By Scott Windom, Attorney in Harrisville,
WV specializing in oil & Gas law

As an old Ritchie County farmer used to say when I was a youngster, "There's them what don't know, and them what don't know they don't know."

What landowners with oil gas and mineral interests don't know about the law can definitely hurt them, so let us become better informed and better able to protect your valuable property.

The West Virginia Supreme Court of Appeals recently made a rare procedural move to re-consider their ruling in a Doddridge County oil and gas case that it had previously decided in favor of oil and gas owners. On May 26, 2017, the West Virginia Supreme Court flip-flopped and reversed its prior decision in Leggett, et al., v. EQT Production Company, et al. This time, the Court instead ruled against the oil and gas interest owners and in favor of EQT.

The Pennsylvania energy conglomerate is the largest oil and gas producer in the State of West Virginia, and it is hungry for your royalty money.

The change was made possible after the 2016 election of Justice Beth Walker to the five-member Court re-configured the voting majority, which then agreed to re-consider the earlier decision on the petition of EQT. In the second Leggett decision, the Court found that, "Royalty payments pursuant to an oil or gas lease governed by West Virginia Code §22-6-8(e) (1994) may be subject to pro-rata deductions or allocation of all reasonable post-production expenses actually incurred by the lessee...." Whew, that's a bit of heavy reading there. The first question that readers likely may have is, "What is West Virginia Code § 22-6-8(e)? The second may be "how will that affect me?" In short, that code section—and the second Leggett ruling—applies only to certain old leases that paid a flat rate for gas production.

When most of those leases were signed during the late 19th and early 20th centuries, there was not a huge market for gas and very little pipeline—what is called mid-stream infrastructure today—in place to transport the production from the rural oil and gas fields. Not too many years ago, natural gas was flared off remote wells in order to produce the oil, which could be hauled away on trucks.

Therefore, the oil and gas lessees (companies) paid the oil and gas lessors (farmers and landowners) an annual flat fee—commonly $300 per year—for each gas well. When the cost of a new Ford Model T was just over $600, that meant you could get a new car every two or three years if you saved-up your flat rate gas payments.

However, as time went on, the value of that same $300 decreased significantly. Unfortunately, that good bargain in 1880 was not such a good bargain in 1980. As a result, the West Virginia Legislature, finding that such terms were "wholly inadequate', "unfair", "oppressive" and created and "unjust hardship on the owners of the oil and gas in place", passed what has evolved into West Virginia Code § 22-6-8(e).

That statute prohibited the issuance of any permits for flat rate leases unless the oil and gas producer (permit applicant) certified by affidavit that it would pay a one-eighth (1/8) royalty, calculated at the wellhead, for all new or re-completed wells. And therein lies the problem..."at the wellhead" That often-used oil and gas lease language has caused quite a kerfuffle.

The Leggett decision defines "at the wellhead" not according to its obvious meaning, but instead through the prism of deregulation in the oil and gas industry, and according to how related language in similar statutes is construed across the United States. In reversing its prior holding, the West Virginia Supreme Court determined that reasonable post-production costs could be taken from the one-eighth (1/8) royalties that are paid to oil and gas owners pursuant to this statute.

Let's stop here and ask, "What is reasonable' post-production cost?"

In the case of W.W. McDonald Land Company, et al., v. EQT Production Company, et al., from the U.S. District Court for the Southern District of West Virginia, EQT was deducting post-production expenses from oil and gas royalties for such items as meals, entertainment and uniforms. That Court found those charges to be unreasonable.

However, the "reasonableness" of the post-production costs can be rather hard to determine because the royalty statements are vague, at best, when setting out the deductions. One of our oil and gas clients even received a flat rate royalty check with a negative amount—showing the royalty owner actually owed EQT a reimbursement!

How is that "reasonable"? If oil and gas owners lose all their royalty payments, they would be better off to leave the gas in the ground!

It isn't just EQT, either. Another client had worker's compensation premiums taken out of her Antero Resources royalties. All energy companies either do it, or they will do it.

The Leggett Court limited its holding and specifically stated that other negotiated leases with royalties that are not paid pursuant to this statute are unaffected by their decision. However, Justice Allen Loughry, who authored the second Leggett decision, devoted a significant portion of the opinion to taking issue with the prior cases which prohibited the deduction of post-production costs from royalty payments. In fact, Justice Loughry spent much of his effort discussing what he referred to as the "under-developed or inadequately reasoned" cases and questioned the continued vitality of those decisions.

So where does that leave the owners of oil and gas? First and foremost, I suggest that if you have not leased your oil and gas, you absolutely do not sign a lease that allows for deductions.

Secondly, if you have a flat rate lease that holds your oil, gas and minerals, you should try and negotiate the royalty without any post-production deductions if the oil and gas producer approaches you with a pooling modification or consent to pool. If they want to modify the contract, you should modify the royalty terms to avoid a Leggett situation.

Perhaps more importantly, for the short term, Tawny is alive...but certainty not well. Justice Loughry's scathing rebuke of Tawny would certainly lead one to believe that it is only a matter of time until that case is reversed and the oil and gas companies will be able to take "reasonable" post-production costs from other existing leases.

The door of post-production costs has been opened by Leggett. Oil and gas companies will spend valuable time and resources—and a huge public relations effort—trying to cram and push as much through that opening as they can get away with in an effort to take money out of the pockets of the oil and gas owners.

Leggett is just another in a long series of oil and gas industry attacks on the rights of royalty owners, and you may rest assured that it will not be the last. The oil and gas industry is willing to gamble your royalties in order to get a financial windfall and increase their bottom line.

Samuel Adams once said, Among the natural rights of the colonists are these: First a right to life, secondly to liberty, and thirdly to property; together with the right to defend them in the best manner they can."

The impending 2018 legislative session will likely be a bellwether moment for oil and gas owners in West Virginia.

In the final sentence of Leggett, Justice Loughry Implore[d] the Legislature to resolve the tensions..." of oil and gas lessors and lessees. How those tensions will be resolved is not a Republican or Democrat issue. Rather, it is an industry V. landowner issue.

We must also implore our delegates and senators to not only act on this issue, but to be proactive and join with members of both parties in combined efforts to defend and protect the inherent property rights of West Virginians.


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