The Road to Kellem Vs SWN

For many people in West Virginia, oil and gas production is a very real part of life, from 100-year-old wells to the more modern horizontal wells that exist amid pasture, hayfield, and woodlots. Many landowners and farmers get free gas off these wells for their homes and royalty checks from the production. Over the past decades though, the size of those royalty checks drove a disagreement between the landowners and operators, specifically around whether those checks should be reduced for what we call “post-production expenses.”

Some historical context is necessary here. For many decades, royalty rates were pretty much set at 1/8th at the well head, because the well head was where the gas was sold. It was simple and something everyone understood. Then the game changed, and through what is called “de regulation” the point of sale was moved to the consumer downstream, which allowed new middlemen to make money by transporting, processing, and gathering gas from all the individual wells. So instead of the oil and gas company owning both the wells and the pipelines, they spun off pipelines and processing facilities into separate companies often still controlled by the original parent company. This created a question, should the new charges for getting the gas to market be shared by the royalty owner? Eventually the WV Supreme Court weighed in and said there was an implied duty on the gas producer to market the gas, and this case is known as Wellman. After Wellman, the court later decided the case, Tawney vs Columbia Natural Resources, and in that case the court firmly placed WV in the market product rule legal category and prohibited post-production expense from being passed on to royalty owners unless the language of the lease specifically allowed for them and spelled out a method of calculation. Gas producers did not give up though, and challenged Tawney in a case know as Leggett vs EQT. West Virginia Farm Bureau intervened in this case by filing and Amicus Brief on behalf of Leggett, and the first Leggett decision was decided 3-2 in favor of Leggett, that royalties paid at the well head under the 1/8th statute should be deduction free. Then in a very unusual move, just a couple months later Justice Benjamin was replaced by Justice Beth Walker on the court, and one of the first actions taken by the court, Justices Ketchum, Loughry, and Walker voted to rehear the case and reversed the original decision. In what is called Leggett 2, those three justices declared the 1/8th statute allowed for deductions, and they criticized Tawney for having “faulty legs.”

Fortunately, Senator Charles Clements introduced a bill, SB 360 to fix the 1/8th statute, and with the very strong support of WVROA, West Virginia Farm Bureau and other landowner groups, that bill passed into law with an overwhelming bipartisan vote in both the House and Senate. But the story didn’t end there.

In Kellem vs SWN, the Federal Court for the Northern District of WV certified a question to the WV Supreme Court, “Is Tawney still good law in WV?” Due to Leggett 2, SWN had an opening to challenge Tawney and took it. Once again West Virginia Farm Bureau joined an Amicus Brief in support of Tawney, and in a 4-1 decision with only Justice Walker in dissent, ruled that Tawney is still good law, and reaffirmed its validity. Hopefully this cements WV as a market product rule state once and for all. Terms like market product rule and net back are legal jargon, but they have real impacts on people here in this state. We have seen real examples where the post-production costs deducted from royalty checks push them into negative amounts when the price of gas is lower, and dramatically reduce them at other price points. In parts of the state with horizontal drilling, this adds up to many millions of dollars leaving the state instead of being spent here in West Virginia. In practical terms this victory means more of the proceeds of oil and gas production stay in the hands of land and mineral owners, and that it is much harder to play games with people’s royalty payments. In our view, that is a good thing not only for landowners receiving those checks, but our communities, counties, and state where those royalty checks get spent and where taxes on them get paid. Once again, this major victory for WV property rights is at least in part due to the WVROA’s efforts and participation in these court cases as well as its engagement with the legislature. Thank you to all our members for their work and participation in those efforts!