonlyifallofthefollowingapply:

•  Thetheoryuponwhichtheprocedure,test,orexperimentisbasedisobjectively•  verifiableorisvalidlyderivedfromwidelyacceptedknowledge,facts,orprinciples;•  Thedesignoftheprocedure,test,orexperimentreliablyimplementsthetheory;

•  Theparticularprocedure,test,orexperimentwasconductedinawaythatwillyieldanaccurateresult

HowManyMAIsareinOhioandhowmanyLicensed

AppraisersareinOhio?•  TheAppraisalInstituteoffers3differenttypesofdesignations(i.e.MAI,SRPA,andSRA).Youareableto

getalistofprofessionalsinOhiowithanyofthese3designationsfromtheAIwebsite.Iprintedoffall3listswithadescriptionofthedesignation(seeattachedfolder).Tosummarize,inOhio,thereare:

•  137MAIs;

•  16SRPAs;•  157SRAs•  Ohiooffers3typesofappraiserlicenses/certifications(i.e.“State‐certifiedgeneralrealestateappraiser,”

“State‐certifiedresidentialrealestateappraiser,”and“State‐licensedresidentialrealestateappraiser”).ThesearedefinedinR.C.4763.1(K,L,M)(Seeattachedfolder).Thereisawebsitecalled“OhioDepartmentofCommerceOnlineLicensingwebsite.”Thiswebsitehasacomprehensivelistingofalllicensedrealestateprofessionalsinthestate,includingappraisers.YoucandownloadanExcelSpreadsheetandsortthroughprofessionalsbydesignation,activestatus,etc(note:Ihaveasavedspreadsheetonmydesktopbutdidn’tprintitbecauseitwastoolong).Doingthis,Imadethefollowingfindings:

•  Thereareapproximately738Active“State‐certifiedgeneralrealestateappraisers”inOhio(includesthosewithtemporaryandreciprocallicenses)

•  Thereareapproximately1241Active“State‐certifiedresidentialrealestateappraisers”inOhio(includesreciprocallicenses)

•  Thereareapproximately790Active“State‐licensedresidentialrealestateappraisers”inOhio(includesreciprocallicenses)

•  OrCombingthethreetypes,thereareatotalof2769AppraiserProfessionalsbasedonthisdatabase

AppraisalMethodology

Highestandbestuseisdefinedas:

1.Thelegalpermissibilityoftheintendedimprovements.2.ThePhysicaladaptabilityofthesite.

3.Theeconomicfeasibilityoftheintendedimprovements.4.Theeconomicprofitabilityoftheintendedimprovementsin

termsoftheircapabilitytogeneratethegreatestamountofnetincometothesite.

AppraisalInstitute,TheAppraisalofRealEstate,ThirteenthEdition(AppraisalInstitute,550WestVanBuren,Chicago,Illinois60607,2008)277.

ValuationProcedure

•  Threegenerallyacceptedtechniquesavailableforestimatingthevalueofrealestate.

1.  CostApproach‐estimatingthereproductionorreplacementcostnew.

2.  IncomeCapitalizationApproach‐Measurevaluebyestimatingthepresentworthofanyanticipatedfutureincomestreamtobegeneratedbyaproperty.Oneyear’sincomeexpectancycanbecapitalizedatamarketderivedcapitalizationratethatreflectsaspecifiedincomepattern,returnoninvestment,andchangeinthevalueoftheinvestment.

3.  SalesComparisonApproach‐Salesofsimilarpropertiesareresearchedandadjustedbasedupontheircomparabilitytothesubjectproperty.

AssetValuation

Return(Howmuchinterestisexpectedfor

anassetrisk?)

Capitalization

(Howmuchwouldyoupayforastreamofpayments?)

ExhibitA.PlatMapofGileadTownship,MorrowCounty,Ohio

ExhibitB.CloseupofPlatMapShowingLocationofTractinquestion

ExhibitC.WellLocationMap.TractinQuestionLocatedHere

ExhibitD.CrossSectionMapshowingErosionalRemnantsalongKnoxUnconformityinOhio

ExhibitE.TheOilProductionfortheWellsLocatedintheYellowCirclerangeform40,000BOto70,000BO.Thedryholesthatweredrilledalongthegreenovaltrend

contained>40feetofGlenwoodShale.TractinQuestionisredcircle.

ExhibitF.OldShotPointBaseMapShowsLocationofSeismicandPossibleOilWelllocatedontheTractinQuestion

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Columbus,OH43215

(614)228‐6888

JimHavens

AdamSchwartz