Estimating the value of a unitization law for shale gas development

Horizontal drilling together with hydraulic fracturing has become a very effective mechanism for the extraction of natural gas in several shale plays in the United States. Efficient horizontal drilling, however, generally requires operating in a "unit,"across the property of numerous landowners. If a landowner, however, is unwilling to allow drilling beneath their property, the result can be harmful to both the producing company and other landowners in the unit. To address this problem, most major oil and nature gas states, except for Pennsylvania, have unitization statutes. We examine the impact of such laws by looking at the recent Emersyn matter from the state of Ohio. We estimate that the unitization ordered by the State of Ohio greatly increased the potential recoverable product from the proposed unit. Just as importantly, it more than proportionally increased the profits to the producer and royalty owners. Our results also show that the breakeven production price is very sensitive to whether forced unitization is available to the producer. At least three policy issues arise from this analysis. First, the rationale for unitization is not clear in all circumstances. In the Emersyn matter, the State of Ohio required access to property rights, even though not allowing such access would not have "stranded"any other landowners, and where the party in question was a sophisticated producer, rather than a landowner. Second, there appears to be no guidance for setting reimbursements to property owners who are forced to allow producers access to their property. Third, it is not clear the extent to which the state should take the producers' plans as given, rather than inquire about options to unitization.