[Cite as Neuhart v. Transatlantic Energy Corp., 2018-Ohio-4099.]



             IN THE COURT OF APPEALS OF OHIO
                             SEVENTH APPELLATE DISTRICT
                                   NOBLE COUNTY

                                  VELMA J. NEUHART, et al.,

                                       Plaintiffs-Appellants,

                                                     v.

                       TRANSATLANTIC ENERGY CORP., et al.,

                                      Defendants-Appellees.


                       OPINION AND JUDGMENT ENTRY
                                        Case No. 17 NO 0449


                                     Civil Appeal from the
                         Court of Common Pleas of Noble County, Ohio
                                    Case No. CVH-215-0064

                                         BEFORE:
                  Cheryl L. Waite, Gene Donofrio, Carol Ann Robb, Judges.


                                          JUDGMENT:
                       Affirmed in Part. Reversed and Remanded in Part.

Atty. David J. Wigham
Atty. Lucas K. Palmer
Atty. J. Breton McNab and
Atty. Leighann K. Fink, Roetzel & Andress, LPA, 222 South Main Street, Suite 400,
Akron, Ohio 44308, for Plaintiffs-Appellants Velma J. Neuhart, Charles R. Neuhart,
Marilyn Neuhart, James Waldie, Mary Lou Waldie, Candie Clark, Robert Clark, Menno
A. Byler, Menno M. Byler, Jr., and Christina E. Byler

Atty. J. Kevin West, Steptoe & Johnson PLLC, 41 South High Street, Suite 2200,
Columbus, Ohio 43215 and
Atty. Melanie Morgan Norris, Steptoe & Johnson PLLC, 1233 Main Street, Suite 3000,
P.O. Box 751, Wheeling, West Virginia 26003-0751, for Defendant-Appellee Gulfport
                                                                                   –2–


Energy Corporation

Atty. Daniel P. Corcoran,
Atty. James S. Huggins, and
Atty. Kristopher O. Justice, Theisen Brock, L.P.A., 424 Second Street, Marietta, Ohio
45750, for Defendants-Appellees, Northwood Energy Corporation, Ralph W. Talmage,
Trustee of the Ralph W. Talmage Trust, and David E. Haid, Trustee of the David E.
Haid Trust

Atty. John P. Brody, Kegler Brown Hill & Ritter, 65 E. State Street, Suite 1800,
Columbus, Ohio 43215, for Defendant Transatlantic Energy Corp., Don Quest and
Candace Bennett

Atty. W. Prentice Snow, Morrow & Erhard Co., L.P.A., 10 W. Locust Street, P.O. Box
487, Newark, Ohio 43055, for Defendant Sabre Energy Corporation.

                               Dated: October 5, 2018


WAITE, J.

      {¶1}   Appellants Velma J. Neuhart, Charles R. Neuhart, Mary Lou Waldie,

James Waldie, Candie J. Clark, Menno A. Byler, Marie A. Byler, Menno M. Byler, Jr.,

and Christina E. Byler appeal two Noble County Common Pleas Court judgment entries.

In the first, dated November 15, 2016, the trial court ruled that Appellants’ claim

regarding undrilled acreage was barred by the statute of limitations and granted

summary judgment in favor of Appellees Northwood Energy Corp. (“Northwood”);

Gulfport Energy Corp. (“Gulfport”); Ralph W. Talmage, Trustee of the Ralph W.

Talmage Trust; and David E. Haid, Trustee of the David E. Haid Trust. In the second

entry, dated June 13, 2017, the trial court ruled that the remaining acreage was

producing oil and/or gas and granted summary judgment in favor of Appellees.

      {¶2}   Appellants’ argument regarding the undrilled acreage has merit. As such,

the trial court’s November 15, 2016 judgment entry is reversed and the matter is

remanded.    However, Appellants’ argument regarding the production of the existing



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wells is without merit. Accordingly, the trial court’s June 13, 2017 judgment entry is

affirmed.

                               Factual and Procedural History

       {¶3}   This oil and gas action involves two tracts of land in Beaver Township,

Noble County: the Neuhart property and the Waldie property. The Neuhart property

encompasses 24.71 acres of land, owned in fee simple by Velma J. Neuhart. Based on

the complaint, only Velma J. Neuhart owns an interest in the minerals underlying the

Neuhart property. (6/22/15 Complaint, pp. 5-7.) Charles R. Neuhart, Mary Lou Waldie,

James Waldie, Candie J. Clark, Menno A. Byler, Marie A. Byler, Menno M. Byler, Jr.,

and Christina E. Byler own an interest in the Waldie Property. The Waldie Property is

not at issue in this appeal.

