CONTENTS:

To declare that the Division of Mineral Resources Management in the Department of Natural Resources has exclusive authority to regulate the permitting, location, and spacing of oil and gas wells in the state, and to revise the laws governing the drilling of oil and gas

State Fiscal Highlights

STATE FUND	FY 2005	FY 2006			FUTURE YEARS
General Revenue Fund
Revenues	- 0 -		- 0 -	- 0 -
Expenditures	Potential minimal increase		Potential minimal increase	Potential minimal increase
Fund 518 (Oil & Gas Permit Fees and Oil & Gas Well Plugging)
Revenues	Potential gain		Potential gain	Potential gain
Expenditures	Increase		Increase	Increase

Note: The state fiscal year is July 1 through June 30. For example, FY 2005 is July 1, 2004 – June 30, 2005.

· As a result of this bill, the Division of Mineral Resources Management is given exclusive state authority to regulate oil and gas exploration and operations, while the role of local governments is reduced. This may increase the number of permits, which would create a potential gain in revenues in Fund 518 from the additional permitting and the corresponding severance tax from the additional wells drilled. If this occurs, there would be a need for more inspections, which would result in an increase in expenditures in the GRF and Fund 518. Most of the expenditures for this activity are in Fund 518. However, the increased expenditures should be partially offset by the increase in revenues.

· The bill adds authority for the Chief DMRM to adopt rules specifying minimum distances that wells and other excavations, structures, and equipment must be located from public or private recreational areas, zoning districts, and structures other than buildings. The bill also adds additional subjects that the rules concerning the oil and gas law must cover. Lastly, for applications for a permit to drill a new well, there are additional requirements that must be met for the applicant. The Division must transfer copies of applications to appropriate municipal corporations and townships. These additional rules will increase expenditures from Fund 518.

Local Fiscal Highlights

LOCAL GOVERNMENT		FY 2004		FY 2005		FUTURE YEARS
Counties, Municipalities and Townships
Revenues	Potential loss		Potential loss		Potential loss
Expenditures	Potential decrease		Potential decrease		Potential decrease

Note: For most local governments, the fiscal year is the calendar year. The school district fiscal year is July 1 through June 30.

· As a result of this bill, the Division of Mineral Resources Management is given exclusive state authority to regulate oil and gas exploration and operations, while local governmental regulation is reduced. If this bill is enacted, local fees, if any, for oil and gas drilling would be eliminated. Expenses for those local entities that do not collect fees for oil and gas regulations could be reduced.

Detailed Fiscal Analysis

According to the Division of Mineral Resources Management’s (DMRM) website, Ohio has 62,902 active wells. These wells produced six million barrels of oil and 97 billion cubic feet of natural gas in 2002. The market value for this is $466 million.

State and Local Regulation of Oil and Gas Explorations and Operations

Under current law, DMRM has a certain amount of concurrent jurisdiction with municipal corporations, counties, and townships to regulate oil and gas well operations. A person applying for a state oil and gas well drilling permit must include a sworn statement that the person will comply with all local requirements related to drilling or operation of an oil or gas well. Current law cannot prevent municipal corporations, counties, or townships from enacting and enforcing health and safety standards for drilling and exploration for oil and gas, as long as those standards are not less restrictive than state law. Counties and townships, however, are prohibited from adopting or enforcing any requirement relative to minimum acreage requirements for drilling units, minimum setback distances for wells, or the restoration or plugging of an oil and gas well. Counties and townships also are not to prohibit the use of land, owned or leased by an industrial firm, to conduct oil and gas drilling activities on the land when the oil or gas is used for the operation of the firm.

This bill repeals all provisions of law that grant or allude to the authority of local governments to adopt requirements concerning oil and gas operations. The DMRM would have sole and exclusive authority of regulating the permitting, location, and spacing of oil and gas wells within the state. The regulation of oil and gas requires statewide regulation and the Oil and Gas Law and rules adopted under it constitute a comprehensive plan with respect to all aspects of oil and gas operations.

Currently, permits to drill are $250 and plugging permits are $50. In 2002, DMRM issued 681 permits to drill and 807 permits to plug. The DMRM also performed over 10,602 site inspections. If the regulation of oil and gas operations is more uniform statewide and local regulations are reduced, there could be an increase in the number of permits issued. This would increase the revenues to Fund 518 from the increased permitting and the corresponding severance tax from the additional wells drilled. However, a greater number of permits issued would increase the number of inspections required. It might also increase the time needed for permit review and issuance. As a result, expenditures could also increase. While the Department Natural Resources (DNR) does not have an estimate regarding the total increase in revenues and expenditures, it is likely that the fees collected would balance out the increased expenditures.

