Stewart Title Guaranty Company 2012 Fall Seminar Ohio Mineral - - PowerPoint PPT Presentation

Stewart Title Guaranty Company 2012 Fall Seminar Ohio Mineral Rights Update

Presented on November 12, 2012 Columbus, Ohio

141 E. Town Street Suite 200 Columbus, Ohio 43215 (614) 228-6888 Fax (614)228-6878 Cell (614) 496-3500 jhavens@havenslimited.com www.havenslimited.com

Ohio Oil and Gas Industry Overview

• Number of Wells Drilled:

1. Texas. 2. Oklahoma.

• First oil well in 1860; Gas discovered in 1880’s
• Regulations for permits and drilling:
• Ohio Department of Natural Resources.
• Ohio Division of Oil and Gas Resources Management.
• Updated by SB 315 (signed 6/12).

Natural Gas

• Market:

– U.S. = 87% from domestic sources. – Ohio = almost all from Ohio.

• Characteristics

– Mostly methane (65% - 95%). – “Wet Gas” (ethane, propane, butane).

• “Natural Gas Liquids” (NGL’s).
• More closely track oil prices.

Shale

• Geology of Shale rocks.

– Dead plants and animals + pressure + time. – Small pores. – Dense/low permeability (sidewalk cement).

• Drilling Methods.

– Conventional “Play”

• Tap into traditional reservoir of sandstone/limestone.

– Unconventional “Play”

• Tap into deeper source rock, like Shale.
• Also “tight sands” and coal bed methane

Shale Drilling

• Key: Horizontal Drilling + Fracking
• Horizontal Drilling.

– Traditional vertical well until kick off point. – Horizontal leg can be 4,000 – 8,000 feet.

• = like drilling two wells

– More costly = need greater return – Bigger “pay zone” than vertical – Less surface impact (6 replaces 30).

Shale Drilling (Cont…)

• “Fracking”/ “fracing”

– Slang for hydraulic (water) fracturing. – Use water/sand to break up the shale.

• Horizontal + Fracking

– 3-10 times more expensive. – 20 times more productive.

Shale “Plays” in Ohio: Marcellus

• Area: 95,000 square miles over 9 states.

– KY, MD, NJ, NY, OH, PA, TN, VA, WV.

• Depth: 4,000 – 9,000 feet.
• Most drilling in Pennsylvania.

Shale “Plays” in OH: Marcellus (Cont…)

• Southeast Counties:

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

• Shallower in OH (3,000 – 4,000 feet) but thinner than in NY/PA.

Shale “Plays” in OH: Marcellus (Cont…)

• Permits: 2010 (4); 2011 (5); 2012 (3)
• Permits:

– Monroe = 7 – Belmont =6

• Status of Wells

– Drilled = 5 – Producing = 5

*As of 10/22/12 (Source: ODNR)

Shale “Plays” in OH: Utica

• Area: 170,000 square miles over 8 States.

– NY, KY, MD, OH, PA, TN, WV, VA (no NJ). – Almost double the size of Marcellus.

• Depth: 2,000 – 7,000 feet below Marcellus.

– Older = deeper

Shale “Plays” in OH: Utica (Cont…)

• Why Ohio?
• Shallower than other states = less costly

– 6,000 – 9,000 feet.

• Closer to Marcellus = more efficient

– 3,000 vs. 7,000 feet.

• More NGL’s than Marcellus and other States

– Natural gas prices down (irony). – This is why BP bought 80k acres in Trumbull.

