Here’s an excellent quick article by Byron C. Keeling about the differences in how royalties are supposed to be calculated (by law) in many of the oil and gas producing states. Note that in West Virginia a producer has to calculate payment from the first point of sale, and can’t deduct any costs up to that point. The only exception to that rule will be if the lease specifically lists post-production costs that can be deducted. Even then, they may not have gone far enough according to the West Virginia Supreme Court of Appeals, which said that there also has to be a method of calculating those costs. See Tawney v. Columbia Natural Resources.
Nuttall Legal, LLC
West Virginia Oil and Gas Lawyer
The West Virginia Tawney case is a very strong stance in favor for the state’s mineral owners. However there are O&G companies still working to get around the old gross proceed leases. When mineral owners inquire about deductions on their royalty checks for their gross proceed leases, the owners are told by the O&G companies the old leases do not provide for production of natural gas liquids (NGLs) and they extract the NGLs when profitable. To share in those increased proceeds, the proportional costs of production are deducted from their royalty checks. These statements sound like the O&G companies are invoking the market enhancement clauses that are not contained in the old gross lease terms which Tawny addressed. When questioned, the O&G companies state they will remove proceeds from the NGLs and the cost associated with extracting NGLs and pay gross proceeds on the gross natural gas volume only which in most cases reduces the amount of royalty paid. It seems that Tawny addressed this, as proceeds shall be at market or first point (hopefully first arm’s length) sale which would prohibit this approach. Thoughts?
You’re right, Mike. Tawney is a very strong case, and it wasn’t the first that the West Virginia Supreme Court handed down which dealt with the question of deductions in that exact same way. While the old leases didn’t deal with NGLs directly, it’s safe to argue that royalties should be paid on anything that comes out of the well that is marketable. After all, the oil and gas company certainly doesn’t own anything coming out of the well unless they buy the rights to it. If NGLs aren’t covered by an old lease, then they need to be bought up under a new lease.