HOWLEY SAYS LEASES "BUSINESS AS UNSUAL" - Royalty Owners May Be Getting Short-Changed

(06/05/2008)

Royalty owners may be getting short-changed

By David Hedges, Publisher
www.thetimesrecord.net

Did a record-setting verdict in a class-action lawsuit in Roane County change the way gas companies are treating royalty owners?

It depends on whom you ask.

One of the lawyers who represented more than 10,000 royalty owners in the case known as Tawney vs. Columbia Natural Resources said the $403 million verdict got the attention of gas companies who were illegally deducting post-production expenses from payments to royalty owners.

"I think this verdict has already changed the way companies do business," retired circuit judge George Scott said. "It has already accomplished some permanent reform."

Scott, speaking after the state Supreme Court turned down a request for an appeal in the case on a unanimous 5-0 vote, was the first attorney to take up the case after retired teacher Garrison Tawney spoke to him about money being deducted from his royalty checks.

Spokesmen for Chesapeake Energy, which bought CNR, and NiSource said they plan to appeal the verdict to the U.S. Supreme Court.

In the meantime, some people say it's business as usual.

"Chesapeake is definitely still offering leases that would withhold their costs," Grantsville lawyer Loren Howley said.

She said several clients have brought leases into her office, from Chesapeake and other companies, with language that allows expenses to be deducted from the royalty owner's one-eighth.

"I'm finding it's very common," Howley said.

"I've been telling clients about the Tawney case and advising them not to sign that kind of lease," she said. One royalty owner who did not want to be identified said he has been presented leases from at least two other companies with clauses that allow expenses to be deducted.

He said the leases look good at first, and give the impression that the royalty owner will receive a full share. But fine print in the lease tells otherwise.

He said a person who was a named plaintiff in the Tawney case, and stands to benefit from the ruling, even acted as a land man for another company and presented him a lease with the language.

When the royalty owner pointed it out, he said the land man told him to strike that language from the lease.

Traditionally, the royalty owner was to receive one-eighth of the value of the gas at the wellhead, Howley said, before any expenses for transportation, marketing, taxes and other post-production costs.

"Now some companies are trying to get royalty owners to take less than what is their traditional share," Howley said.

The jury in the Tawney case found the gas companies committed fraud by deducting the expenses, and hiding those deductions from royalty owners.

Now many of the leases seek to authorize the deductions, Howley said, although the language may be less than specific and in fine print.

"They are trying to legalize what's been deemed fraudulent and illegal," Howley said.

"But my understanding is these leases may still not be legal because they don't specify what they are deducting," she added.

Howley said royalty owners should have an attorney look over any lease before they sign it.

Norm Steenstra, a founding member of the West Virginia Surface Owners' Rights Organization, said complaints about leases are on the increase.

While the organization was started to protect the surface owners, because of problems royalty owners are facing he said about 40 percent of the membership is now made up of royalty owners or those who own both the surface and mineral rights.

"There is no regulation and the oil and gas industry can do what they want to do," Steenstra said.

"It's an important industry for West Virginia, but we want them to respect us and not take money out when they should not be," he said.

Steenstra said in spite of what some companies say, there is no such thing as a standard lease.

"Every one is done differently," he said.

Steenstra said the problem is not going to go away until the legislature clarifies matters.

"Even if Chesapeake loses their final appeal, there is no regulation protecting mineral owners in West Virginia," Steenstra said.

The Independent Oil and Gas Association of West Virginia was contacted for comment and a secretary said executive director Charlie Burd was out of the office, but a board member would return the call. The call was not returned.

The W.Va. Oil and Gas Association also was contacted, but a message left on voice mail was not returned.

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