       {¶4}   In 1991, Appellants and TransAtlantic Energy Corp. (“TransAtlantic”)

entered into an oil and gas lease. The lease is signed by Neil A. and Velma J. Neuhart

and a TransAtlantic representative and is dated June 9, 1991. The lease contains a

two-tiered habendum clause setting out both a primary and secondary term. The length

of the primary term was two years. The clause provided that the lessee would remain in

the lease past the primary term “so much longer thereafter as oil or gas or their

constituents are produced or are capable of being produced on the premises in paying

quantities, in the judgment of the Lessee.” (June 9, 1991 Lease, paragraph 2.)

       {¶5}   On the same day, TransAtlantic sent Neil and Velma Neuhart an

amendment letter agreeing to release any undrilled acreage in the event that three wells

were not drilled on the property by the end of the primary term.        A TransAtlantic

representative and the Neuharts signed the letter. When the primary term ended in




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1993, TransAtlantic had drilled two wells on the Neuhart property. On December 30,

1992, TransAtlantic assigned a 2% interest in the Neuhart wells to Sabre. On February

9, 2006, TransAtlantic assigned the leases to Northwood.

       {¶6}   According to Appellants, they first learned that Transatlantic and

Northwood continued to claim an interest in the undrilled acreage in 2011. On October

13, 2011, Velma J. Neuhart filed and recorded an affidavit of nonproduction regarding

the wells. Appellants then sent TransAtlantic a notice of abandonment. Appellants also

sent TransAtlantic and Northwood a letter stating their belief that TransAtlantic’s interest

in the undrilled acreage had terminated pursuant to the June 9, 1991 amendment letter.

Both TransAtlantic and Northwood responded, claiming they had a continuing interest in

the undrilled acreage.

       {¶7}   On June 22, 2015, Appellants filed a complaint against Appellees,

collectively. The complaint also named TransAtlantic, Sabre Energy Corp., Donald R.

Quest, and Candace L. Bennett as defendants.           The complaint sought declaratory

judgment on their claims regarding both the Neuhart and Waldie properties and quiet

title to both properties. As earlier discussed, this appeal involves only the Neuhart

property. On July 23, 2015, Appellees filed a counterclaim. On December 30, 2015,

Appellees Northwood; Ralph W. Talmage, Trustee of the Ralph W. Talmage Trust; and

David E. Haid, Trustee of the David E. Haid Trust, filed a partial motion for summary

judgment. They argued that the Neuhart wells were producing in paying quantities and

that Appellants’ claim regarding the undrilled acreage was barred by the statute of

limitations. On February 26, 2016, Appellee Gulfport filed its own motion for summary

judgment on the same issues. Named defendants TransAtlantic, Sabre, Donald R.




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Quest, and Candace L. Bennett failed to file either a brief in support of or in opposition

to summary judgment. On March 21, 2016, the trial court entered an order bifurcating

the issues.

      {¶8}    On November 15, 2016, the trial court granted summary judgment in favor

of Appellees on the issues involving the undrilled acreage. On June 13, 2017, the trial

court also granted summary judgment in favor of Appellees on the remaining issue of

paying quantities. Appellants appeal both the November 15, 2016 and June 13, 2017

judgment entries.

                           ASSIGNMENT OF ERROR NO. 1

      THE TRIAL COURT ERRED AS A MATTER OF LAW BY FAILING TO

      DETERMINE THAT TRANSATLANTIC'S LEASE RIGHTS IN THE

      UNDRILLED ACREAGE EXPIRED AUTOMATICALLY AT THE END OF

      THE PRIMARY TERM OF THE LEASE BECAUSE TRANSATLANTIC

      NEVER DRILLED A THIRD WELL.

                           ASSIGNMENT OF ERROR NO. 2

      THE TRIAL COURT ERRED AS A MATTER OF LAW IN DETERMINING

      THAT ANY STATUTE OF LIMITATIONS BARRED THE LANDOWNERS'

      CLAIMS BECAUSE THESE CLAIMS DID NOT ACCRUE UNTIL 2011, AT

      THE EARLIEST, WHEN THE LANDOWNERS FIRST HAD REASON TO

      BELIEVE THAT NORTHWOOD CLAIMED AN ADVERSE INTEREST IN

      THE UNDRILLED ACREAGE.

