First, a Look Back at 2011

The first production from Ohio’s Utica Shale was realized in 2011 and reported on March 31, 2012. That data showed that merely nine Utica wells were in production during some part of 2011 — all drilled by Chesapeake Appalachian, LLC. Six of those wells were located in Carroll County. The remaining data came from wells in Portage, Harrison and Mahoning counties.

Though none of those nine wells were in production for all of 2011 (all but two were in production for less than six months), combined they still produced 2.56 billion cubic feet of natural gas and 46,326 barrels of oil, which amounted to 3.5% of the state’s overall gas production and 1% of oil production for that year. These are impressive statistics considering that Ohio had more than 50,000 conventional (vertical) wells reporting production in 2011.

“Staggering” 2012 Production Results

On May 16, 2013, ODNR released production results for 2012. There were 87 wells in production for at least part of 2012. Not only has the number of wells expanded since 2011, so has the number of companies drilling those wells and the area in which those wells were drilled. The wells reportedly in production in 2012 were drilled by 12 different operators across 18 counties throughout the eastern half of Ohio.

So how were the results? In the words of ODNR Director James Zehringer, “staggering.” ODNR data shows that the 87 horizontal Utica wells produced 635,896 barrels of oil and 12,836,662 mcf of gas (that’s nearly 13 billion cubic feet of gas). That equates to 12% of Ohio’s total oil production and 16% of its gas production in 2012.

These numbers truly are staggering when you keep in mind that Ohio still has about 50,000 active conventional wells and that none of the Utica wells were in production for all of 2012. In fact, 85% (74 wells) of the Utica wells were in production for less than six months and 37% (32 wells) were in production for less than one month. To put this in perspective, ODNR estimates that a single horizontal Utica shale well will produce as much oil as 312 conventional wells and as much gas as 448 conventional wells.

Looking Behind the Numbers

It is important to understand what is, and is not, reflected in the production data. Foremost, the general terms “oil” and “gas” can be misleading to anyone who does not understand the Utica shale play. Utica “oil” is lighter than Brent or even WTI crude oil traded on world exchanges, which means it will not be able to command as high a price. However, Utica “gas” is much more valuable than the natural gas or dry gas traded on the world market because it has a much higher Btu content than dry gas.

While some skeptics have recently decried the Utica shale play, it is apparent that many of those skeptics do not appreciate what the industry has long understood about the play: the value is in the gas. Natural gas liquids can be separated from the rich Utica shale gas and sold for 40% to 60% of the price of a barrel of oil.

Ohio law does not require operators to report the Btu content of their gas but it is clear that operators are excited about their results in Ohio. ODNR reports that as of May 14, 2013 there were 31 active drilling rigs in Ohio and permitting and drilling continues to grow. There were 215 wells drilled in 2012. Another 111 wells were drilled in roughly the first four months of 2013. There are 27 different companies registered with ODNR focused on the Utica shale. With all of this activity, ODNR expects Utica shale wells to out-produce conventional wells in Ohio by 2015.

The data also shows how the play is evolving. When the play first began, much attention was focused in Columbiana, Carroll and Mahoning counties. But, the new production numbers show the reason for the recent interest in the southern portion of the play: oil! The following map helps visualize 2012 production by volume and product (click image to view larger): 

Source: MacKenzie Land & Exploration, Ltd.

What Else Did We Learn?

First, Ohio needs infrastructure. All this oil and gas needs a place to go and a way to get there. Pipelines and processing facilities are being built fast, but right now wells are being drilled faster. The single biggest thing holding back the potential of the Utica shale is lack of pipelines and processing facilities. This lack of infrastructure is the reason so few wells were in production in 2012 — there is simply no good way to get the product to market or to separate the valuable natural gas liquids.

Second, ODNR supports higher severance taxes and quarterly production reporting. The production results news conference conducted by ODNR gave us some insight into ODNR’s position on hot topics in the industry. At that news conference ODNR made clear that it supports the Governor’s plan to boost severance taxes and also believes that quarterly reporting of production results would be beneficial.

Now What?