Shale “Plays” in OH: Utica (Cont…)

• Permits: 2009 (1); 2010 (2); 2011 (147); 2012 (330)
• Permits: (Action in the overlap)

– Columbiana = 58 (21 drilled; 1 producing) – Harrison = 51 (6 drilled; 2 producing) – Jefferson = 31 (18 drilled; 1 producing) – Monroe = 18 (1 drilled; 1 producing) – Mahoning = 14 (1 drilled) – Portage = 14 (2 drilled; 1 producing) – Stark = 13 (4 drilled; 2 producing) – Noble = 13 (5 drilled; 2 producing) – Guernsey = 24 (4 drilled; 2 producing) – Belmont = 11 (3 drilled)

*As of 10/22/12 (Source: ODNR)

Shale “Plays” in OH: Utica (Cont…)

• Who is/was Buying?

– Chesapeake Exploration LLC.

– Spent 2 billion for 5% of Ohio’s land mass. – Trying to sell off parts of its 1.3 million acres.

• Status of Wells:

– Drilled = 75 – Producing = 33 (22 in Carroll).

– 2011: 9 producing wells (6 in Carroll). – Buell well in Harrison = 2% of Ohio gas production.

*As of 10/22/12 (Source: ODNR)

Utica Impact

• Economic
• Taxes (Kasich proposal)
• Investment by Energy, Manufacturing (Steel), Chemical
• Jobs
• Local budgets for fire/police
• Income (royalties)
• Government too
• Litigation
• Environmental

– Proposed moratorium until EPA study done – Groundwater – Earthquakes

It’s Political

Our experience with shale gas shows us that the payoffs on these public investments don’t always come right away. Some technologies don’t pan out; some companies fail. But I will not walk away from the promise of clean energy. The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between

• ur environment and our economy.

We have a supply of natural gas that can last American nearly one hundred years, and my Administration will take every possible action to safely develop this energy. Experts believe this will support more than 600,000 jobs by the end of the decade. And I’m requiring all companies that drill for gas on public lands to disclose the chemicals they use. America will develop this resource without putting the health and safety of our citizens at risk.

It’s Political

You cannot degrade the environment at the same time you’re producing this industry. It is not acceptable. . . . . But we cannot let our fears outweigh the potential. . . . . Billions of dollars worth of investment in this state— that’s all good, as well. And we have much work to do.

• Gov. Kasich: State of the State

Oil and Gas Leases

• Signing bonus.

– $2,000 - $6,000/acre.

• Royalties.

– Production: usually 12.5% (1/8) to 20%. – Delay. – Shut-in (royalty or rental).

• Term

– Primary (2-5 years). – Secondary (“producing” “paying quantities”).

• Pooling/Minimum Acreage.

Title Defects

• Generally

– Conveyance (deed; reserve; lease)

• Minerals separate property right (royalty too)
• Default rule: move with the surface rights
• Current Issues

– Reservations = need to read the docs. – Creates separate chain. – Handwriting and personalized language.

Title Defects: Cures

Dormant Mineral Act (RC 5301.56) Background: Marketable Title Act (RC 5301.47-.56) Does not apply to: Coal Public bodies Rights “abandoned” and “vest” in surface owner if chain silent for 20 years Chain not “silent” if: Part of a recoded “title transaction” Actual production/withdrawal Used in underground gas storage A drilling or mining permit has been issued A preservation notice has been filed A separate tax number has been created

Title Defects: Cures (Cont…)

Dormant Mineral Act (Cont…) The procedure/contents of a preservation notice are laid out in Subsection C. The abandonment procedure has two steps:

• 1. Service notice by certified mail to the last known address of the holder (or their

successors/assignees). If service can’t be made this way, publication is used. The required contents are described in Subsection F. 2. File an affidavit with the recorder between 30 and 60 days after the notice is given. The required contents are described in Subsection G. In response to the notice, if the holder (or their successors/assignees) claims their interest, then it has 60 days to file certain things with the recorder under Subsection H(1). If not, the surface

• wner can have the recorder memorialize the abandonment in the chain of title under

Subsection H(2). It is this filing that creates the abandonment.

