State Supreme Court reverses previous ruling in gas royalties case

By Kyla Asbury | May 30, 2017

CHARLESTON – The West Virginia Supreme Court of Appeals has reversed its previous ruling in a lawsuit regarding royalties payments to property owners who have natural gas wells on their properties.

CHARLESTON – The West Virginia Supreme Court of Appeals has reversed its previous ruling in a lawsuit regarding royalties payments to property owners who have natural gas wells on their properties.

Chief Justice Allen Loughry authored the majority opinion. Justice Margaret Workman concurred and filed a concurring opinion. Justice Robin Jean Davis dissented and reserves the right to file a separate opinion.

The case is before the court upon certified questions presented by the U.S. District Court for the Northern District of West Virginia regarding whether its decision in Tawney V. Columbia Natural Resources has “any effect” upon whether a lessee of an oil and/or gas lease subject to West Virginia code may deduct post-production expenses from the lessor’s royalty, according to the May 26 opinion.

“Upon original hearing, a majority of this court reformulated the certified question and held that royalties paid pursuant to leases which were subject to West Virginia Code § 220608 could not be ‘diluted’ by costs incurred downstream from the wellhead, nor could amounts attributable to loss or beneficial use of volume be deducted prior to calculation of royalties,” the majority opinion states.

However, upon careful review of the briefs on rehearing , the appendix record, the arguments of the parties and amici curiae and the applicable legal authority, the Supreme Court concluded that both the legislative intent and language utilized in West Virginia Code § 22-6-8 permits allocation or deduction of reasonable post-production expenses actually incurred by the lessee and more specifically permits use of the “net-back” or “work-back” method of royalty calculation.

The petitioners are owners of a 75 percent undivided interest in the gas estate of a 2,000-acre tract in Doddridge County. Certain wells on the property are “flat-rate” wells.

The petitioners filed suit against EQT Production Company and affiliated companies for underpayment of royalties, resulting from EQT’s deduction of certain costs incurred for the gathering and transporting of the gas to the interstate pipeline.

“Upon review of EQT’s petition for rehearing, this court determined that substantial justice required us to revisit the prior opinion issued in this matter to ascertain whether the previous majority had misapprehended certain points of law,” Loughry wrote.

Loughry wrote that with all due regard to the previous majority’s consideration of the admittedly complex and subversively entangled issues implicated in the case, the Supreme Court concluded that it did, in fact, misapprehend the applicability of certain common law principles and exceeded its charge in its interpretation of the statute.

Loughry wrote that the Supreme Court readily concluded that the phrase “at the wellhead” is not ambiguous as used in West Virginia Code § 22-6-8.

“Despite Tawney’s conclusion to the contrary, we disagree fully with its rationale that ‘at the wellhead’ is ambiguous simply because it fails to fully outline allocation of post-production costs,” Loughry wrote. “Rather, the absence of such terms is mere silence and as this court has repeatedly held, ‘silence does not, in and of itself, render a statute ambiguous.’”

The Supreme Court implored the Legislature to resolve the tensions as it sees fit inasmuch as the court may only act within the confines of its “constitutional charge,” according to the opinion.

In her concurring opinion, Workman wrote that she concurred with the majority’s conclusion that the use of the phrase “at the wellhead” must be construed in a manner which most closely effectuates the Legislature’s intent at the time the statute was enacted.

Workman wrote that she wrote separately to emphasize that the majority’s decision to allow cost deduction may not be abused to the detriment of lessors who are chargeable with pre-rata costs and to urge the Legislature to enact specific protections to assure fairness and reasonableness in the calculation of post-production costs.

W.Va. Supreme Court of Appeals case number: 16-0136

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