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Clarity Needed for Royalty Deductions in West Virginia

by Elizabeth Alford on December 26, 2016

The fight over whether post-production fees can be deducted from royalty statements continues to play out in West Virginia Courts.

Related: West Virginia Bill Seeks Transparency for Mineral Owners

Royalty statements can be confusing, with owners not always knowing why they are being charged. Gas companies might deduct money for transportation, loss of gas and even marketing the gas.

In a 2006 lawsuit, a group of mineral owners claimed Columbia Natural Resources “fraudulently, intentionally and knowingly” underpaid royalties by deducting post-production costs. The West Virginia Supreme Court ruled for the plaintiffs, saying the gas company had incorrectly calculated the payments. The court awarded the royalty owners $134.3 million in compensatory damages and $270 million in punitive damages.

However the central question over deductions wasn’t settled and when a suit was recently file against EQT Production Co, the District Court asked the state’s Supreme Court to rule on what the state law allows.

In November, the court decided that the lessee could “not deduct from that (royalty) amount any expenses that have been incurred in gathering, transporting or treating the oil or gas after it has been initially extracted, any sums attributable to a loss or beneficial use of volume beyond that initially measured or any other costs that may be characterized as post-production.”

Earlier this year, the Oil and Gas Royalty Payment and Transparency Act (HB 4500) passed the West Virginia House of Representatives, which would amend an old 1931 code in order to ensure transparency in determining the amount paid to a royalty interest owner. The bill is currently being reviewed in the Senate.

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