Local Government Examples

Local governmental regulation of oil and gas operations seems to differ from agency to agency. Three counties were called and surveyed about their oil and gas regulations. Neither Huron nor Tuscarawas counties regulate oil and gas operations. Summit County stated that there were setback regulations for oil and gas wells, but there were no permits issued or inspections performed. Bath Township in Summit County stated that they have regulations regarding oil and gas operations. The Township Board of Zoning is able to make recommendations regarding drilling and could also send zoning inspectors to the drilling site to determine if these recommendations have been followed. However, Bath Township does not collect any fees for this.

The Department of Natural Resources stated that some local governments have fees applied to the review of proposed oil and gas wells and fees on existing wells. These fees are used to compensate zoning inspectors for their time relating to oil and gas issues. As a result, those local governments that do not regulate oil and gas would be unaffected. Government expenses for those local entities that do not collect fees for oil and gas regulations could be reduced. Lastly, there could be an offsetting effect for those local entities that collect fees since they will no longer have to pay zoning inspectors for their time on matters relating to oil and gas regulations. The fiscal effect for each local government will differ depending on the scope of their oil and gas regulation and whether or not they collect fees for this.

Location of Oil and Gas Wells

Under current law, the Chief of DMRM may specify minimum distances that wells and other excavations, structures, and equipment must be located from water wells, streets, roads, highways, rivers, lakes, streams, ponds, other bodies of water, railroad tracks, and buildings. The bill adds authority for the Chief to adopt rules specifying minimum distances that wells and other excavations, structures, and equipment must be located from public or private recreational areas, zoning districts, and structures other than buildings.

These additional rules could increase expenditures from Fund 518. The DNR stated that the majority of information needed if these new rules are enacted can be provided with the registered survey that is required with an application. If on-site permit and additional post permit issuance reviews are needed, personnel costs could be higher.

Rules and Permits for Oil and Gas Law

The Chief of the Division of Mineral Resources Management shall adopt, rescind, and amend, rules for the administration, implementation, and enforcement dealing with oil and gas law. This bill requires that the rules include an identification of the subjects that the Chief shall address when attaching terms and conditions to a permit with respect to a well and production facilities of a well that are located within a municipal corporation or within a township that has a population of more than 15,000. The subjects shall include:

· Safety concerning the drilling or operation of a well;

· Protection of the public and private water supply;

· Location of surface facilities of a well;

· Fencing and screening of surface facilities of a well;

· Containment and disposal of drilling and production wastes;

· Construction of access roads for purposes of the drilling and operation of a well.

This could increase expenditures to the Division.

Permits for Wells

An application for a permit to drill a new well, drill an existing well deeper, reopen a well, convert a well or plug back a well shall be filed with the Chief of the Division of Mineral Resources Management and shall contain such things as name and address of owner, location of tract, designation of the well by name and number, and type of drilling equipment to be used to name a few. This bill eliminates the requirement concerning a sworn statement that all requirements of any municipal corporation, county, or township be met for any application filing with the Division of Mineral Resources Management. The bill adds requirements for an application for a permit to drill a new well. The new requirement is that a sworn statement that the applicant has provided notice of the application to the owner of each occupied dwelling unit that is located within 500 feet of the surface location of the well if the surface location will be less than 500 feet from the boundary of the drilling unit and more than15 occupied dwelling units are located less than 500 feet from the surface location of the well. The notice shall contain a statement that an application has been filed, identify the name of the applicant and the proposed well location, and contain a statement that comments regarding the application may be sent to the Division (the Division’s address shall also be provided). The notice may be delivered by hand or regular mail. The identity of the owners of occupied dwelling units shall be determined using the tax records of the municipal corporation or county in which the dwelling unit is located as of the date of the notice.

The bill also requires that the Chief shall transfer a copy (facsimile or if unavailable, by regular mail) of a drilling permit application to the clerk of the municipal corporation or township in which the well or proposed well is to be located. This transfer is to be done if the municipal corporation or township has a population of greater than 15,000 or has requested a copy.

The additional requirements concerning new permits to drill could increase expenditures to the Division. Staff will have to process and review this additional information. Also, copies of these permits must be faxed or mailed to municipal corporations or townships. This will also increase expenditures to the Division.

Oil and Gas Marketing Program

Under current law, if an independent producer requests the end of a marketing program, all operations of the program shall be terminated and remaining unobligated moneys shall be returned to the independent producers who paid assessments. This bill adds that if a program is operated by a nonprofit corporation that is exempt from federal income taxes, the nonprofit corporation shall distribute any remaining unobligated money to be used for exempt purposes or for a public purpose. If there remains any unobligated money after the distribution by the nonprofit corporation, the court of common pleas of the county in which the principal office of the corporation is located shall distribute the remaining unobligated money for purposes exempt under section 501(c)(3) of the Internal Revenue Code.

LSC fiscal staff: Wendy Risner, Budget Analyst

HB0278EN.doc/arc

BILL:	Sub. H.B. 278		DATE:	April 27, 2004
STATUS:	As Enacted – Effective September 16, 2004		SPONSOR:	Rep. Niehaus
LOCAL IMPACT STATEMENT REQUIRED:		No —	Minimal cost