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Prohibition of Post-Production Expenses on Flat Rate Royalty Leases in West Virginia
March 12, 2018
S.B. 360
Passed - March 2, 2018
Signed by Governor - March 9, 2018
Effective -- May 31, 2018
Summary of S.B. 360
SB 360 applies to flat rate royalty leases, i.e. leases for which the royalty is not "inherently related to the volume of oil and gas so extracted, produced, and marketed," and the conditions upon which a well work permit may be issued. The law proposes to reverse the West Virginia Supreme Court decision in Leggett v. EQT dated May 26, 2017, 239 W.Va. 264, 800 S.E.2d 850, which held post-production costs may be deducted from the 1/8th royalty share imposed by W. Va. Code § 22-6-8(d) for flat rate royalty leases subject to new permits. Note this legislation does not give relief to lessors whose royalty clauses are linked to the volume of oil and gas extracted, produced or marketed regardless of how small the negotiated volumetric royalty rate.
SB 360 expressly imposes a condition on the issuance of a well work permit by the West Virginia Department of Environmental Protection that the owner of the oil and gas in place shall be tendered "not less than one-eighth of the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm's length transaction for the oil or gas so extracted, produced or marketed before deducting the amount to be paid to or set aside for the owner of the oil and gas in place, on all such oil or gas to be extracted, produced or marketed from the well".
Thus, at least for well work permits issued as of May 31, 2018, where a lease provides for a flat royalty not related to the volume produced, the operator must pay a royalty of at least 1/8th of the gross proceeds without deduction of post-production expenses. The term "post-productions expenses" is not defined in Chapter 22 related to oil and gas operations, but the term is defined in the Cotenancy Modernization and Majority Protection Act, §37B-1-3, as " an expense or cost subsequent to production including, but not limited to, an expense or cost related to severance taxes, pipelines, surface facilities, telemetry, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or natural gas and their constituents." However, it is not clear whether that definition of post-production expense will be applied with respect to SB 360 and well work permits issued based upon W. Va. Code §22-6-8(e).

If you have any questions about this issue, please contact us.
Energy Law Mark D. Clark
304.340.3876 William M. Herlihy