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GonzOil, Inc. 5260 Fulton Drive, NW Canton, Ohio 44718 Phone: (330)497-5888 Fax: (330)497-8010 Email: GonzOil1@aol.com

 

 

 

 

 

 

 

 

 

Who Owns the Minerals Underlying My Property?

Usually the owner of the surface land is also the owner of the minerals underneath the surface of that land. If you have access to your property deed, look for a title transfer in “fee simple” meaning that all interests in the property were transferred from the property Seller to the property Buyer.

Occasionally a Seller does not sell all rights, title and interest to a property. This can be accomplished by “reserving” certain interests in the property before they are transferred to the new owner. Coal rights are a historical example from southeastern Ohio. Many large tracts of land in coal country have ownership of the coal separated from ownership of the surface property. Sometimes this is referred to as a “split estate” or “severed minerals." Oil and gas rights are usually conveyed with the surface land, but, like coal, they may not be necessarily owned by the surface owner. Due to this concern, a mineral title study is conducted before an oil and gas well is drilled.

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Is There an Oil and Gas Lease Covering My Property?

If an oil and gas company is asking you about leasing your property, it most likely has done its research and believes there is no currently valid lease on your property. Leases are usually a public record document on file at your County Recorder’s office. Most county records in Ohio can be searched on the Internet. If you are receiving oil and gas royalty checks, then it is almost certain there is a valid oil and gas lease on your property.

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There is a Well Not Too Far from my Property Now. How Does that Affect my Property?

That can be good news or bad news for the oil and gas royalty income potential from your property. If you are receiving a royalty check now, it is likely that your property is part of the drilling unit that contains the well that you see, or another nearby well. If you are not receiving a royalty check, then your property may not be leased and may be available for a possible new well.

In general, oil and gas producers prefer to drill in proven areas to minimize the risks of a “dry hole” from a wildcat well. A wildcat is a well that is drilled more than one mile from any other well targeting the same oil and gas formation. However, drilling too close to an existing strong well may prove unprofitable. The older well may have drained or depleted the oil and gas from a wide area surrounding it. Consequently, if there is a well near your property, the oil and gas in your vicinity may be depleted by that well.

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How is the Location of a New Well Determined?

There are several considerations that come into play. First are spacing regulations set forth in Section 1509 of the Ohio Revised Code and enforced by the Ohio Department of Natural Resources, Division of Oil and Gas Resources Management. Wells are very expensive, and in 1965, the State of Ohio established well spacing requirements tied to the depth of the well to assure orderly and efficient development of Ohio’s oil and gas resources.

The State of Ohio requires a minimum of 40-acres for a well drilled greater than 4,000’ deep. If the well’s depth is between 2,000’ and 4,000’, Ohio requires at least 20 acres. Wells between 1,000’ and 2,000’ deep require 10 acres. The acreage block does not have to be a square, circle or rectangle, but all of the acreage must be contiguous (touching).

Ohio also imposes setbacks of wells from properties that are not part of the drilling unit. The wellhead location must be at least 300’ from any property line not leased and included in the drilling unit in areas of 20-acre spacing and setback at least 500’ in areas requiring 40-acre spacing.

Ohio also sets minimum distances between wells that target the same oil and gas producing formation. If the wells are more than 4,000’ deep, they must be at least 1,000’ apart. If they are between 2,000’ and 4,000’, wells must be at least 600’ apart.

Wells and tank batteries must be located at least 100’ from any inhabited dwelling and at least 50’ from any road or railroad. However, new construction, though perhaps imprudent, is allowed right next to (no setback from) existing oil and gas wells and tank batteries.

Oil and gas companies have additional considerations once it has been determined that compliance with state spacing requirements can be achieved. The first is access to a natural gas pipeline. Dominion East Ohio Gas and Columbia Gas operate the largest pipeline systems in northeastern Ohio. The well’s distance to the nearest pipeline is a factor in the well site decision.

The surface topography of the land has a strong influence on the location of the well and tank battery. Wells cannot be drilled in ponds and streams, and wetlands in general. The desire to minimize creek crossings and heavily wooded areas also affects well site location decisions. Safe access to the well lease road from public roads is also a consideration. These surface issues are the primary reasons most oil and gas companies work with the landowner to find the best possible well location to satisfy the interests of all parties.

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Why Would a Property Owner Sign an Oil and Gas Lease?

We like to think that property owners want to join GonzOil in reducing America’s dependence on foreign energy. But, there is another advantage. Landowners are paid a royalty on the oil and gas produced from the well that includes their acreage.

GonzOil and their partners pay 100% of the costs associated with the drilling and the operation of the well. Leasing your oil and gas rights will cost you nothing, but will pay royalties if we find oil and gas under your property. All risk of a dry hole is ours.

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Who Buys the Oil and Gas, and How Do I Get Paid?

