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Gas pooling case could turn gas industry on its side

By LINDA HARRIS

The State Journal

CHARLESTON, W.Va. — A property transfer recorded more than 70 years ago in Marshall County has the potential to turn West Virginia’s oil and gas industry upside down.

The state’s highest court is considering what say, if any, non-participating royalty interests should have had in a gas pooling arrangement involving a nearly 106-acre property in Marshall County.

PPG Industries, which owns the “executive rights” to the gas on the property, in 2011 leased them to Gastar Exploration, which subsequently pooled them into the 700-acre Wayne/Lilly unit. The lease and pooling arrangement were executed without the involvement of the non-participating royalty interests, identified as Joyce Contraguerro and other heirs of the late Mabel Sims, who under the terms of the 71-year-old deed own a one-quarter non-participating interest in the 105.9 acre property.

Sims and her sister, Ada Parsons, once owned the property, but sold it in 1946 to John Wenzel. The sisters retained the reserve royalties for themselves but gave Wenzel the right to lease the land. Wenzel later sold his interest in the land, which ultimately became vested in PPG Industries.

Sims’ heirs were unaware they even had any interest in the property until Gastar notified them they’d have to sign off on the lease before they’d receive any of the royalties due from the pooled gas production. The heirs sued, seeking a declaratory judgment defining their “rights, status and/or other legal relations” as non-participating royalty owners.

In April 2016, Circuit Judge Jeffrey D. Cramer sided with the heirs — voiding the pooling and utilization clause in the PPG/Gastar lease “until such time as (the Sims heirs) consent to and authorize those operations.”

Cramer had pointed out the issues raised in the Contraguerro complaint break new ground in West Virginia, though other states have addressed it. Texas courts have held that pooling effected by the executive rights holder “cannot be binding upon the non-participating royalty owner in the absence of his consent.”

He said the rule in Texas is “the holder of the executive right has the power to execute oil and gas leases, but cannot pool or unitize” it without approval of the non-participating royalty interest owner.

Five of the eight oil and gas wells in Gastar’s Wayne/Lilly Unit have horizontal well bores penetrating the mineral interest underlying the 105.9-acre mineral tract, Cramer noted.

The 610-member Independent Oil & Gas Association says there’s a lot at stake. In a 25-page amicus brief, IOGA said the lower court’s order “has significant negative implications upon existing, and future, oil and gas development in West Virginia.”

Cramer’s decision “places additional and unnecessary burdens on the ability to pool oil and gas producing parcels in West Virginia,” IOGA said.

“Because the Marcellus Shale can only be economically developed by lateral wells that cross numerous parcels pooled together into a unit, and Marcellus production is important to our state’s economy and tax revenue, giving an owner without leasing rights a veto to development is not in the public interest,” it said.

The West Virginia Oil & Natural Gas Association said the Texas rule Cramer adopted relies on a “cross-conveyance” theory that had previously been rejected by West Virginia’s Supreme Court.

“The legal underpinning of the Texas Rule is not found in West Virginia law and the circuit court’s attempt to graft the Texas Rule onto our state’s jurisprudence will have real and practical consequences for the oil and gas industry that could negatively affect oil and gas owners, lessees, producers and the state of West Virginia itself,” WVONGA said.

“In practical terms, the Texas Rule would give any single (non-participating royalty interest holder) disproportionate power to thwart oil and gas development by giving him or her the power to withhold consent to pool, which will cause significant royalty allocation problems in the affected units. Specifically, producers will not be able to determine what percentage of royalty is to be allocated to a non-consenting (non-participating royalty interest holder), and ultimately, what royalties are to be allocated unit-wide,” WVONGA wrote.

Gastar’s attorney, William M. Herlihy of Spilman Thomas & Battle in Charleston, insisted the Texas rule “is a bad rule and will have extensive consequences for the oil and gas industry in West Virginia.”

Herlihy argued that West Virginia “has recognized and established legal principles concerning the scope and power of the executive right, the power of a deed grantor to dictate the interest that he or she conveys, the absence of the power to develop in a non-participating royalty interest holder, and the adoption of the contract theory of pooling.

“Disregarding these expansive principles and instead adopting the cross-conveyance theory of pooling will inject uncertainty in West Virginia oil and gas property rights jurisprudence and negatively impact both the industry and landowners,” he argued.

Cramer’s order voiding the lease and the pooling agreement “is unprecedented and unreasonable and should be reversed,” Herlihy noted. “No other jurisdiction has employed such draconian measures, and West Virginia should not become the exception.”

Herlihy told the justices “it’s undisputed that PPG had the executive rights and (thus) the power to lease” the acreage,” he said. “The power to lease is the power to make decisions to produce and develop the tract, that includes bonus payments, all the different aspects of the lease. Included in that concept is the idea of pooling and unitization.”

PPG’s legal counsel, Mychal S. Schulz of Babst, Calland, Clements & Zomnir P.C., insists the case is “remarkably simple.”

“The facts needed to resolve this appeal are not complex,” he told the court. “We don’t need to look to Texas law or California law or Illinois law … all we need to do is look at West Virginia law.”

In his brief, Schulz pointed out Gastar has been holding the royalties attributable to that one-quarter non-participating interest in escrow “pending confirmation of who, specifically, is entitled to those payments.” The Sims heirs, PPG adds, own only the non-participating interest, not the surface, and none live on the property.

“Plaintiffs make no complaint about the financial terms of the Gastar Lease and offer no evidence that the pooling of their one-quarter non-participating royalty interest in the property damaged them in any way,” he said in the brief, adding the Sims heirs chose to ignore applicable West Virginia case law, particularly Donahue v. Bills, that “eviscerates the notion that the holder of an ‘executive right’ to lease mineral interests must obtain the ‘consent’ of non-participating royalty interest holders before property is pooled for mineral production.”

PPG maintains the Sims heirs “have not, do not and cannot argue that they have been ‘damaged’ by the natural gas production that has taken place.”

Schulz said the 1946 deed specifically states PPG’s executive rights “ have no limitation” and “has the right to lease … the land for oil and gas purposes.

“The circuit court took a judicially crafted decision from Texas and (applied it) in a manner that, if it doesn’t directly contradict it, repudiates what this court said in Donahue,” Schulz added.

Contraguerro, represented by Jeremy McGraw of Wheeling-based Bordas & Bordas, contends it’s a question of protecting the ownership interest of the heirs — the non-participating royalty interest holders.

“There is no language in the 1946 deed which demonstrates that Mabel Sims ever intended that any executive would have the right or power to change her ownership royalty interest,” McGraw said in his brief. “With that understanding it is clear that the trial court did not do anything to limit the granting rights which created the executive, but instead served to protect the nature and extent of the rights actually reserved by the grantor.”

The heirs insist Gastar could have sought their consent before pooling, adding the Texas case law cited by the circuit court “provide(s) a much better, reasoned and practical approach which protects the non-participating royalty interests.”

“Gastar was not without options when it decided that it wanted to pool (the heirs) non-participating royalty interest,” McGraw’s brief states. “Had Gastar directly approached the (heirs) before the well was drilled and advised them of the lease and its plans, it is highly likely that this situation would never have arisen.”

McGraw said Gastar and PPG should have been “honest with the mineral owners about what was going to be going on with their property in the first place.”

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