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West Virginia Royalty Law Abolishing Some Post-Production Deductions a Pen Stroke Away

West Virginia’s oil and natural gas producers would no longer be permitted to deduct post-production expenses from some landowners’ royalty checks under a bill awaiting the signature of Republican Gov. Jim Justice.

SB 360 was sponsored by Republican state Sen. Charles Clements to reverse a controversial West Virginia Supreme Court ruling last year that favored EQT Corp. and upheld post-production deductions from royalties. The favorable opinion came after EQT filed a petition for rehearing of an earlier ruling from the high court that would have prohibited post-production deductions.

The state Senate voted unanimously late last month to pass the legislation, which also cleared the House of Delegates by a vote of 96-2. It was unclear when or if Justice would sign the legislation. The bill does not apply to all leases, but only to less common flat rate royalty leases, which are often paid monthly or quarterly and not tied to the volume of oil and gas produced or marketed.*

SB 360 preserves the state statute requiring producers to pay landowners with flat rate leases a minimum 12.5% royalty on the value of production at the wellhead. However, it modifies the law to make clear that those payments be made “free from any deduction for post-production expenses.” For natural gas, those costs can currently be taken from royalties to cover expenses for items that include compression, dehydration and transmission.

The bill would nullify Leggett v. EQT Production, No. 16-0136, by Patrick and Katherine Leggett, who own mineral rights in the Marcellus Shale hotbed of Doddridge County. The plaintiffs claimed that EQT was  deducting post-production expenses for years and unlawfully reducing their net royalties.

SB 360 declares that the “continued exploitation of the natural resources of this state in exchange for such wholly inadequate compensation is unfair, oppressive, works an unjust hardship on the owners of the oil and gas in place, and unreasonably deprives the economy of the state of West Virginia of the just benefit of the natural wealth of this state…”

In petitioning for a rehearing, EQT said the state Supreme Court had misinterpreted state royalties laws, misapplied a previous ruling by the high court on a similar case and exceeded a lower court’s question. In explaining the court’s decision to reverse the previous ruling, Chief Justice Allen Loughry pointed to a similar case that came before the Pennsylvania Supreme Court.

“While the language” of West Virginia’s royalty statute “differs from that of the Pennsylvania statute, the import is the same: both were intended to guarantee a fair, minimum royalty to lessors calculated at the wellhead.” The plaintiffs, Loughry wrote in the opinion, “fail to persuade us that this purpose is undermined in any fashion through the pro-rata deduction or allocation of costs incurred to enhance the value of the oil or gas.”

However, the high court said the allegations against EQT were not without precedent and acknowledged that the case raised policy issues suitable for the state legislature.

The issue of post-production deductions has been controversial across the country.

In Pennsylvania, where royalty laws are different, the attorney general continues to pursue a lawsuit against Chesapeake Energy Corp. related to similar deductions. Lawmakers there have repeatedly tried to address the issue. Specifically, efforts to clarify the state’s Guaranteed Minimum Royalty Act for how marketing costs should or should not be factored into royalty payments have faltered for years

*Correction: The original version of this article indicated that SB 360 would prohibit post-production deductions from all oil and natural gas royalty payments.

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