ExxonMobil Corp. subsidiary XTO Energy Inc. has asked a federal court in Pennsylvania to dismiss what could be a class action lawsuit filed against it for deducting post-production costs from royalty payments in the state.
In its argument, filed on Monday, the company has turned to what has become the industry's chief defense against such claims in the state, pointing to a 2010 Pennsylvania Supreme Court decision that determined the "netback" method of calculating royalties does not violate state law (see Daily GPI, March 29, 2010). State and federal courts have applied the Kilmer v. Elexco Land Services Inc. case to authorize the netback method and shield producers from having to pay higher royalties, according to XTO. The netback method helps determine the fair market value of natural gas at the wellhead by subtracting value-enhancing post production costs, such as compression, processing and transmission.
In July, a family trust and farm that have 303 acres under lease with XTO in Butler County filed the lawsuit in the U.S. District Court for the Western District of Pennsylvania alleging XTO breached their leases by deducting those costs (see Shale Daily, July 20). The plaintiffs also claimed 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. The plaintiffs are also seeking class action certification for their complaint as others have across the state in similar claims against producers.
In all, the plaintiffs claim that they're owed $75,000 in royalties, plus court costs, and also allege that more than 100 landowners with XTO leases in Western Pennsylvania have similar grievances and are owed more than $5 million.
But XTO argues that the Kilmer case bars the plaintiffs' complaint because it held that royalties are subject to costs incurred after production, saying courts across the country have found the netback method to be the most logical and economical way of calculating royalties. The 2010 Pennsylvania Supreme Court case pitted a group of landowners against a land brokerage firm and Southwestern Energy Co. That case resolved several pending in Pennsylvania state and federal courts at the time, when the justices ruled in favor of the land firm and Southwestern. Other producers have consistently pointed to the high court's decision in defending post-production deductions.
In the past, however, federal judges have denied producers' motions to dismiss landowners’ claims because they deemed the term "royalty" under the state's Guaranteed Minimum Royalty Act to be ambiguous.
While the plaintiffs in the XTO case claim Phillips honored the terms of their leases by paying royalties based on gross proceeds, XTO also said they've failed to provide facts for that argument.
"The leases do not state that the royalty should be paid based on 'gross proceeds,' nor do the leases contain express language forbidding deductions," XTO wrote in its motion to dismiss. "...The complaint does not allege any factual basis for plaintiff's belief as to what the original lessee knew or understood. What the original lessee may have subjectively believed does not change the plain language of the leases."
Recent cases against other producers were prompted by an outcry last year from landowners in the state alleging Chesapeake Energy Corp. was unfairly deducting post-productions costs (see Shale Daily, Feb. 18, 2014). The state attorney general's office started an investigation into the matter and landowners have pushed for class action status in their claims against Chesapeake (see Shale Daily, Jan. 2; March 14, 2014).
Lawmakers have also introduced legislation that would shield royalty owners from post-production costs with a bill to clarify the state's guaranteed payment of the statutory minimum of 12.5% of the value of oil and gas produced (see Shale Daily, June 26). That bill was reintroduced in June after it stalled last year.
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 in July after the lawsuit was filed that it's committed to properly paying royalty owners under the terms of their leases.