      {¶9}    Pursuant to the letter amendment to the parties’ contract, Appellants

argue that the undrilled acreage automatically reverted to them at the end of the primary




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term because Appellees failed to drill three wells. Appellants contend that no action

was required on their part due to the automatic reversion, thus, there is no statute of

limitations issue in this matter. In the event that this case involves an issue where a

statute of limitations applies, Appellants argue that it should be twenty-one years in

accordance with Rudolph v. Viking International Resources, Co., 2017-Ohio-7369, 84

N.E.3d 1066 (4th Dist.).

      {¶10} In response, Appellees maintain that the statute of limitations in cases

involving oil and gas leases is controlled by R.C. 2305.041.        Appellee Northwood

argues that the statute of limitations is fifteen years. Acknowledging that uncodified law

exists that interprets an amendment to R.C. 2305.041, Appellee TransAtlantic argues

that the statute of limitations is eight years. Regardless which statute of limitations is

applied, both Appellees contend that Appellants’ claim is barred because the triggering

event in this matter occurred in 1993, twenty-two years before their complaint was filed.

      {¶11} The determinative issue here is whether the letter amendment to the

parties’ contract amounts to a Pugh clause. Generally, leased lands are considered

indivisible. Summitcrest, Inc. v. Eric Petroleum Corp., 2016-Ohio-888, 60 N.E.3d 807

(7th Dist.). A Pugh clause in a lease allows land to become divisible when the lease is

held by production of less than the whole acreage. Id. The Pugh clause allows the

lease to continue only as to the producing acreage. Id. Hence, if the language of the

letter amending the parties’ contract is construed to be a Pugh clause, the undrilled

acreage automatically reverted to Appellants. No further action on their part would have

been required and no statute of limitations would apply.




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      {¶12} The original lease was signed by the parties on June 9, 1991. On that

same day, the parties signed the amendment letter. The letter states in full:

      Please be advised that TransAtlantic Energy Corp. has agreed to Lease

      your property with the following stipulations;

      TransAtlantic Energy Corp. does hereby agree, at the expiration of the

      primary term of the lease, to release the balance of the undrilled acreage

      covered by that certain Oil & Gas Lease dated June 9, 1991, and being

      recorded in Volume 110, Page 676 of the Noble County Lease Records, in

      the event that (3) three Wells are not drilled on the above referenced

      Lease within the primary term of (2) Two Years. However, It [sic] is futher

      [sic] agreed that TransAtlantic Energy Corp. shall hold the acreage that is

      required to comprise the Well unit as set out by the ODNR Division of Oil

      & Gas for the depth to which the Well has been drilled.

      This letter shall be made a part of the aforementioned Lease by this

      reference and shall be deemed binding to both parties of said Lease as

      long as the terms and conditions of the lease have been complied with.

      [sic]

(6/9/91 Amendment Letter.)

      {¶13} It is apparent from the facts of this case that the letter integrated a term

into the lease the parties had intended to include, but for some unknown reason this

term was omitted from the underlying lease. The amendment by letter incorporated its

language into the original lease and made this language a lease term.




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      {¶14} Appellees contend that the contents of the amendment letter merely

created a drilling covenant rather than a term covenant. The plain language of the

letter, however, specifically provides for the release of undrilled acreage at the end of

the primary term. This language evinces that the parties certainly intended to terminate

the lease as to any undrilled acreage at the end of the primary term.        Hence, the

language addresses the term of the lease rather than merely addressing the manner or

method of drilling. If the parties had intended to create a drilling covenant, language

regarding the release of undrilled land would have been excluded as unnecessary.

      {¶15} It is a general principle of law that “a contract is to be construed against

the party who drew it.” Poirier v. Chong Hui Sin, 7th Dist. No. 97 C.A. 158, 1999 WL

35306, *6 (Jan. 14, 1999), citing Graham v. Drydock Coal Co., 76 Ohio St.3d 311, 313-

314, 667 N.E.2d 949 (1996). Appellees drafted both the original lease and the letter

amending the lease. Any ambiguity is therefore construed against Appellees.

      {¶16} Appellees urge that, even if the amendment letter constitutes a Pugh

clause, it was not recorded. However, Appellants are blameless for the failure to record

the amendment letter.     Again, Appellees drafted both the original lease and the

amendment letter. Appellees recorded the original lease, which was signed the same

date as the amendment letter. Appellees have not explained why they failed to record

the letter of amendment. Northwood points out that their predecessor, TransAtlantic,

was in possession of the lease file at the time the documents were drafted and the

original lease was recorded, and urge that they should not be held to account for

TransAtlantic’s failure to record the amendment. However, when Northwood purchased




Case No. 17 NO 0449
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the lease file, Northwood stepped into TransAtlantic’s place. Northwood has no greater

rights or fewer duties than TransAtlantic possessed.