The real proof of the Utica shale will be slow to develop. The most telling figures will be full year production results when production is not constrained by pipeline capacity problems. This data may not be available for any wells for another year or two. Will Utica shale wells have production curves similar to what we see in the Marcellus or Eagle Ford shale? Time will tell but right now, the Utica shale continues to look very promising.

Who owns the minerals under bodies of water? When oil and gas were being produced in meager quantities, not many people cared. But the story is different when lease bonuses are thousands of dollars per acre and royalties could be worth millions. Now, every acre in eastern Ohio is cast in a different light and suddenly there is enormous interest in figuring out who owns the minerals beneath Ohio’s lakes, rivers, ponds, streams and reservoirs. The following press release helps drive home the point about what is at stake:

The Muskingum Watershed Conservancy District today approved a $40.3 million natural gas lease for 6,500 acres at Seneca Lake in Guernsey and Noble counties.

The lease with Colorado-based Antero Resources was approved 5-0 by the district’s commissioners, despite continued protests from a grassroots group, the Southeast Ohio Alliance to Save Our Water.

The district will be paid a leasing bonus of $6,200 per acre plus a royalty of 20 percent on natural gas, oil and natural gas liquids from Antero wells under district-owned land, said district spokesman Mark Swiger.

That makes the district that stretches from southern Akron to the Ohio River one of the biggest beneficiaries of the Utica shale boom in eastern Ohio. It will get $77.4 million for the Antero lease and two earlier leases at other lakes. Additional and significant royalty income is also expected from the wells at the three sites.¹

Though it is clear that there is much at stake, figuring out who owns mineral rights under bodies of water has sometimes proven difficult.

Ohio Law: Background

Riparian Rights

The Ohio Department of Natural Resources (ODNR) has explained riparian rights as follows:

There are two components to a stream, the water flowing in it and the land beneath the water. Water is a “public good” and not ownable as private property. Landowners do have rights to make use of the water flowing through their property including the right to withdraw it and otherwise control it to the extent that nature permits, so long as the rights of others are not infringed upon. Such rights are known as “riparian rights,” meaning they are derived through the ownership of streamside property.²

English Common Law — “… to the middle of the stream”

Regarding ownership of land under a stream, English common law provided that the soil beneath tidal waters, the seashores and banks thereof, was vested in the crown. The soil beneath the non-tidal rivers and streams was vested in the adjacent landowners if the land had been granted. It is noted that even non-navigable tidal waters such as tidal marshes were owned by the crown. All non-tidal rivers that were navigable in fact were subject to a right of public passage, but could be owned privately. See Saffer, Ownership of Minerals Underlying Rivers and Streams, Railroads and Public Roads in Marcellus and Utica Share Development States (hereafter “Saffer”), 1, presented to the Energy and Mineral Law Foundation (2012).

Ohio Has Adopted the English Common Law Rule.

The Ohio Supreme Court applied English common law more than 180 years ago in a case arising from the construction of a dam on the Sandusky River. Faced with an argument that the riverbed was owned by the government — not an abutting property owner — the court responded:

We do not believe that it was the intention of the United States to reserve an interest in the bed, banks, or water of the rivers in the state, other than the use for navigation to the public, which is distinctly in the nature of an easement, and all grants of land upon such waters, we hold to have been made subject to the rule of the common law, which, in this case, is the plain rule of common sense. And it is this: He who owns the lands upon both banks, owns the entire river, subject only to the easement of navigation, and he who owns the land upon one bank only, owns to the middle of the river, subject to the same easement. This is the rule, recognized not only in England, but in our sister states.

(Emphasis added.) Admr’s. of Gavit v. Chambers, 3 Ohio 496, 498 (1828).

The Gavit holding has been applied consistently in modern times. For example, in a case involving construction in the Little Miami River, an Ohio appellate court held that the title of lands bordering on a navigable stream extends to the middle of the stream. State ex rel. Brown v. Newport Concrete Co., 44 Ohio App. 2d 121, 123-124, 336 N.E.2d 453(1st Dist.1975).