Title Defects: Cures (Cont…)

• Superpriority (R.C. 1509.31(D)) (effective 6/30/10)

– Preserves oil and gas leases (etc) from being extinguished in a foreclosure – Only if recorded after the mortgage

• Potential new exceptions for Schedule B:

– “Oil and Gas leases, pipeline agreements, or any other instruments related to the production or sale of oil or natural gas which may arise subsequent to the Date of Policy.” – “Coal, oil, natural gas, or other mineral interests and all rights incident thereto now or previously conveyed, transferred, leased, excepted or reserved.”

Title Defects: Cures (Cont…)

• Lease “Expiration” (on its own terms)

– EX. No production in “paying quantities”

• OSBA Standards of Title Examination (section 4.4)

– Problem A: Should an oil, gas or coal lease be shown when satisfactory evidence is furnished that rentals are in default and that minerals are not being produced? – Standard A: No, provided further that the primary term of the lease has expired.

Title Defects: Cures (Cont…)

Lease Forfeiture (RC 5309.332)(breach)

When: No producing or drilling Lessee breached covenants in lease or expired Service notice by certified mail to the last known address of the lessee (or their successors/assignees). If service can’t be made this way, publication is used. The required contents are described. File an affidavit with the recorder between 30 and 60 days after the notice is given. The required contents are described. In response to the notice, if the holder (or their successors/assignees) claims their interest, then it has 60 days to file certain things with the recorder. If not, the surface owner can have the recorder memorialize the forfeiture on the lease itself. It is this filing that creates the forfeiture.

Additional Resources

• Ohio Department of Natural Resources: Division of Mineral Resources Management
• Ohio State University: The Subsurface Energy Resource Center
• Geology.com
• The Ohio Environmental Protection Agency
• The Ohio Oil and Gas Association
• Ohio Oil and Gas Energy Education Program
• U.S. Department of Energy/ Energy Information Agency
• U.S. Geological Survey

SUBJECT TO THE EXCLUSIONS FROM COVERAGE, THE EXCEPTIONS FROM COVERAGE CONTAINED IN SCHEDULE B, AND THE CONDITIONS, NORTH AMERICAN TITLE INSURANCE COMPANY, a California corporation (the "Company"), insures, as a Date of Policy and, to the extent stated in Covered Risks 9 and 10, after Date of Policy, against loss or damage, not exceeding the Amount of Insurance, sustained or incurred by the Insured by reason of:

• 1. …………..
• 2. Any defect in or lien or encumbrance on the Title………..

Underwriter’s four options

• 5. DEFENSE AND PROSECUTION OF ACTIONS
• Litigate or legal act to resolve.
• 7. OPTIONS TO PAY OR OTHERWISE SETTLE CLAIMS; TERMINATION OF LIABILITY
• Pay policy limit to insured.
• Pay fair market value of loss to insured.
• Pay money direct to 3rd party to resolve.

Who is qualified to calculate or compute the amount of loss?

• Evid R 702 Testimony by experts
• A witness may testify as an expert if all of the following apply:
• The witness' testimony either relates to matters beyond the knowledge or experience possessed by lay

persons or dispels a misconception common among lay persons;

• The witness is qualified as an expert by specialized knowledge, skill, experience, training, or education

regarding the subject matter of the testimony;

• The witness' testimony is based on reliable scientific, technical, or other specialized information. To the

extent that the testimony reports the result of a procedure, test, or experiment, the testimony is reliable

• nly if all of the following apply:
• The theory upon which the procedure, test, or experiment is based is objectively
• verifiable or is validly derived from widely accepted knowledge, facts, or principles;
• The design of the procedure, test, or experiment reliably implements the theory;
• The particular procedure, test, or experiment was conducted in a way that will yield an accurate result

How Many MAIs are in Ohio and how many Licensed Appraisers are in Ohio?

