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WVONGA says new Leggett royalty decision ‘encouraging’

By LINDA HARRIS

The State Journal

CHARLESTON, W.Va. — The West Virginia Supreme Court’s about-face on the legality of deducting post-production costs from royalty payments is “encouraging,” the head of the West Virginia Oil & Natural Gas Association said May 30.

The court had ruled in November state law didn’t permit gas producers to deduct costs incurred getting gas from the wellhead to the pipeline, only to agree to rehear the case a little over two months later. This time, justices decided the statute did, in fact, permit companies to deduct the post-production costs from royalty payments to rights owners who had flat-rate leases that were converted to comply with a 1982 statute

The majority in the most recent decision found “both the legislative intent and language utilized” in a 1982 statute permitted deduction of “reasonable” post-production expenses before paying royalties to rights owners. That 1982 statute required companies benefiting from the old, flat-rate leases to agree to pay the royalty owners one-eighth of the value of the gas “at the well head” if they wanted to re-drill the properties.

A complaint filed by Patrick Leggett, Katherine Leggett, George McCain, Kathryn McCain and Adele McDougal in Doddridge County in 2012 had accused Pittsburgh-based EQT of breaching its lease agreement with them by deducting post-production costs from their royalty checks. The leases in question, executed in 1906, were flat-rate leases converted to comply with the 1982 statute.

The case was moved to federal court, where U.S. District Judge Frederick P. Stamp stayed the proceedings to permit the state Supreme Court to decide how a 2006 decision in Tawney v. Columbia Natural Resources might impact the 1982 statute. In Tawney, the Supreme Court found the “at the well head” language in the 1982 statute to be ambiguous.

In November, the court had pointed to that ambiguity when it ruled the post-production costs could not be charged to the rights owners.

“We do not believe that permitting lessors to benefit from royalties based upon an enhanced, downstream price without commensurately sharing in the expense to create the enhanced value effectuates the ‘adequate’ and ‘just’ compensation sought by the statute,” said Chief Justice Allen Loughry, writing for the majority in the May 26 opinion. “Nowhere within the stated purpose did the Legislature utilize language which enabled the ‘maximum benefit to landowners’ construction adopted by the previous majority.”

Justice Margaret Workman, who authored a concurring, six-page opinion, also said the Legislature needs to address the issue “and declare, by statute, the will of the state’s citizenry in this regard.”

But WVONGA Executive Director Anne Blankenship said it’s “encouraging to know our state justice system is looking at these matters closely and carefully and understands the complexity of these types of leases.”

“It’s always good for our producers to get clarity regarding the conduct of all aspects of our operations. WVONGA producers enjoy mutually beneficial partnerships with thousands of West Virginia mineral owners,” Blankenship said. “We’ll keep working to help local royalty owners create wealth for their families.”

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