Later, in a 2001 quiet title action, there was a ditch, now a depression, used in an 1854 deed to describe the boundaries of abutting property. While the ditch as a monument to effect the boundary may have been unclear, the law was not:

Under Ohio law, as well as under the common law, “owners of lands situated on the banks of navigable streams running through [Ohio], are also owners of the beds of the rivers to the middle of the stream.” Of course, this rule applies where there is no express reference or grant beyond the boundary of the near bank. Where there is an express grant that goes beyond the near bank, the unambiguous language of the deed must be given effect, absent some other rule of law being applicable.

Here the appellees’ deed conforms to the common law rule and expressly grants title to the middle of the stream. However, the appellant’s deed expressly grants title to the low water mark of the far bank, i.e. the west bank. This express grant creates a conflict that cannot be resolved by simply applying the common law rule of Admr’s of Gavit, supra, to render that grant nugatory.

(Citations omitted.) Haynes v. Markel, 4th Dist. No. 01CA2587, 2001 Ohio App. LEXIS 5599, *10 (Dec.10, 2001).

Lakes, Ponds and Reservoirs

The subsurface ownership question has arisen less frequently with regard to lakes, ponds and reservoirs. This could be because the principles for streams are thought to apply, because there are relatively few inland lakes in Ohio, or because the issue simply has not presented itself in conjunction with conventional wells — which may change given the advent of horizontal drilling. But the Supreme Court of Ohio did provide some indication of how the issue would be addressed in a case decided in 1890. See Lembeck v. Nye, 47 Ohio St. 336, 24 N.E. 686 (1890). The plaintiff in Lembeck claimed that he owned the land under Chippewa Lake in Medina County, Ohio, as well as a narrow strip of land that surrounded the lake. The plaintiff brought a trespass action against the defendants, who operated resort-type buildings on the premises, constructed piers extending into the lake and rented boats. The Court found that the title to the lake and the lands enclosing it were susceptible of private ownership and that the plaintiff’s title stemmed from the title acquired by the land’s original owners. Id. at 347, 353.

Because the deed to the plaintiff did not describe the boundary of the lake as a limitation on the property conveyed, the Lembeck court applied the common law theory applicable to streams to determine who owned the lake. But, what makes the Lembeck case complicated, and instructive, is that the deeds from the original property owners fell into three classes:

1. Those in which the lake itself (but not the edge of the lake) is described in the deed as a boundary;
2. Those in which the “margin” of Chippewa lake is included in the description as a boundary; and
3. Those in which the lands conveyed are described by metes and bounds only with no reference to the lake.

For the first class of deeds, the court applied the common law rule applicable to steams, i.e., to the center of the water body: “[P]ublic policy and the presumed intention of the parties will extend the line [to that point].” Id. at 351.

As for the second class of deeds, the court found that, “by the use of these words [expressing that the margin of the lake is a boundary] the parties have declared their intention to make, not the middle, but another part of the lake — the edge of the water — the boundary line.” Id. The Court stated that “[n]o other construction can be given to the words the parties themselves have chosen, without doing violence to their meaning; and an intention contrary to the one expressed by the very words selected by the parties themselves cannot be presumed.” Id.

The defendants in Lembeck held deeds in the third class described above — those that contained only a metes and bounds description with no mention of the lake. As to those deeds, the court held, “[i]n descriptions of this class only the lands within the bounds pass.” Id. at 352. “Indeed, where the parties have by their deed enclosed the land by agreed lines, without any reference whatever to adjacent natural objects, it is difficult to conceive of a principle that would extend those lines to include those natural objects, however convenient they might be to the enjoyment of the land actually conveyed.” Id.

Thus, with the exception of the first class of deeds, where title to abutting land was found to extend to the middle of the lake, the original property owners, and the plaintiff as their successor in title, owned the lakebed. Therefore, the court said:

There should be a decree, therefore, finding, that as against the defendants herein, the plaintiff … is the owner in fee simple and entitled to the exclusive possession of all the lands underlying the waters of Chippewa Lake except those parts thereof that … were conveyed by the [original property owners] to [purchasers whose deeds did not include the lake as a boundary], and restraining the defendants from letting to hire either boats or fishing tackle, to be used on the water overlying the lands so found to belong to him. Id. at 355.