Oil is sold at spot market prices to an oil buyer, typically an oil refinery. Most of the oil produced from GonzOil’s wells is sold to American Refining Group (successor company to Kendall Oil) or to Ergon Oil Purchasing (the successor company to Quaker State Oil). Both companies are set up to refine Pennsylvania Grade Oil. Due to its high paraffin and wax content, “Penn Grade” is ideal for refining into motor oil and lubricants. After an oil load is picked up by the oil buyer, it takes about four to six weeks for GonzOil to receive payment from the refinery, and then another 30 days to distribute the oil royalty to the landowners.

Natural Gas produced by the well is sold to a Gas Broker and transported through the pipelines of one of the large gas utilities: Dominion East Ohio Gas or Columbia Gas. Natural gas can be sold at a variable price or at a long-term fixed price. GonzOil currently has both types of contracts in place. Many of the gas brokers who buy gas from GonzOil are the same ones that offer to sell you gas as a retail or commercial gas customer. Our goal is to maximize long-term revenue from the well, and we work hard to determine the best gas contract depending on current market conditions. Because a transportation pipeline company and a gas broker are involved in the gas purchasing, it takes about 60 days for GonzOil to receive payment for gas produced from the well and another 30 days for GonzOil to distribute the gas royalties to the landowners.

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How is My Land Used During the Drilling and Completion of the Well

The first step is an agreement between the owner of the land that will have the well and tank battery on it and the oil and gas company as to the location of all facilities. This enables a well plat location survey to be conducted. This well plat is part of the Ohio drilling permit application.

When an Ohio drilling permit has been issued, it is valid for one year. The permit has “Special Permit Conditions” determined by the Division of Oil and Gas Resources Management based on the specific geology in the vicinity and on experience gained from nearby wells. There are more extensive permitting requirements for wells drilled in urban areas.

The next step is constructing a safe entranceway to get equipment off the public roads and onto the drill site. The entranceway is extended by a lease road back to the wellhead location. Depending on the size of the drilling rig used to drill the well, the drill pad can range from .50 to 0.75 acres in size for a traditional.

Drilling normally takes four to seven days, 24 x 7, and then the drilling rig leaves. A smaller service rig is used to complete the well by running the production tubing in the wellbore and performing other steps necessary to place the well in production.

After completion, the well site is much smaller. The well head is in a fenced-in cage that ranges in size from 10’ x 10’ to 15’ by 30’ if a pumping unit is required. The tank battery must be at least 50’ from the wellhead. Depending on the number of production tanks required, the fenced-in tank battery ranges from 20’ x 30’ to 28’ x 50’. A lease road is maintained to the tank battery so that the oil buyer’s tank truck and other equipment to service the well can gain access to the well at anytime of the year.

Natural gas is delivered to the gas utility by a gas sales line that runs from the tank battery to the nearest utility’s transportation or distribution pipeline. The pipeline is trenched in and buried below plow depth.

However, if your lease is a No Surface Trespass Oil and Gas Lease, then there should be absolutely no use of your surface property, and the oil company should not set foot on your land while the new well is being constructed on another person’s land.

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What About Safety?

Safety is important. Unsafe is very costly. Safety must be maintained from the time the initial entranceway is built until the well is plugged and abandoned at the end of its life. Before drilling can begin, The Division of Oil and Gas Resources Management requires a site inspection, approval of proposed drilling pit locations and identification signage to be placed in a highly visible place. In urban areas, a copy of the Ohio Drilling Permit and Special Permit Conditions are part of the posted safety signage.

During drilling, access to the well construction site is limited to those contractors who are actively working on the well. Because the drilling is 24 x 7, there are always safety-conscious people on location. When the drilling rig leaves, all excavations are fenced in and a temporary gate may be placed to keep curious strangers from gaining access to the property.

After the construction, the wellhead and tank battery are completely fenced in. In urban areas, regulations require an 8’ high fence around both. A permanent locked entranceway gate may be required by the State or requested by the landowner. Several warning signs (“No Smoking”; “No Trespassing”) are posted around the well site. The name of the company that operates the well and a 24-hour emergency telephone number are included in the required signage.

In addition, the Ohio Department of Natural Resources requires a cash bond of $15,000 to be on deposit in Columbus in the event there is a situation that must be addressed, and the oil and gas operator is not complying with Division of Oil and Gas Resources Management rules and regulations.

Finally, most oil and gas companies have general liability insurance policies in place with at least $1,000,000.00 in liability coverage. GonzOil maintains $3,000,000.00 in general liability insurance policies.

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Is My Water Supply at Risk?