       {¶17} Although the trial court determined that to regain the rights to their

property Appellants were required to take some further action, and so construed this

matter as a statute of limitation problem, because the amendment letter sets out a Pugh

clause the undrilled acreage automatically reverted to Appellants by operation of law.

Appellants were not required to take any action in order to obtain their right to the

undrilled acreage once the primary term ended in 1993. Appellees rely on Potts v.

Unglaciated Industries, 7th Dist. No. 15 MO 0003, 2016-Ohio-8559 and Ricketts v.

Everflow Eastern, Inc., 2016-Ohio-4807, 68 N.E.3d 165 (7th Dist.) to contend Appellants

waited too long to assert their rights. However, neither Ricketts nor Potts involved a

Pugh clause. This clause governs the rights and duties of the parties regarding the

undrilled property. The right to control the undrilled property automatically reverted to

Appellants at the end of the primary term by operation of this clause and discussion of

any statute of limitations is irrelevant.

       {¶18} Accordingly, Appellants’ first and second assignments of error have merit

and are sustained. However, our determination regarding the automatic reversion of

rights in the undrilled acreage to Appellants does not fully resolve this issue.       In

Appellants’ complaint they sought the remedy of specific performance or monetary

damages for Appellees’ continued use of the property. Because the trial court ruled that

the statute of limitations barred Appellants’ claim, any harm suffered by them and the

issue of remedy was never addressed. Thus, this issue is remanded to the trial court in

order to address Appellants’ outstanding claims.




Case No. 17 NO 0449
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                           ASSIGNMENT OF ERROR NO. 3

      THE TRIAL COURT ERRED IN DENYING THE LANDOWNERS'

      SUMMARY JUDGMENT MOTION AND GRANTING APPELLEES'

      SUMMARY JUDGMENT MOTIONS AS WHETHER THE NEUHART NO.

      1 WELL PRODUCED OIL OR GAS IN PAYING QUANTITIES.

                           ASSIGNMENT OF ERROR NO. 4

      THE TRIAL COURT ERRED IN DETERMINING THAT NO GENUINE

      ISSUES OF MATERIAL FACT REMAINED AS TO WHETHER THE

      NEUHART NO. 2 WELL PRODUCED OIL AND GAS IN PAYING

      QUANTITIES.

      {¶19} Appellants also contend that the lease has terminated as to the property

containing the two existing wells, Neuhart Well No. 1 and Neuhart Well No. 2, due to the

wells’ lack of production in paying quantities. Appellants focus on production during the

years 2013 through 2016. However, they argue that even if this Court looks to the

period relied on by Appellees, 2010 through 2016, the lease has expired due to lack of

production in paying quantities.

      {¶20} We note that Appellants filed their complaint in May of 2015 and the

expense records pertaining to these wells are not part of the appellate record. Thus, we

cannot complete an analysis regarding paying quantities for the months of June through

December of 2015 or for the year 2016. For ease of understanding, then, Appellants’

third and fourth assignments of error will be addressed together.

                                    Applicable Law




Case No. 17 NO 0449
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       {¶21} The Ohio Supreme Court has defined the term “paying quantities” as the

production of “quantities of oil or gas sufficient to yield a profit, even small, to the lessee

over operating expenses, even though the drilling costs, or equipping costs, are not

recovered, and even though the undertaking as a whole may thus result in a loss.”

Blausey v. Stein, 61 Ohio St.2d 264, 265-266, 400 N.E.2d 408 (1980).

       {¶22} A lessee is given discretion to determine whether a well is profitable,

however, a good faith standard is imposed on the lessee. Burkhart Family Trust v.

Antero Resources Corp., 7th Dist. Nos. 14 MO 0019, 14 MO 0020, 2016-Ohio-4817, 68

N.E.3d 142, ¶ 18, citing Hupp v. Beck, 7th Dist. Nos. 12 MO 0006, 13 MO 0002, 13 MO

0003, 13 MO 0011, 2014-Ohio-4255, 20 N.E.3d 732. A plaintiff bears the burden of

proving that a well is not producing in paying quantities. Burkhart, supra, at ¶ 13, citing

Moore v. Adams, 5th Dist. No. 2007AP090066, 2008-Ohio-5953.

                                     Neuhart Well No. 1

       {¶23} Appellants argue that in their calculations Appellees have misrepresented

their expenses by omitting a monthly $175 administrative fee and maintenance and

repair costs. According to Appellants, this well suffered a loss of $7,696.27 from 2013

to 2016. If the time period is extended to include 2010 through 2016, Appellants assert

that Appellees lost $7,597.69.      If the administrative fees are added to the paying

quantities analysis, the well caused Appellees to lose $16,096.27 between 2013 and

2016. When the time period is extended to include 2010 through 2012, that number

rises to $18,457.69. Appellants also argue that gathering and compression fees were

not considered in making the paying quantities analysis.