This 1890 case has not been distinguished, embellished upon or even cited in the last 120 years and, therefore, remains good law. The court went out of its way to give effect to the words in the deeds and, when adopting the common law of streams, relented to symmetry and pragmatism.

The lesson learned with regard to lakes and ponds, say, in the case of a residential subdivision that includes a pond, is that one will have to pay special attention to documents that describe the subdivision — especially when the water body is surrounded by privately owned lots. Ownership of a body of water may have been vested in an owners’ association as a common area or may have been retained by the developer. In the absence of either scenario, and absent a deed falling within either class 2 or 3 described above, the lakebed and its mineral interest would be owned by the abutting lot owners, and ownership for each would extend to the center of the water body.
_________________________

¹ Downing, District to get $40.3 million for Seneca Lake drilling lease, Akron Beacon Journal Online (Feb. 15, 2013), (last accessed May 8, 2013).

² (Footnote omitted.) Ohio Department of Natural Resources, Ohio Stream Management Guide No. 2 “Who Owns Ohio’s Streams?,”  (last accessed May 8, 2013).

Different states have answered this question in different ways, and the answer is not yet clear in Ohio. But the characterization under Ohio law is critically important in federal bankruptcy law, as Andy Nicoll discusses in his recent post on the Banking & Finance Law Report blog. It is worth the read.

What Is Unitization?

Unitization is the creation or designation of a contiguous area of land, called a “unit,” for the efficient development of the oil and gas resources underlying that land. Units can be formed by order of the Ohio Department of Natural Resources (ODNR), on application from an operator. Units also can be formed voluntarily by consent of interest owners, usually owners of the leasehold. Inevitably, the land sought to be unitized — really the geologic formation below the surface — is subject to a patchwork of different ownership interests. The operator attempts to negotiate lease rights with all such land or mineral rights owners, but it is often the case that the operator cannot reach an agreement with all of them. When an operator has the consent of all but a small portion of the land for a unit, Ohio law allows the operator to apply for ODNR to compel the non-consenting interest owners to join the unit.

Unitization is a close relative of mandatory pooling, in that mineral rights owners who are unwilling to lease their rights for drilling operations are compelled to cooperate by ODNR. The difference lies in the size of the unit. Mandatory pooling is about gathering sufficient land to meet minimum spacing requirements set by law to create a “drilling unit” of 40 acres or less, depending on the total depth of the well. Unitization, on the other hand, is about gathering all the mineral rights for a specific portion of oil and gas resources and bringing its development under common control. In the context of drilling in the Utica Shale, this creates units hundreds of acres in size.

A New Context: What Is a “Pool” These Days?

Before going further, we should clarify a key term. ODNR issues unitization orders in relation to a “pool” of oil or gas. To obtain a unitization order, the owners of at least 65% of the land overlying a pool must apply to ODNR to have the pool, or part of it, operated as a unit. R.C. §1509.28. Usually, it is the operator who makes the application pursuant to the authority granted to him in the leases. A “pool” as used here, is distinct from mandatory pooling (we’ve discussed these confusing terms before). A “pool” is defined in the Revised Code as “an underground reservoir containing a common accumulation of oil or gas, or both, but does not include a gas storage reservoir.”

Herein lies the new application of an old law. Passed in 1965, Ohio’s unitization law predates the advent of horizontal drilling methods. A “pool” as defined in 1965 fits with the idea of liquid contained in a geologic trap susceptible to conventional drilling. A “pool” was just that: an underground reservoir of oil or gas, sloshing around in liquid or gaseous form usually within a sandstone formation. In the context of unconventional — i.e., horizontal — drilling, the concept of a pool has broadened to include geologic formations of source rock such as shale.

Qualifying for a Unitization Order: Is Unitization Necessary to Increase Recovery?

To obtain an order, the operator must present evidence that the proposed unit qualifies under the statutory legal standard. This legal standard is whether or not the proposed unit is “reasonably necessary to increase substantially the ultimate recovery of oil and gas, and the value of the estimated additional recovery of oil or gas exceeds the estimated additional cost [of operating the unit].” R.C. §1509.28. The applicants must prove that having control of a large area is important enough to justify compelling unwilling mineral owners to cooperate.

