Ohio Declines to Set Rule for Post-Production Costs

by Elizabeth Alford on November 10, 2016

Ohio’s top court declined to establish a ruling on post production costs for mineral owners.

Related: Ohio Supreme Court Sides with Mineral Owners

Last week, the Supreme Court of Ohio published its opinion in Lutz v. Chesapeake Appalachia, L.L.C., a case that has been carefully watched by industry officials and mineral rights groups alike.

At issue was whether the owners of a class action suit were underpaid on their gas royalties under the terms of their individual leases. The case centered around the question of law regarding how operators determine fees and costs that might be deducted from royalties. The “at the well” rule permits the deduction of postproduction costs, while the “marketable product” rule limits the deduction of postproduction costs under certain circumstances.

The court declined to establish a consistent rule and instead said that any postproduction costs that might be deducted from royalties must be decided based on the language used in each individual lease, or based on extrinsic evidence.

Under Ohio law, an oil and gas lease is a contract that is subject to the traditional rules of contract construction. Because the rights and remedies of the parties are controlled by the specific language of their lease agreement, we decline to answer the question of law submitted by the United States District Court for the Northern District of Ohio, Eastern Division and dismiss the cause. 

Legal experts are saying that this could create a potential barrier for future class action lawsuits based on underpayment of gas royalties.


Read more at supremecourt.ohio.gov


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