West Virginia Supreme Court case to decide on gas and oil royalties

During a Wednesday meeting with mineral owners in Wheeling, West Virginia Royalty Owners Association Vice President Tom Huber shared a copy of a royalty statement from an operation in Pennsylvania that allowed the company to deduct “post-production expenses” from the mineral owner’s payment. In this particular instance, the expenses — $3,298.37 — were higher than the amount of royalties — $2,672.08 — due to the mineral owner, so the landowner actually owed money to the company.

The case Chief Justice Allen H. Loughry, along with Justices Robin Jean Davis, Margaret L. Workman, Menis E. Ketchum and Beth Walker, are scheduled to hear Tuesday could have a major impact on the finances of mineral owners who have leases with drilling companies.

“Any of you who have examples of post-production expenses know how it can eat up your royalties,” Tom Susman, organizer of the West Virginians for Property Rights group, said. “We’re pretty nervous about this.”

Because Marcellus and Utica shale natural gas often contains other substances — such as ethane, propane, butane and condensate — the gas stream must go through processing before it can go directly to market. These steps are considered post-production expenses.

According to Susman — and verified by court documents — the court voted 3-2 in November against allowing companies to take post-production expenses from royalty payments.

However, former Justice Brent Benjamin was one of those who voted in the majority, along with Davis and Workman.

Walker replaced Benjamin as a member of the court on Jan. 1, as she defeated him for election last year. The defendants in the case, listed as EQT Corp. and others, promptly filed for a rehearing. With Walker replacing Benjamin, the court voted to rehear the case.

“It’s kind of like a football game. You won the game, but then the NCAA comes in and says, ‘We want you to play the fourth quarter again,’” Susman said of this development.

The hearing is set for 10 a.m. Tuesday. Susman said there could be a decision as early as the end of May.

During Wednesday’s meeting, West Virginia Royalty Owners Association Vice President Tom Huber said those who own minerals in the Mountain State are already at such a disadvantage that allowing companies to deduct these expenses would only exacerbate the predicament.

“They already have all the information. They have all the high-priced attorneys,”he said of natural gas drillers. “They have these ‘boiler-plate’ leases that are filled with legalese, all in the hope of confusing the landowners.”

When a member of the audience asked Huber how to tell exactly how much natural gas a company is producing from a piece of property, he said the producer is required to report the amounts to the West Virginia Department of Environmental Protection. However, this is all “self-reporting,” as there is no metering requirement.

“It would be like if the IRS asked me, ‘Hey, how much do you make?” Huber said. “And then, they are just going to trust me?”

Also, the mineral owners said they were thankful the industry’s latest efforts to pass a bill to allow a practice that has been known by different names — the latest being “joint development” — failed to pass in the recent session of the Legislature.

The measure would have allowed gas companies to take gas from beneath unleased land if a certain percentage of the ownership interest in a drilling unit has signed leases. Industry leaders have been trying to allow this concept for several years when it was previously called “forced pooling,” or “lease integration,” and proponents say it ensures mineral owners can get maximum financial benefit from their property.

“They know it is extremely unpopular in West Virginia. Even after spending their millions of out-of-state dollars, they still can’t get it through because of the public opposition,” Huber said.

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