Despite Revisions, House Bill 152 Remains Bad Law

By: Steven R. R. Anderson

A substitute for House Bill 152 was introduced today at a meeting of the Ohio House Energy and Natural Resources Committee. The changes are a mixed bag, and do nothing to fix the bill’s major, structural problems.

What changed?

Under the previous version of the bill, non-participating landowners were given two choices. They could either pay the oil company a massive penalty, termed a “non-participation charge”, or else accept an oil and gas lease with terms dictated by House Bill 152. The revised bill tinkers with these options in an attempt to make them more palatable.

With respect to the non-participation charge, the revised bill lowers it from 300% of the amount carried to 200% of the amount carried. This is only a slight improvement. The charge remains a large penalty against landowners, and a big windfall for oil companies.

The mandated lease terms get a makeover as well. Whereas the previous version of the bill forced landowners to accept a 12.5% net proceeds lease, the revised version gives them a 12.5% gross proceeds lease instead. At the same time, however, it reduces the bonus payment landowners will receive from 75% of market value to 50% of market value.

While the change in royalty calculation from net to gross is an improvement, the royalty percentage remains well below market value. Moreover, the revised bill contains no language preventing oil companies from selling their production to affiliates. In practice, this means landowners will have gross leases in name only, as the cost deductions typical of net leases would simply be shifted to affiliates, resulting in lower “point of sale” prices. Finally, the reduction in the bonus payment is a large step in the wrong direction.

The revised bill is no better, and possibly worse.

On balance, these changes are the proverbial “lipstick on a pig”. The structure of House Bill 152 remains the same: Assess a massive penalty against non-participating landowners in order to force them into discount oil and gas leases. Previously identified problems with constitutionality, vagueness, and perverse incentives remain. House Bill 152 should be scrapped entirely.