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Shaky Shale – Trouble Ahead for Contractors?

Posted on March 31, 2016

With the price of crude oil remaining at record lows, the Akron Beacon Journal recently reported that the Ohio’s number one Utica driller, Chesapeake Energy Corp is halting new drilling in Ohio’s Utica Shale because of financial constraints. Although the company has no plans to drill new wells in the near future, it has stated that it expects to place 45 to 55 Utica wells previously drilled into production in 2016.

Other Utica drillers are following suit. According to the Youngstown Business Journal, Eclipse Resources Corporation has disclosed that it intends to halt new drilling for the first half of 2016 and limit its activity to completing one well that was previously drilled last year.  Last year, the company drilled 31 Utica wells, completed 51 wells, and placed 76 wells into production.  It also reported losses of $971.4 million.

Of the 2,134 state issued drilling permits for the Utica Shale, Chesapeake is the largest stakeholder. It holds 813 permits in various stages of development – 578 are for Utica wells in production, 106 have been drilled, and 121 have not yet been acted upon.  Chesapeake also reportedly plans to cut its capital expenditures by more than half in 2016 and sell off between $500 million and $1 billion in assets. The company divested $700 million in assets in 2015.  Chesapeake is under further duress with the recent death of its founder in early March while under federal charges of conspiracy to rig bids to buy oil and gas leases.

Some industry executives have predicted that the decline in oil prices could persist for several years and that the $100 price for a barrel of oil that looked to be a constant may not be seen again in the foreseeable future. While cheap oil is a boon to the motoring public, it means less profits for those oil and gas companies that have invested heavily to acquire property interest and constructed improvements in the Utica shale.  Those interests and improvements were made based on projected oil prices that simply no longer exist.

Given the pricing uncertainties and turmoil within the Utica oil and gas industry, contractors and suppliers are right to be wary. The Ohio legislature has adopted a mechanics’ lien law specifically for labor, work, or materials performed on oil and gas wells and facilities.  The oil and gas lien is similar to traditional mechanic’s liens, with several notable differences.  First, lien rights exist even where the services and supplies are for operation.  This differs from traditional mechanic’s liens which limit lien rights to the services/supplies furnished in furtherance of an improvement to property.  Second, an oil and gas well lien claimant is not required to serve a Notice of Furnishing to preserve lien rights.  Third, an oil and gas well lien claimant has 120-days from the last supply of labor, work, or materials to record a lien.  The recording and service requirements remain the same as those for traditional mechanics’ liens.

Once perfected, the lien attaches to: 1) the oil and gas lease or leasehold estate or, in the absence of a lease, to the mineral estate, 2) the oil or gas produced from the property and the oil and gas proceeds, and 3) upon all material located at the well site or used in connection thereof.

In addition to these lien rights, an unpaid oil and gas lien claimant may serve the well owner or lessee with a statutory notice of amounts due from an original contractor. The service of a notice of amount due gives the owner/lessee the right to issue payment by a joint check or to require the original contractor to obtain lien waivers prior to making payment to the original contractor.  The statutory notice must contain the following information:

(a)       a description of the nature of the work performed,

(b)       a description of the materials furnished,

(c)        statement of amount due,

(d)       the identity of the person the claimant contracted with,

(e)       the identity of the well,

(f)         the permit number, and

(g)       the county where such work or materials was performed.

This statutory notice of amounts due may also be served prior to the performance of work or the supply of materials much in the same fashion as a Notice of Furnishing. While no Notice of Furnishing and no statutory notice of amounts due are required by law, the oil and gas lien law does afford an owner or lessee a defense in the event that the improvement contract is paid in full prior to the receipt of notice of an amount due a lien claimant or perspective lien claimant.

For questions regarding oil and gas lien rights please contact Joseph Spoonster or any of the other construction lawyers at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971.

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