West Virginia Legislature Overrules the Supreme Court

West Virginia Legislature Overrules the Supreme Court

For all the negative ideas coming out of Charleston during the recent legislative session, there was one small victory for mineral owners. Some of you might be aware that the West Virginia Supreme Court recently held a rehearing of one of its prior decisions, EQT v. Legget, and determined that oil and gas operators would be permitted to subtract post-production costs from old “flat-rate” royalty leases which had been modified by the minimum royalty statute. Years ago, there were many oil and gas leases which did not pay mineral owners a percentage of proceeds for their royalty, but instead paid pre-set flat fee- for example $300 per year after a well was drilled. Ultimately, the West Virginia legislature passed a statute which required minimum royalties of 12.5%. Old “flat-rate” leases were grandfathered into the new law unless the operator needed to alter their permit.  After the permit was altered, those old leases had to meet the 12.5% royalty requirement. 

Could the oil and gas operator subtract post-production costs from that minimum 12.5% royalty under the statute? Originally the West Virginia Supreme Court said no. A change in the make-up of the Court after the most recent Supreme Court elections enabled the new majority to rehear that decision and change their ruling. The new Court decided that it would allow post-production costs to be deducted from those 12.5% statutory leases. This year, however, Senate Bill 360 changed that. The bill passed both houses and was signed by the governor on March 9, 2018. The new law specifically altered the language of W.Va. Code § 22-6-8(e) to state that payments under the statute should be based on “the gross proceeds, free from any post-production expenses.” This does provide some protection to mineral owners, but there are still questions. The statute includes language referencing the “first point of sale” which still might be used to limit the monies ultimately payable to mineral owners.   Oil and gas operators might try to create earlier markets for gas such that the “price” that they receive is lower and ultimately lower royalties are paid to landowners. The concern is that these oil and gas operators might still obtain their value for the gas through other contractual and business relationships with the “third parties” who buy the gas. In any event, in a legislative session which seemed intent on continuing to protect big business, and the oil and gas industry in particular, there was one small victory and perhaps something that can be built upon moving forward. The new law, however, does not fully protect other landowners from the dangers of post-production costs. The oil and gas companies are continuing their assault on landowners by trying to milk every last cent of costs from the landowner’s royalty share. Landowners are losing as much as 50-60% of their royalty payments to these costs. 

If you have concerns about the nature and types of costs being deducted from your royalty checks, please do not hesitate to contact us!


Jeremy McGraw explains the recent WV Supreme Court decision to rehear one of its prior decisions, EQT v. Legget.