Certainly not if you have a municipal water source and your water is piped in by a utility. GonzOil participates in the Ohio Utility Protection Service (OUPS), and we “Call Before We Dig” to avoid damaging any pre-existing water lines. If water is supplied from a water well, we take stronger preventive measures. First, a water sample is taken before any activities begin. This becomes the base line if, after drilling, there is a need to re-test the water quality from the water well. The Ohio drilling permit and Special Permit Conditions are developed with water safety a priority. The Division of Oil and Gas Resources Management employs professional hydrologists and geologists who determine the locations of the fresh water aquifers. Conditions to safeguard these aquifers must be adhered to while drilling, and a State Oil and Gas Inspector has the right to observe all critical phases of water protection.

Oil and gas are valuable, and no oil company wants those sources of income to go anywhere except into the production tanks and pipelines that take them to market. The State of Ohio requires that dikes be constructed around all tanks that have the capacity to hold no less than 110% of the volume of the largest tank. In addition, there are many safety regulators and automatic shut off valves set in place to shut-in the well if operating conditions exceed the normal range.

In addition to protecting surface and shallow potable water, the Division of Oil and Gas Resources Management requires an extensive cementing program to insure that the oil and gas coming up and through the well does not escape the production casing. Typically, the state drilling permit requires three separate cementing operations. The first is setting the 11.875” conductor casing into bedrock and cementing it in place. Depending on the amount of glacial till (overburden) and the depth of solid bedrock, conductor casing runs from 30’ to 350’ deep. Well operators are required to notify the local Oil and Gas Inspector when the conductor casing is being cemented in place. After the cement hardens, drilling resumes inside of the conductor casing until all potable water zones have been drilled through. At this point in the process, 8.625” surface casing is placed in the wellbore and cemented in place. Again, the local Oil and Gas Inspector is notified when the surface cement job will take place. The third cementing operation takes place when the well has been drilled to its total depth. At this time, the 4.5” production casing is run in the well and cemented in place. Again, the local Oil and Gas Inspector is given the opportunity to monitor the cementing of the production casing. The purpose of the three cement jobs is to force all production from the well to flow up and through the production casing and into the tank battery.

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Once a Well is Placed into Production, What Kind of Traffic Can I Expect?

New wells take several weeks to work the bugs out of the operating cycle. Consequently, the well is likely to be visited by a well tender almost every day until the well settles into a smooth operating cycle. Typically, well tenders drive a 4x4 pickup truck and limit their work hours to daytime.

There are several larger trucks that need to service the well from time to time. Our favorite is the oil tanker, usually a 30’ straight truck, not a semi. We hope it stops by every week! A smaller water truck also services the well by removing brine from the well and taking it to a state-approved injection well for reinjection into the ground. We hope this truck does not come too often since this is a waste product, and we must pay to have it removed. The largest piece of equipment to access the well after it has been completed is a service rig. We hope to see a service rig less than once a year; however, we never know when a mechanical problem downhole will require a service rig to be placed over the wellbore. Finally, the State Oil and Gas Inspectors have the right and responsibility to visit the well occasionally to monitor safety and compliance issues. They usually drive a 4X4 SUV owned by the State of Ohio (i.e., you).

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What Happens at the End of a Well’s Life

When a well is no longer profitable, it becomes a candidate for plugging. Most Clinton Sandstone wells have a commercial life of 15 to 20 years. As a general rule, wells are not allowed to sit idle for more than one year. When it comes time to plug the well, all surface equipment is removed along with as much production casing as possible (the portion not cemented in place). The well is then filled with cement to prevent oil and gas from coming up the plugged hole. This cementing operation can be from the top of the hole to the bottom of the hole, or with State permission, a series of cement plugs across any potable water zones. Buried pipelines are removed or filled with cement and left in place, based on the property owner’s decision. Finally, the surface location is re-graded as closely as possible to its pre-drilling contours and reseeded. Typically, if another well is not drilled on the property within a short period of time, the acreage around the well is no longer held and the oil and gas lease expires.

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How Does an Oil and Gas Well Affect the Value of My Property?

A well can add value or reduce value. A well that is distributing nice royalty checks to the landowner enhances property values. However, as the well ages and production declines, this value is reduced unless offset by increasing oil and gas prices. Unsightly wells and production equipment can depreciate a property’s value. Consequently, it is important to lease your property to an oil and gas company that takes pride in its facilities. The best way to determine that is to “see for yourself” by visiting some of the well operators' other wells, and it is always wise to ask for and follow up on a company’s references.

If the property receives free gas from a well on the premises, that is a significant improvement to the property’s value. In recent years, it has cost most home owners thousands of dollars to heat their homes each season with gas from Dominion East Ohio Gas or Columbia Gas or gas suppliers using their pipelines.

If the well on the property has been properly plugged and abandoned in compliance with Ohio law, there should be almost no physical evidence that there ever was a well on the property. And, the lease roads that may be left behind with the landowner’s permission, can provide better access to parts of the acreage that would not have been accessible had the well not been drilled.

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