Case No. 17 NO 0449
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       {¶24} In response, Appellees argue that any analysis of paying quantities should

consider 2010 through 2016 as the base period rather than basing an examination of

production separately, year-to-year. Regardless, Appellees contend that the numbers

Appellants cite from the expense report do not provide an accurate representation of the

well’s expenses. According to Appellees, the report does not differentiate between the

types of expenses, including:    operating expenses, capital expenses, administrative

charges, and gathering and compression fees.          According to Appellees, only the

operating expenses should be included in an analysis of paying quantities.

       {¶25} Additionally, Appellees point out that Appellants concede they have

attempted to terminate the lease since 2011. Because of Appellants’ efforts in this

regard, Appellees urge that they were unable to make significant expenditures, because

they would not recoup those costs in the event the lease was terminated. Appellees

cite to caselaw from other states holding that a lessor’s obligations are suspended

during the time that a landowner asserts forfeiture claims. Even if we were to adopt

these cases, however, the record reveals that months after the complaint in this matter

was filed, Appellees invested $5,000 in the property to replace a broken pump. As

Appellees were apparently willing to invest relatively large amounts of money in this well

even after the complaint was filed, there is no evidence in this record suggesting that

Appellees were unable to make expenditures due to any uncertainty regarding their

right to the leasehold.

       {¶26} It is unclear from the trial court’s entry whether it analyzed the well’s

production on a year-to-year basis or using as a base period the years 2010 through

2016. Beginning with 2010, Appellees’ records show that the well produced 532 MCF




Case No. 17 NO 0449
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of gas, generating $3,933.66 in revenue. No oil was sold during this year, but there is

evidence that oil was collecting in the tank. According to certain records, Appellees

incurred $4,323.42 in expenses during 2010. However, Holly Clemens testified in her

deposition that this amount includes operating expenses, capital expenses, and

compression and gathering fees. (3/31/17 Clemens Depo., pp. 36-37.) According to

Clemens, only the operating expenses are directly related to the production of oil and

gas.

       {¶27} Appellees do not dispute that the following operating expenses are

relevant in a paying quantities analysis: $22.73 for tax purposes, $7.58 to Noble County

for property tax purposes, $1,200 for the cost of pumping the wells, $64.50 for chart

integration fees, $40.85 to Sweeney Services (routine maintenance work), $80 for brine

removal, and $532.34 for royalties. These total $1,948.

       {¶28} Appellants argue that a monthly $175 administration fee should be

included as an operating expense. Clemens testified that this is a service fee charged

to the working owners and is paid to Northwood. According to Clemens, the fee covers

only the costs of recordkeeping services, accounting services, and the disbursement of

royalties. (3/31/17 Clemens Depo., p. 30.) It is calculated on the individual owner’s

percentage of ownership.    For example, if an investor owns one-half percent of a

working interest, that owner would be charged one-half percent, times the total

administrative fee amount ($175), which in this example totals eighty-eight cents (.50 X

$175 = 88). This amount is then paid to Northwood. (3/31/17 Clemens Depo., p. 33.)

       {¶29} The issue of whether monthly payments are operating expenses for

purposes of a paying quantities analysis depends on whether the fee is directly related




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to the production of oil and gas. In Hogue v. Whitacre, 2017-Ohio-9377, -- N.E.3d --

(7th Dist.), appeal not allowed Hogue v. Whitacre, 152 Ohio St.3d 1480, 2018-Ohio-

1990, we considered whether monthly administrative fees paid by an oil and gas

company to a third-party entity constituted an expense in a paying quantities analysis.

We determined that these fees were not directly related to the production of oil and gas,

and were not to be included. We based our decision on evidence showing that the

monthly payments did not contribute to the production of oil and gas. However, in

Kraynak v. Whitacre, 7th Dist. No. 17 MO 0014, 2018-Ohio-2784, we held that a

monthly payment from an oil and gas company to a third-party entity was a direct

operating cost. We relied on testimony from the oil and gas company president that the

monthly payments did represent a cost of operating the well. Id. at ¶ 30.

      {¶30} The record in this case contains evidence that the administrative fee in

question did not contribute to the production of oil and gas. Instead, the evidence

shows that the payments covered overhead costs. As such, the administrative fee

should not be deducted as an expense in any paying quantities analysis in this matter.

