March 2nd, 2020
Post-Production Costs are Eating up your Royalties
Early on in the shale boom oil and gas operators were quite successful at getting landowners to sign leases which purported to permit the deduction of post-production costs from landowner royalty shares. As landowners caught up with the industry and got attorneys involved, fortunately some of that changed. There are still a lot of people, however, who are seeing very high percentages of their royalty payments taken out each month for these alleged post-production costs. What are those costs? Are they allowed? The law everywhere is that actual production costs, the costs of drilling and getting the gas and oil out of the ground, is not chargeable as part of a landowner royalty. Post-production costs, however, are not per se improper. Post-production costs are costs related to treating, processing, compressing, gathering and transporting gas from the wellhead to the point of sale. State law in WV, OH, and PA does allow landowners and operators to agree to the deduction of post-production costs as part of their lease contracts, but that agreement should be set out in the language of the lease. Additionally, just because a lease might mention post-production costs does not necessarily mean that all costs are allowed. West Virginia, for example, applies significant implied protections for landowners. Protections that he oil and gas industry have sought to change in the legislature and in the court. Right now, even if a West Virginia resident might have unknowingly agreed to a lease which includes post-production cost language, the company may still not be legally allowed to do so. The West Virginia Supreme Court has previously held that any language purporting to allow the deduction of those types of costs must include specific requirements before any of those costs can be deducted. If you have one of those types of leases and are seeing costs coming out, you really need to contact an attorney as soon as possible to determine if you are being treated fairly under West Virginia law. We have seen landowners losing 60-70% of their payments each month to alleged costs and have filed individual and class actions seeking to recover those funds. Even if a company can legally deduct costs that does not mean that the costs that they are deducting are accurate or reasonable. We have seen cases where the oil and gas companies are paying those “costs” to their own sister companies rather than third parties! Those types of transactions really raise eyebrows when considering the issue of post-production costs. Given the total control the gas and oil companies have over their accounting procedures and the complete lack of intelligible information that they give the landowners everyone should be wary and cautious with regard to their royalty payments. If you think your costs are high or if you think costs should not be deducted at all, please feel free to give us a call to discuss your payments and see if there is a way we can help.