• The Appraisal Institute offers 3 different types of designations (i.e. MAI, SRPA, and SRA). You are able to

get a list of professionals in Ohio with any of these 3 designations from the AI website. I printed off all 3 lists with a description of the designation (see attached folder). To summarize, in Ohio, there are:

• 137 MAIs;
• 16 SRPAs;
• 157 SRAs
• Ohio offers 3 types of appraiser licenses/certifications (i.e. “State-certified general real estate appraiser,”

“State-certified residential real estate appraiser,” and “State-licensed residential real estate appraiser”). These are defined in R.C. 4763.1 (K, L, M) (See attached folder). There is a website called “Ohio Department of Commerce Online Licensing web site.” This website has a comprehensive listing of all licensed real estate professionals in the state, including appraisers. You can download an Excel Spreadsheet and sort through professionals by designation, active status, etc (note: I have a saved spreadsheet on my desktop but didn’t print it because it was too long). Doing this, I made the following findings:

• There are approximately 738 Active “State-certified general real estate appraisers” in Ohio (includes those

with temporary and reciprocal licenses)

• There are approximately 1241 Active “State-certified residential real estate appraisers” in Ohio (includes

reciprocal licenses)

• There are approximately 790 Active “State-licensed residential real estate appraisers” in Ohio (includes

reciprocal licenses)

• Or Combing the three types, there are a total of 2769 Appraiser Professionals based on this database

Appraisal Methodology

Highest and best use is defined as:

• 1. The legal permissibility of the intended improvements.
• 2. The Physical adaptability of the site.
• 3. The economic feasibility of the intended improvements.
• 4. The economic profitability of the intended improvements in

terms of their capability to generate the greatest amount of net income to the site.

Appraisal Institute, The Appraisal of Real Estate, Thirteenth Edition (Appraisal Institute, 550 West Van Buren, Chicago, Illinois 60607, 2008) 277.

Valuation Procedure

• Three generally accepted techniques available for estimating the

value of real estate.

• 1. Cost Approach-estimating the reproduction or replacement cost

new.

• 2. Income Capitalization Approach-Measure value by estimating the

present worth of any anticipated future income stream to be generated by a property. One year’s income expectancy can be capitalized at a market derived capitalization rate that reflects a specified income pattern, return on investment, and change in the value of the investment.

• 3. Sales Comparison Approach-Sales of similar properties are

researched and adjusted based upon their comparability to the subject property.

Asset Valuation

Return (How much interest is expected for an asset risk?) Capitalization (How much would you pay for a stream of payments?)

Expert Valuation Analysis

Framework:

• First, can it legally/practically be drilled?
• If so, would a company realistically lease it?

– Function of county-specific demand/factors.

• If so, would a company drill?

– Minerals have no value if can’t be profitably produced (even if actually in the ground). – Compare revenue versus cost.

Expert Valuation Analysis

Factors

• Has a lease been offered/accepted?

– If so, partial damages are certain and known.

• Size and physical features.

– Including surrounding tracts. – Is it big enough? Can it be combined?

• Prior drilling history.

– Were the minerals gone when it was purchased?

• Would a well be drilled on the land or at all?

Expert Valuation Analysis

• How Much Is It Worth? (Income approach)
• Standard: “More likely than not”
• Key Question: What Would A Lease Get You?

– Bonus payment (county-specific). – Free gas (40k value if well drilled on your land). – Royalties.

• Can estimate but may be too speculative.
• Discounted cash flow model (i.e. present value).
• Can run alternative scenarios.

– No prior drilling; well on the land; reserve amounts.

Exhibit A. Plat Map of Gilead Township, Morrow County, Ohio

Exhibit B. Close up of Plat Map Showing Location of Tract in question

Exhibit C. Well Location Map. Tract in Question Located Here

Exhibit D. Cross Section Map showing Erosional Remnants along Knox Unconformity in Ohio

Exhibit 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.

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

Contact Us

HAVENS LIMITED 141 East Town Street, Suite 200 Columbus, OH 43215 (614) 228-6888 Jim Havens Adam Schwartz