Major Decision by the West Virginia Supreme Court of Appeals – Non-Participating Royalty Interest Owner Rights Clarified
June 01, 2017
On May 31, 2017, the West Virginia Supreme Court of Appeals issued a significant opinion regarding the clarification of rights for non-participating royalty interest owners (“NPRI”). In the opinion Gastar Exploration, Inc. v. Joyce Contraguerro, et al., Appeal No. 16-0429, the Court ruled in regard to oil and gas leases and drilling units covering the property to which the NPRI rights attach. This decision is significant because hundreds of NPRIs are included in drilling units located in Northern West Virginia based upon established law in the state. Granting the ability to object to oil and gas pooling and unitization to NPRI holders would have drastically interfered with the ongoing operation of existing drilling units and the development of future operations in West Virginia.
In a 1946 deed, the predecessors in interest to the plaintiffs in this case conveyed away the executive right to lease the oil and gas under a 105.9 acre tract of land as well as the right to obtain bonus payments and delay rentals. These NPRI owners only retained the right to a royalty on any oil or gas produced from the property if and when it was leased for development. In the Marshall County Circuit Court case, the Judge had granted summary judgement to the NPRI owners ordering that they not only had the right to approve the inclusion of a pooling clause in the lease that applied to the property involved, but also the right to consent to any subsequent inclusion of that property in a drilling unit. Based upon this holding, the Circuit Court ruled that both the pooling clause in the lease as well as the resultant drilling unit were invalid.
In a unanimous decision, the Supreme Court reversed the order granting summary judgment issued by the Circuit Court, holding that the owners of a NPRI do not have the right to consent to either the inclusion of a pooling clause in an oil and gas lease or the formation of the resultant drilling unit. In writing the opinion, Justice Ketchum found that the pooling of NPRIs with the interests of other property owners does not create a joint or undivided property interest in the oil and gas, and therefore rejected the cross-conveyance theory proposed by the plaintiffs. Instead, he declared that the pooling of oil and gas property interests consolidates the property owners’ contractual and financial interests, which is consistent with prior West Virginia law on this subject. The Supreme Court went on to reverse the ruling of the Circuit Court and vacate its invalidation of the pooling provision in the oil and gas lease and the drilling unit at issue in this case.
According to William M. Herlihy, a member at Spilman Thomas & Battle, who is one of the counsel for Gastar Exploration, Inc, “This case was especially important to the state of West Virginia as natural gas has been and will be continuing to lead the charge in having a dramatic impact on economic development throughout our region. Natural gas companies need to be able to develop and produce their products in a stable legal and regulatory environment. This decision by the Supreme Court upheld existing West Virginia law which avoided an unanticipated and potentially catastrophic impact on our state’s future oil and gas development.”