In support of unitization applications, operators point out that the oil and gas resources lying in shale rock formations are not economically viable with vertical drilling methods. “It is unlikely that vertical development of the unit would ever take place,” wrote Chesapeake in its Colescott South application. Application for Unit Operation, Colescott South Unit, at 6. However, horizontal drilling brings a certain efficiency to bear that allows shale oil and shale gas to be economically produced, with less impact to the surface of the land.

But accessing the oil and gas using horizontal drilling methods requires space, and a lot of it. To be profitable, horizontal shale drilling requires large, uninterrupted areas of mineral rights. Drilling units of the size commonly associated with vertical wells are too small — they won’t produce enough to be profitable and they aren’t large enough to drill horizontally in the first place. The most efficient horizontal shale drilling techniques use horizontal well bores or “laterals,” which may extend one or two miles from the well pad. In its application for the Colescott South Unit, Chesapeake argued that “oil and gas recovery from horizontal drilling methods is directly related to the length of the [horizontal] lateral — limit a lateral’s length and you limit its ultimate recovery.” Id. Chesapeake presented evidence that its proposed unit, which would grant Chesapeake rights to 75 extra acres (a 12% increase), would result in a 48% increase in oil and gas recovery. Id.

Further, to maximize economic efficiencies and reduce potential environmental impacts and surface disturbance, operators frequently drill multiple laterals from a single well pad. Chesapeake’s Colescott South Unit, depicted at right, shows three laterals extending from one well pad but it is not uncommon for an operator to drill as many as eight laterals from one pad. 

Because the law imposes spacing requirements between wells (the laterals) and from each well to the boundary of the unit (generally, an operator must allow 1,000 feet between wells and 500 feet to the boundary of the unit, unless a variance is granted), in this case 549 acres are necessary to accommodate the three laterals in the unit shown at right. Chesapeake negotiated leases of the mineral rights underlying all but five tracts, which are shaded in red. Because the owner of the five shaded tracts would not lease, Chesapeake applied for — and was granted — a Unitization Order forcing these tracts into the unit. Order No. 2013-06, Order for Unit Operations of the Utica/Point Pleasant Formations for the Colescott South Unit, Carroll County, Ohio, March 7, 2013.

The Unitization Order

If ODNR is satisfied that a proposed unit meets the legal standard and is necessary for increased recovery, it will issue a unitization order. The order is required by statute to “be upon terms and conditions that are just and reasonable,” and must contain certain descriptions of the unitized area, the dates for drilling operation to begin and terminate, and the nature of the drilling operations. R.C. §1509.28(A).

Operators and the forced-in mineral owners pay particular attention to one part of the order — the money/payment provisions. Because the mineral owner never agreed to a lease, ODNR determines the terms by which the mineral owner is included in the unit operations, including the royalty interest, working interest and risk penalty. The terms of the order will differ as the situation dictates.

In two orders issued to Chesapeake, each forced-in mineral owner received a 1/8 royalty interest, which commences upon production, and a 7/8 net production revenue interest that begins to pay out only after the operator recovers 200% of the cost of drilling and operation for the first well and 150% of the costs of any subsequent wells. For two orders issued to BP, because the chance of production was perceived as riskier, ODNR raised the risk penalty to 300% of costs for both initial and subsequent wells, but awarded the mineral owners a 15% royalty interest and 85% of net production revenue. One of the ODNR orders also required BP to pay the mineral owners a one-time payment, akin to a privately negotiated signing bonus.

In addition, the BP orders provide for forcing in “uncommitted working interest owners” — i.e., non-operating leasehold owners. ODNR compelled these leasehold owners to participate as if they had signed an operating agreement with BP. Here, too, ODNR prescribed a 300% risk penalty for the first and subsequent wells if the working interest owner cannot meet their financial obligations, i.e., to pay in their share of the cost up front.

Unitization as a Policy: Correlative Rights and Balancing Interests

As with mandatory pooling, unitization relies on the principle of correlative rights as a restraint on the rule of capture. The correlative rights doctrine (explained in Part 1), prevents a few recalcitrant landowners from standing in the way of development of their neighbor’s natural resources. In the Colescott South Unit, for example, Chesapeake had voluntarily acquired rights to 88% of the proposed unit. The doctrine dictates that the other 12% (who were mostly non-responsive, rather than overtly unwilling) should not be allowed to prevent the majority from reaping the benefits of the minerals owned by the majority.

