Estimating the Value of a Unitization Law for Shale Gas

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 particular landowner, however, is unwilling to allow drilling below their property, the result can be harm to both to the producing company and to other landowners in the unit.To address this problem, most major oil and nature gas states, with the exception of Pennsylvania, have unitization statutes. We examine the impact of such laws by looking 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 break-even production price is very sensitive to whether or not forced unitization is available to the producer. At least two 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