The Pennsylvania Supreme Court has rejected the long-standing test for analyzing claims brought under Article I, Section 27 of the Pennsylvania Constitution, commonly known as the Environmental Rights Amendment (ERA). In its June 20, 2017 decision in Pennsylvania Environmental Defense Foundation (PEDF) v. Commonwealth, the Supreme Court set aside the test from Payne v. Kassab that has been used since 1973, and held that the Commonwealth’s oil and gas rights are “public natural resources” under the ERA and that any revenues derived from the sale of those resources must be held in trust and only expended to conserve and maintain public natural resources.
The Supreme Court’s opinion in PEDF is an important step in the ongoing judicial re-examination of the ERA. However, the impact of the Court’s decision on environmental and land use issues beyond the relatively narrow facts of this case remains unclear.
For more information, read our Administrative Watch.
On May 26, 2017, in a suit styled Leggett v EQT Production Company, the West Virginia Supreme Court of Appeals issued majority and concurring (links to PDFs) opinions finding 4-1 that the use of the language “at the wellhead” in the Flat Rate Royalty Statute allows the use of the “net back” method to calculate royalties, and that the Estate of Tawney v. Columbia Natural Resources, L.L.C. case does not apply or control. Leggett was certified to the West Virginia Supreme Court of Appeals to determine whether the holding in Tawney, which did not allow post-production expense deductions when calculating royalty, applied when royalties are paid on old, flat rate leases converted to a 1/8 royalty by application of West Virginia’s “Flat Rate Royalty Statute.” The statute provides that royalties are to be paid “at the wellhead.” Tawney held that “at the wellhead” language in a lease was ambiguous, and deductions could not be taken unless expressly authorized in the lease in detail as to the type and method of calculation. After initially deciding Tawney applied and refusing to allow deductions under the Flat Rate Royalty Statute, the Leggett majority (with a change in composition post-election) reconsidered the case and reversed itself. The Court held that the rules of contract construction used to decide Tawney did not apply when interpreting a statute. More importantly, the Court seems to be signaling that it is willing to reconsider and possibly reverse Tawney, which could subsequently impact royalty calculations for West Virginia production.
On March 23, 2017, a Committee Substitute for Senate Bill 576 (SB 576) was introduced to the West Virginia Senate Judiciary Committee that substantially rewrote the original version of the bill, which addressed the oil and natural gas industry’s effort to efficiently develop production of natural resources. For an analysis of the original version of SB 576, click here.
Among the significant changes in revised SB 576 are the following:
- The percentage of cotenant mineral ownership interests needed to consent to mineral development is increased from two-thirds to three-fourths.
- Non-consenting mineral owners are still entitled to production royalties free of post-production expenses, but they are also entitled to a bonus payment calculated as “equal to the average amount paid to such consenting cotenants calculated on net mineral acre basis.”
- Non-consenting mineral owners may forgo receiving a production royalty payment by electing to obtain a “revenue share” in development, which allows the non-consenting mineral interest holders to essentially obtain a working interest in the production activities on the tract.
- If any property subject to mineral development under this statute has a non-consenting mineral interest owner, the surface of that property may not be disturbed for that development without the consent of the surface owner, unless such disturbance is permitted through a prior surface use agreement or is otherwise permitted by a “valid contractual arrangement.”
- “Joint development” is still permitted for multiple contiguous oil and gas leases, but the “operator” must pay surface owners damages available under W. Va. Code §22-6B-3, all damages permissible under common law, and $30,000 for “each well pad constructed by the operator which results in damage to that surface owner’s property.”
- “In the absence of specific language to the contrary, the royalty for all royalty owners of acreage jointly developed . . . shall not be reduced for post-production expenses incurred by the operator.” This provision, however, is not “intended to impact royalties due for wells drilled prior to the effective date of this chapter.”
- Consenting cotenants (or the operators) are subject to detailed reporting requirements that includes the amount of oil or natural gas produced and sale information, including price, for that oil and natural gas.
- Detailed guidelines for the payment of royalties are added, which include a requirement that royalties must be paid once the royalties due exceed $100, payment must be made within 180 days from the date that the sale of mineral is realized, and regardless of the amount of royalty due, payment must be made at least once a year.
Babst Calland will follow SB 576 during West Virginia’s Legislative Session, which is scheduled to end on April 8, 2017.
A Pennsylvania senate committee recently unanimously approved two bills regarding oil and gas royalty calculations. StateImpact Pennsylvania reported that Senate Bills 147 and 148 were approved by the Senate Environmental Resources and Energy Committee on Wednesday, January 21, 2015. If passed into law, SB 147 would require operators to disclose more information on royalty checks, including calculations and joint ventures between companies. The bill would also permit landowners to inspect company records, even if that right is not set forth in an oil and gas lease. SB 148 would prohibit operators from retaliating against landowners who question the calculation of their royalty payments. The bills are two of several that have been introduced in the state house and senate in the last year.
A third bill, Senate Bill 279, also passed the senate committee with unanimous approval. This bill would create the Pennsylvania Grade Crude Development Advisory Council, which would advise and assist the state Department of Environmental Protection with the differing regulations for conventional oil and gas operations and unconventional oil and gas operations. All three bills will move forward for consideration by the full senate.
NPR’s StateImpact Pennsylvania reports that the Pennsylvania Farm Bureau is getting involved in the debate over minimum royalties. As we have previously posted, House Bill 1684 is currently in the state House. If passed, the bill would guarantee landowners a minimum royalty of 12.5%, which could not be reduced further by post-production costs. The Farm Bureau is putting its support behind the bill, as indicated by remarks from the Farm Bureau’s President, Carl Shaffer.
The United States District Court for the Western District of Pennsylvania has accepted in part the recommendations of a magistrate judge, and has granted the motion to certify two classes of plaintiffs in Pollock v. Energy Corp. of America. A third class was denied certification. In February, District Judge Joy Flowers Conti ruled on a summary judgment motion.
The plaintiffs, owners of various oil and gas interests under lease to Energy Corporation of America (ECA), brought suit for the alleged miscalculation of royalty payments by ECA. The classes, as certified, now encompass two groups: 1) “all Pennsylvania lessors holding an oil and gas lease with ECA for which interstate pipeline service charges were deducted prior to March 26, 2012;” and 2) “all Pennsylvania lessors holding an oil and gas lease with ECA for which marketing fees were deducted from royalties prior to March 26, 2012.” The third requested class, based on the failure to pay royalties on gas used as plant fuel, was denied.