      {¶31} Appellants next argue that gathering and compression fees should be

included in a paying quantities analysis, here. The Sixth Circuit has defined gathering

as “the movement of lease production to a central accumulation and/or treatment point

on the lease, unit or communitized area, or to a central accumulation or treatment point

off the lease, unit or communitized area.”     Poplar Creek Dev. Co. v. Chesapeake

Appalachia L.L.C., 636 F.3d 235, fn. 1 (6th Cir.2011). The Court defined compression

as “ ‘the process of raising the pressure of gas.’ It is often used to transport low

pressure gas through the pipeline to a place where it can be sold.” Id. at fn. 2. Both




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gathering and compression are considered post-production processes as they occur

after the gas leaves the well. Id. at 239.

       {¶32} Gathering and compression costs are not directly related to the production

of oil and gas.    In fact, they become relevant only after oil and gas is produced.

Importantly, Appellees in this case own the pipeline. (3/31/17 Clemens Depo., p. 52.)

Even if the gathering and compression process were somehow related to the production

of oil and gas, these fees are not expenses. Instead, the fees represent merely an

accounting mechanism, as Appellees essentially pay themselves for use of their own

pipeline. (3/31/17 Clemens Depo., p. 66.) Hence, the gathering and compression fees

are not expenses for purposes of a paying quantities analysis in this matter.

       {¶33} Accordingly, this record shows that Appellees’ expenses for 2010

amounted to $1,948. Appellees generated $3,933.66 in revenue. Simple subtraction

reveals they received a profit of $1,985.66 for that year.

       {¶34} In 2011, the well produced 575.54 MCF of gas for a total revenue of

$4,139.09. Appellees do not dispute the following expenses are included in a paying

quantities analysis for 2011: $47.94 for income tax purposes, $30.36 in Noble County

property tax, $1,200 for the cost of pumping the well, $117.80 for chart integration fees,

and $556.99 for royalties. These expenses total $1,953.09.

       {¶35} As administrative fee and gathering and compression fees are not to be

included, the above represent the sole expenses in a paying quantities analysis. Again,

Appellees generated $4,139.09 in revenue and had $1,953.09 in expenses.             They

received a profit of $2,186 for 2011.




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       {¶36} In 2012, the well produced 382 MCF of gas for a total revenue of

$2,268.82. Appellees concede the following expenses: $13.54 to Noble County for

property taxes, $19.89 income tax, $1,200 in pumping costs, $117 for chart integration

fees, and $288.14 for royalties. These total $1,638.57 and Appellees received a profit

of $630.25.

       {¶37} In 2013, the well produced 299 MCF of gas, generating $1,901.36 in

revenue. The following expenses are included: $13.10 in Noble County property taxes,

$9.02 for income tax, $1,300 for pumping the well, $117 for chart integration fees, and

$247.23 for royalties. These total $1,686.35, so that Appellees had a profit of $215.01.

       {¶38} In 2014, the well produced 155 MCF of gas, generating $1,017.50 in

revenue. Appellees agree to the following expenses: $7.34 for property taxes, $4.70

for income tax, $1,200 for pumping, $136.50 chart integration fees, and $102.25 for

royalties.    These expenses total $1,450.79.    Based on these totals, Appellees lost

$433.29 in 2014.

       {¶39} Through the date of filing of the complaint in May of 2015, the well

produced 56.26 MCF of gas and generated $480.19 in revenue. The direct operating

costs for this period of time include: $4.46 property taxes, $48.75 chart integration fee,

$500 pumping fee, $1.73 income taxes, and $15.68 for royalty payments. As the total

expenses amount to $570.62, Appellees lost $90.43 through May of 2015.

       {¶40} Although the expense records from June through December of 2015 are

not part of the appellate record, it is important to consider the production records during

this timeframe as they explain the dip in production in 2014 and in the first half of 2015.

According to Appellees, a broken pump was responsible for low production during this




Case No. 17 NO 0449
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period. The production report shows that from the time of replacement of the pump in

August, the well produced 189.12 MCF through December of 2015, almost twice the

production from January to July (108 MCF). The evidence reflects that low production

was likely caused by the broken pump.

