CHARLESTON — Legislation that would correct what some flat-rate gas royalty owners insist was a bad decision by the West Virginia Supreme Court last year allowing energy companies to deduct post-production expenses from their payments is headed to the Senate Judiciary Committee.
Senate Bill 360, sponsored by Sen. Charles Clements, R-Wetzel, would require energy companies to pay royalty owners one-eighth of the gross proceeds at the point of sale to an unaffiliated, third-party company.
That would prevent companies from assessing post-production costs against the royalty owners, a practice West Virginia Royalty Association President Tom Huber says can leave them with a negative balance.
“That’s our top priority,” said Huber, who described Clements as “gutsy” for being willing to take on the energy industry.
“We talked to (him) about it early on in session. He’s really run with it, he believes in it,” Huber said. “It deals with what we consider to be a very bad decision from the Supreme Court over the summer, but they did say in their decision … that the Legislature should take this issue up, so we’re glad the Legislature has decided to do so.”
The court had ruled 3-2 in November 2016 in Leggett vs. EQT that state law didn’t permit gas producers to deduct costs incurred getting gas from the well to the pipeline from royalty payments, then abruptly decided to rehear the case a little over two months later after the departure of former justice Brent Benjamin. With Benjamin gone, the court reversed itself, 4-1, in 2017 and decided companies could deduct the post-production costs from royalty payments to rights owners who had flat-rate leases they’d converted to comply with a 1982 statute.
The majority that time found the 1982 statute permitted deduction of “reasonable” post-production expenses from royalties, though the justices also stated language in the statute requiring companies to pay royalty owners one-eighth the value of the gas “at the well head” was ambiguous.
“It’s getting a lot of resistance from EQT,” Huber said. “They are the gas company that controls most of the old, flat-rate leases in the state. There’s quite a few of them, and that’s what the bill deals with. But from a matter of fairness and public policy, we feel at WVROA that paying a one-eighth royalty to people held by indefinite leases when they’re drilling these new horizontal wells is not asking a lot.”
Huber said most new leases have from 15 percent to 20 percent royalties, “and developing these old leases at a 12.5 percent rate is pretty much a steal as it is.
“We just want to make sure some of the proceeds from (gas) development stays in the state of West Virginia with West Virginia royalty owners and landowners and that all the money doesn’t go (out-of-state),” he said.
Dave McMahon, founder of the West Virginia Surface Rights Owners Association, said most flat-rate leases were signed well over a hundred years ago and were rarely producing, until new drilling technologies were developed.
“We think it’s only fair they redo them in modern lease terms, and modern lease terms say no post-production deductions,” McMahon said.
Clements said the court’s 2017 ruling literally invited the Legislature to intervene. He said lawmakers need to define parameters, “because if we don’t do it they’ll write their own rules.”
“Really, it’s a starting point,” he added. “As far as I’m concerned, we’re negotiating with these people. We need to define how ‘price at the wellhead’ is determined, because that affects royalties.”
Clements said royalty owners aren’t told what production costs are included or how they are calculated, and the value of the gas coming out of the ground isn’t defined.
“It should be based on the first arms-length sale,” he said, though noting sales to subsidiaries are not arms-length, so that also has to be considered. “We need to define how the price ‘at the wellhead’ is calculated.”
“I spent almost an hour on the phone with a royalty owner who had calculated the revenue from wells on his property at $11 million, but he only got $200,000,” Clements said. “Now, that’s nothing to sneeze at but it’s a long ways from one-eighth of $11 million.
“I’ve had people with post-production expenses on their well who got nothing. The only thing I’m saying is if we don’t define the parameters, then the gas company is going to. Not only does that hurt the royalty owners, but it also hurts state revenue collections on severance taxes because we got an artificially low price at the wellhead.”
Clements said SB 360 passed unanimously out of Energy and was sent to Judiciary, where it will face renewed scrutiny.
“I would venture to say a large percentage of people I talk to about this legislation are in favor of it,” Clements noted. “If you read the legislation and look at what it says — all we want to do is define the parameters so everybody is playing on a level playing field.”