But correlative rights works both ways: The same doctrine motivates ODNR to award “just and reasonable” royalty interests to the mineral owners who were forced into the unit. By relying on the correlative rights doctrine, unitization is ultimately a balancing of interests. In looking for the right balance, Ohio has found new use for an old law.

As we discussed after the last order was released, this statute is becoming a valuable tool for operators as they cobble together the rights to drill horizontal production wells. In the early stages of the Utica shale play, each new unitization order is noteworthy for operators who are trying to plan drilling units and to help companies evaluate their lease holdings.

The process of unitization is conceptually related to mandatory pooling (R.C. § 1509.27), and is part of our ongoing blog series on Ohio’s compelled participation laws. (Read part 1 and part 2.). A unitization order allows oil and gas operators to join, or unitize, recalcitrant mineral owners to create large tracts of land — often comprising hundreds of acres — necessary to profitably and efficiently produce hydrocarbons from shale formations while protecting each owner’s correlative rights.

On March 28, the Chief of the Division of Oil and Gas Resources Management (DOGRM — the oil and gas wing of ODNR) issued two orders to BP America Production Company (BP): the Lennington Unit and the Zerovich Unit.

The Lennington Unit: 500.13 acres/ 38 tracts / Trumbull County

In granting an order for the Lennington Unit, DOGRM encountered a new situation. BP had successfully negotiated lease agreements with owners of 30 tracts within the proposed unit comprising 93% of the total acreage in the unit. But unlike prior orders granted to Chesapeake (Rufener and Colescott South), the other eight tracts in the Lennington unit are already leased by operators, specifically EnerVest and Braxton Acquisitions, LLC. BP was unable to secure a joint operating agreement with the other operators so it applied to unitize their mineral rights in the Lennington Unit. In forming the unit, DOGRM forced the already leased tracts to take a working interest in the proposed unit, calling them “uncommitted working interest owners.”

The Lennington Order requires the uncommitted working interest owners to share in all charges, credits, and expenses for wells, tanks, pumps, machinery, materials, equipment and all other unit operation expenses. If those uncommitted working interest owners do not contribute their share, BP is required to carry them but may assess a risk penalty of 300% of such costs before distributing their working interest payments.

(Order for Unit Operations of the Utica/Point Pleasant Formations for the Lennington Unit, Trumbull County, Ohio. Order No. 2013-10, March 28, 2013.)

The Zerovich Unit: 653.78 acres / 61 tracts / Trumbull County

The Zerovich Unit is a hybrid order: part unleased mineral owners, part uncommitted working interest owners. The uncommitted working interest owners — Halcon and Blackridge — were given the same terms as in the Lennington Unit. Specifically, they are joined as working interest owners in the unit, and subject to a 300% risk penalty if they do not pay their share of expenses.

The unleased mineral owners were awarded royalty interest payments of 15% of gross income, and a 85% share of net production revenue. The net production revenue will begin to pay out only after BP recovers 300% of the costs for the first well and any subsequent wells.

Interestingly, DOGRM also required BP to pay the unleased mineral owners a one-time payment (similar to a signing bonus for a lease) of $2,000 per acre. This marks the first time the DOGRM has found circumstances that warranted payment of a “bonus payment” in conjunction with a unitization order. Time will tell whether this will become customary or if it will be reserved for unusual circumstances.

(Order for Unit Operations of the Utica/Point Pleasant Formations for the Zerovich Unit, Trumbull County, Ohio. Order No. 2013-11, March 28, 2013.)

These recent orders differ from prior orders in two notable ways. First, the risk penalty is increased to 300%. In previous orders, DOGRM established a risk penalty for nonparticipating unleased mineral owners of 200% for the first well and 150% of subsequent wells. Second, the royalty awarded to unleased mineral owners is increased to 15%. Prior orders awarded the unleased mineral owners 12.5% royalty interest.