       {¶41} Thus, we must determine whether the low production in 2014 and in the

first half of 2015 was a temporary or permanent cessation. “It is in the very nature of an

oil and gas well for production interruptions to occur ranging from temporary to

permanent.” Paulus v. Beck Energy Corp., 2017-Ohio-5716, 94 N.E.3d 73, ¶ 75 (7th

Dist.), citing Dennison Bridge, Inc. v. Resource Energy, L.L.C., 2015-Ohio-4736, 50

N.E.3d 242, at ¶ 24.    The Fourth District has provided the general rule regarding

temporary cessation in Wagner v. Smith, 8 Ohio App.3d 90, 92, 456 N.E.2d 523 (4th

Dist.1982). Wagner determined: “Courts universally recognize the proposition that a

mere temporary cessation in the production of a gas or oil well will not terminate the

lease under a habendum clause of an oil and gas lease where the owner of the lease

exercises reasonable diligence and good faith in attempting to resume production of the

well.” Id.

       {¶42} “[A] critical factor in determining the reasonableness of the operator's

conduct is the length of time the well is out of production.” RHDK Oil & Gas, L.L.C. v.

Dye, 7th Dist. No. 2016-Ohio-4654, ¶ 21, citing Wagner at 93, 456 N.E.2d 523; Jath Oil

Co. v. Durbin Branch, 490 P.2d 1086 (Okl.1971). Additionally, a court must consider all

attendant circumstances.    RHDK at ¶ 21, citing Wager at 93; Barrett v. Dorr, 140

Ind.App. 295, 212 N.E.2d 29 (1966).




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       {¶43} Here, the cessation lasted from early 2014 until August of 2015. While we

have declined to establish a bright-line rule, we have acknowledged that “other

appellate districts have held that a lease expires when there is no oil or gas produced

for two years or more.” Lang v. Weiss Drilling Co., 2016-Ohio-8213, 70 N.E.3d 625,

¶ 16 (7th Dist.), citing Schultheiss v. Heinrich Ents. Inc., 2016-Ohio-121, 57 N.E.3d 361,

¶ 19 (4th Dist.), reconsideration granted in part (Mar. 11, 2016), appeal not allowed, 146

Ohio St.3d 1431, 2016-Ohio-4606, 52 N.E.3d 1205, ¶ 19, reconsideration granted, 146

Ohio St.3d 1494, 2016-Ohio-5585, 57 N.E.3d 1172, and appeal allowed, 146 Ohio St.3d

1494, 2016-Ohio-5585, 57 N.E.3d 1172; Wagner, supra, at 94.

       {¶44} The record does not specify when Appellees learned the well had a

broken pump. Northwood President William Arnholt testified that the company that

pumps the well would have alerted them to the issue and then Northwood would have

arranged for necessary repairs. (Arnholt Depo., pp. 112-113.) The record is devoid of

any evidence that Appellees failed to take reasonable action to resume production after

learning that the pump was broken. The record shows that the pump was replaced in

August of 2015 and that production resumed to normal levels immediately.

       {¶45} Appellants argue that the costs of replacing the pump should be

considered an expense for purposes of a paying quantities analysis. However, we have

held that a pump replacement “can be considered a non-recurring, capital investment to

be excluded from operating expenses as an equipping cost.” Paulus, supra, at ¶ 61.

Thus, these expenses are not considered in a paying quantities analysis. Even so, the

repair occurred in August. The expense records from June through December of 2015

are not a part of the appellate record.




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                                                                                     – 19 –


       {¶46} Appellants claim that additional maintenance and repair expenses must be

calculated in a paying quantities analysis. However, the only expenses Appellants raise

are the previously discussed pump replacement.          While they also make a vague

reference to repairs that were included in a deposition exhibit, these were not made part

of the appellate record.

       {¶47} Appellants also contend that William Arnholt, President of Northwood,

admitted in his deposition that the well did not produce in paying quantities. Civ.R.

30(B)(5) provides:

       A party, in the party’s notice, may name as the deponent a public or

       private corporation, a partnership, or an association and designate with

       reasonable particularity the matters on which examination is requested.

       The organization so named shall choose one or more of its proper

       employees, officers, agents, or other persons duly authorized to testify on

       its behalf. The persons so designated shall testify as to matters known or

       available to the organization. Division (B)(5) does not preclude taking a

       deposition by any other procedure authorized in these rules.

       {¶48} Appellees designated that Holly Clemens was to testify regarding any

matter dealing with the calculation of profitability, not Arnholt. Regardless, the alleged

admission occurred when Appellants asked Arnholt if the well was producing in paying

quantities. Arnholt initially said it was, but Appellants’ counsel asked him if the well was

producing in paying quantities once Appellants’ calculations were considered. It was to

this question that Arnholt responded, “no.”      We can readily determine that Arnholt




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believed the well was profitable unless the administrative fee and compression and

gathering fees were (improperly) included in a paying quantities analysis.

