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Federal District Court in Ohio Sides With Producers in Post-Production Royalties Case

In a victory for oil and gas producers, a federal district court in Akron, OH, said it believes the Ohio Supreme Court would hold that state law follows an "at the well" rule on leases, which in turn would allow companies to deduct post-production costs.

Although the Ohio Supreme Court has not ruled on the issue, the U.S. District Court for the Northern District of Ohio issued a ruling that said it believes that state's highest court "would adopt the 'at the well' rule, simply applying the clear and unambiguous language in the leases...

"A close reading of the royalty provision, in light of Ohio's contract law, leads to the conclusion that the parties' intent was that the location for valuing the gas for the purposes of computing the royalty was 'at the well.' Accordingly, the court concludes that Ohio would apply the 'at the well' rule."

The district court ordered attorneys on both sides in the case -- Regis Lutz et al. v Chesapeake Appalachia LLC et al. [No. 4:09-cv-2256] -- to confer and propose joint suggestions on how to proceed with the case by Nov. 8. The court will then hold a telephone conference, with only the attorneys, on Nov. 14.

Chesapeake welcomed the decision, spokesman Gordon Pennoyer told NGI’s Shale Daily on Monday. The court’s decision provides clarity to Chesapeake "and other operators as development continues to progress in the Utica Shale.”

Nearly one year ago, the Ohio Supreme Court ruled that landowners challenging producers in court over the deduction of post-production costs from royalty checks must keep heading to trial courts to resolve the issues on a case-by-case basis.

Last August, Chesapeake Appalachia LLC renewed its motion for partial summary judgment and requested oral argument in the case, which began in September 2009, when a group of landowners filed a class action lawsuit against the affiliate of Chesapeake Energy Corp. The landowners alleged that Chesapeake and non-affiliated predecessor companies had underpaid gas royalties due to them under the terms of their leases by deducting post-production costs.

Chesapeake didn't own the leases in question until 2005, but the plaintiffs allege the underpayments began in at least 1993.

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