In Mong v. Kovach Holdings, the plaintiff, Joseph Mong, sold approximately 70 acres of land near Warren, Ohio, he had recently acquired from Alice McMenamin to Defendant Kovach Holdings at auction. Mr. Mong apparently intended to reserve to himself the oil and gas rights associated with the property. According to Mr. Mong, the auctioneer informed the prospective purchasers of that reservation immediately preceding and subsequent to the auction. The auctioneer confirmed that he did so in a following affidavit. The purchaser of the property, Kovach Holdings, denied that that the auctioneer described any such limitations or reservations. The property sold for $245,300.

The parties shortly thereafter executed a standard purchase agreement, but which included the following handwritten language: “Gas + oil Royalty Reserved by Present owner.” Mr. Mong argued this language revealed that the oil and gas rights were not a part of the sale to Kovach Holdings. The problem, for Mr. Mong at least, was that the subsequent warranty deed by which Mr. Mong conveyed the property included no comparable language. It did, however, include merger language.

Mr. Mong filed a lawsuit with the Trumbull County Court of Common Pleas seeking to reform the warranty deed to conform to what he contended were the agreed upon terms of sale: just the land, not the mineral rights. Kovach Holdings unsurprisingly opposed the relief Mr. Mong sought, and submitted an affidavit which emphatically asserted that there had been no understanding there would be a reservation of oil and gas rights. The affidavit apparently did not address the handwritten language of the purchase agreement, and the court oddly made no mention of it. The parties filed cross motions for summary judgment.

The trial court denied Mr. Mong’s motion and granted Kovach Holding’s motion, meaning Mr. Mong lost whatever interest he ever had in the property’s oil and gas reservoirs. The court of appeals affirmed the trial court’s rulings. In support of its ruling, the appeals court noted that reformation of a contract is a limited remedy, available only when there is clear and convincing evidence that the executed document represented a mutual mistake by the parties, citing Wagner v. Natl. Fire Ins. Co., 132 Ohio St. 405, 412, 8 N.E.2d 144 (1937). See ¶¶ 20-21. The court was not persuaded that the evidence sufficiently supported Mr. Mong’s argument for mutual mistake. First, Kovach Holdings denied the warranty deed reflected a mistake — and also argued that the merger doctrine prevented Mr. Mong from even raising the issue. Thus, on the face of it, there was no mutual mistake. See ¶¶ 22-23.

Second, the court concluded that the handwritten language in the purchase agreement actually did not help Mr. Mong. As the court of appeals viewed it, the language in the purchase agreement providing that “the present owner” reserved the oil and gas rights did not refer to Mr. Mong at all, but to the owner who sold the property to Mr. Mong, Mrs. McMenamin: in essence she had reserved a life estate in oil and gas royalties for herself when she sold the property to Mr. Mong. See ¶ 24. Notwithstanding the fact that Mr. Mong did own an alienable future interest in the oil and gas rights, the court of appeals deemed that Mrs. McMenamin remained the “present owner” of the oil and gas rights.

Consequently, any reference in the purchase agreement to a reservation of rights with respect to oil and gas on the property referred to Mrs. McMenamin and not Mr. Mong. Thus, the court concluded, the language of the purchase agreement did not constitute evidence in support of Mr. Mong’s cause. As the court explained: “we are bound by the rule of construction that a ‘conveyance is to be construed most strongly as against the grantor, or in favor of the grantee.’ (Citation omitted.) Pure Oil Co. v. Kindall, 116 Ohio St. 188, 203, 156 N.E. 119 (1927). ‘Applying this rule, an exception or reservation in a conveyance is construed in favor of the grantee rather than of the grantor.’ Id.” ¶ 27. Accordingly, summary judgment and the oil and gas rights went to Kovach Holdings.

Perhaps some would argue this decision is inequitable and may not accurately reflect Ohio law. Who knows. Difficult cases can effect confounding conclusions. But whether the decision is correct or not, it offers a poignant reminder that those involved in the conveyance of real property involving or excluding mineral rights must make sure that the language in purchase and sale documents precisely reflects the parties’ unambiguous intentions. It is an old saw, but a true one. Trouble brews otherwise.