        {¶49} Appellants also contend that an internal email between Arnholt and a

Gulfport representative indicated that the well was not producing in paying quantities.

While Appellants are correct about this email, it was sent before the broken pump was

repaired. Again, production greatly increased after the broken pump was replaced.

        {¶50} As to the base period used in the paying quantities analysis, we recognize

that the base period “can be influenced by various considerations, requiring an

assessment of the totality of the circumstances and the good faith of the lessee.”

Paulus, supra, at ¶ 78. We also recognize that “[t]he trial court was the fact-finder

whose job was to determine the reasonableness of the base period to be used.” Id. at

¶ 85.

        {¶51} It is unclear from the trial court’s judgment entry in this matter which base

period was used, but all of the evidence shows that the well produced in paying

quantities during the relevant time period no matter how the period was set. Appellants

made a profit in the years 2010, 2011, 2012, and 2013. Although production declined in

2013 and Appellants lost money in 2014 and from January through May of 2015, it is

apparent that production resumed for the remaining months of 2015, and that the losses

were as a result of a temporary cessation caused by a broken pump.

        {¶52} Accordingly, Appellants’ third assignment of error is without merit and is

overruled.

                                    Neuhart Well No. 2




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      {¶53} Appellants contend that Neuhart Well No. 2 also failed to produce in

paying quantities. Appellants repeat their arguments concerning administrative fee and

repair expenses. Although Appellants’ complaint alleged a lack of production from 2010

through 2015, on appeal they limit this period to 2014 through 2016.       Again, the

complaint was filed in May of 2015 and the record contains expense reports only

through that date. Thus, we lack sufficient evidence to review June through December

of 2015 and any portion of 2016.

      {¶54} In 2014, Neuhart Well No. 2 produced 508 MCF of gas for a total revenue

of $2,299.88. Appellees agree that the following are included as operating expenses:

$126.75 for chart integration, $1,200 for pumping, $14.36 to Noble County for real

estate taxes, $15.36 for income taxes, and $194.34 for royalty payments.        These

expenses total $1,550.81 and Appellees made a profit of $749.07 for the year 2014.

      {¶55} In 2015, the well produced a total of 547.88 MCF for a total revenue of

$2,427.64. From January through May of 2015, the well produced 130.16 MCF for a

total revenue of $473.73. Appellees agree to the following operating expenses: $68.25

for chart integration, $500 for pumping, $14.18 for Noble County real estate taxes,

$3.94 for income taxes, and $31.10 for royalty payments.       These expenses total

$617.47 and Appellees lost $143.74 from January to May of 2015.

      {¶56} While the well operated at a loss for the first five months of 2015, the

evidence shows the well went on to produce 417.72 MCF in the remaining months

(June through December) of 2015. “[T]he caselaw indicates that absent a finding of

unreasonableness, a six-month cessation period is temporary and does not terminate a




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lease.” RHDK at ¶ 24; Lang at ¶ 16. The record is devoid of any evidence to suggest

that the five month loss period was unreasonable.

       {¶57} Although we are without sufficient evidence to complete an analysis of

paying quantities for the remainder of 2015, production admittedly resumed to normal

levels after a temporary cessation. Hence, the record contains evidence that the well

produced in paying quantities. Appellants’ fourth assignment of error is without merit

and is overruled.

                                        Conclusion

       {¶58} Appellants are correct that the trial court erred in holding that any statute

of limitations barred their claim regarding the undrilled acreage. The right to control this

property automatically reverted to Appellants.     The trial court’s November 15, 2016

judgment entry granting Appellees summary judgment is reversed. Because Appellants

were prevented from arguing damages, the matter is remanded for further proceedings.

Appellants also argue that Neuhart Well No. 1 and Neuhart Well No. 2 have failed to

produce in paying quantities.      However, the record demonstrates that both wells

produced in paying quantities during the relevant timeframe. The trial court’s June 13,

2017 judgment entry is affirmed.


Donofrio, J., concurs.

Robb, P.J., concurs.




Case No. 17 NO 0449
[Cite as Neuhart v. Transatlantic Energy Corp., 2018-Ohio-4099.]




        For the reasons stated in the Opinion rendered herein, Appellants’ first and

second assignments of error are sustained and their third and fourth assignments are

overruled. It is the final judgment and order of this Court that the judgment of the Court

of Common Pleas of Noble County, Ohio, is affirmed in part and reversed in part. We

hereby remand this matter to the trial court for further proceedings according to law and

consistent with this Court’s Opinion. Costs to be taxed against Appellees.




                                       NOTICE TO COUNSEL

        This document constitutes a final judgment entry.
