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Federal Court Denies XTO's Motion to Dismiss Pennsylvania Class Action Royalties Lawsuit

A federal judge in Pennsylvania has denied ExxonMobil Corp. subsidiary XTO Energy Inc.'s motion to dismiss what could be a class action lawsuit filed against it last year for allegedly deducting post-production costs from royalty payments in the state.

After a review of pleadings and documents in the case, U.S. Magistrate Judge Cynthia Reed Eddy in February denied XTO's motion, allowing the case to proceed. A family trust and farm that have 303 acres under lease with XTO in Butler County filed the complaint in July 2015 in the U.S. District Court for the Western District of Pennsylvania alleging that the company breached their leases by deducting post-production costs, such as compression, processing and transmission (see Shale Daily, July 20, 2015).

At a conference in April, according to court documents, the parties failed to reach a settlement, moving the case into pretrial proceedings. The plaintiffs claim that they're owed $75,000 in royalties, plus court costs. They also allege that more than 100 landowners with XTO leases in Western Pennsylvania have similar grievances and are owed more than $5 million.

The plaintiffs claim that their leases, executed by Phillips Production Co. before it was acquired by ExxonMobil, barred post-production deductions and instead provided for royalty payments based on the gross proceeds of gas produced on their property. They're seeking class action certification for their complaint, as others have across the state in similar claims against producers.

State and federal courts, XTO argued in its motion to dismiss, have applied a 2010 Pennsylvania Supreme Court decision, Kilmer v. Elexco Land Services Inc., to authorize the netback method and shield producers from having to pay higher royalties (see Shale Daily, Sept. 24, 2015; March 29, 2010). The netback method helps determine the fair market value of natural gas at the wellhead by subtracting value-enhancing post production costs.

But the court found the case can proceed and ordered fact discovery related to class certification to be completed by December. The plaintiffs can also file their motion for class certification by April 2017, and a hearing on that motion has been scheduled for July 2017.

Earlier this month, XTO said it would not oppose the plaintiffs' role as class representatives and said it was the proper defendant to determine and pay royalties on behalf of Phillips.

XTO has about 500,000 net acres under lease in Pennsylvania, roughly 46,000 of which are located in Butler County. The company told NGI's Shale Daily after the lawsuit was filed last year that it's committed to properly paying royalty owners under the terms of their leases.

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