US District Court finds Ohio Would Follow "At the Well" Rule for Post-Production Costs

U.S. District Court Finds Ohio Would Follow the “At the Well” Rule for Post-Production Costs

BY ILYA BATIKOV ON OCTOBER 26, 2017POSTED IN ENERGY

In a decision released yesterday, the United States District Court for the Northern District of Ohio concluded that Ohio would adopt the “at the well” rule regarding the deduction of post-production costs, the first time the issue has been squarely addressed under Ohio law. Lutz v. Chesapeake Appalachia, L.L.C., N.D.Ohio No. 4:09-cv-2256 (Oct. 25, 2017).

By way of background, the plaintiffs (landowners/lessors) had filed a class action complaint, alleging the defendant lessee underpaid gas royalties under the terms of their oil and gas leases by allocating to the plaintiffs their share of post-production costs when calculating royalties. Three lease forms were at issue, including one that contained “at the well” royalty language:

The royalties to be paid by Lessee are: . . . (b) on gas, . . . produced from said land and sold or used off the premises . . . the market value at the well of one eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. . . .

The lessee argued that the “at the well” language meant that a lessee could deduct post-production costs from the downstream sales price of natural gas to work back to the price of the gas “at the well” when calculating royalties. The plaintiffs, conversely, urged the court to adopt the “marketable product rule,” which provides that post-production costs—for example, costs for compression, dehydration, processing, and transportation of gas—must be borne solely by the lessee.

In April 2015, the district court certified the question of whether Ohio follows the “at the well” or the “marketable product” rule to the Supreme Court of Ohio.  Although the Supreme Court of Ohio accepted the certified question, it ultimately declined to answer it, concluding that oil and gas leases are contracts and the “the rights and remedies of the parties are controlled by the specific language of their lease agreement[.]”

Afterwards, the lessee filed a motion for partial summary judgment as to the “at the well” lease form, which the district court granted in yesterday’s decision. In its ruling, the district court determined that Ohio would apply the “at the well” rule.  Concluding that the “at the well” language in the lease was clear and unambiguous, the district court found that it referred to the “location at which the gas is valued for purposes of calculating a lessor’s royalties”—i.e., at the well.  Conversely, applying the marketable product rule, as urged by the plaintiffs, “runs the risk of giving the lessor the benefit of a bargain not made.”

Read the full decision here.


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Permalink Reply by bo boboski on October 26, 2017 at 10:23am

Ok, cool. Now put that in words that most  ordinary,non lawyer folks can understand. Is that decision good or bad for those whose lease says royalties are paid a % of "at the well" value.   with no post production costs deducted. 

Permalink Reply by Dott on October 26, 2017 at 12:17pm

I would think that if you have a lease that states "no post production costs deducted" technically non should be taken no matter where it begins.  But many have that language in their leases and yet are charged deductions from scrupulous Oil and Gas companies.  I too was hoping for others to give their opinion on the court's decision and how it will effect most minerals rights owners.

Permalink Reply by bo boboski on October 27, 2017 at 8:45am

You got to look for "at the wellhead" language. Some older leases included that phrase. Since they don't sell the oil&gas at the wellhead, then it comes down to; just what is it worth,at the wellhead. which would be before a lot of post production costs.

Permalink Reply by Dott on October 27, 2017 at 10:53am

Bo,

After reading the article that Becky provided I think if you have language that states "at the well " with no post production costs deducted that is not good and any deductions may now be taken.  But if you have language that states no post production costs but does not include "at the well" verbiage than there still is hope because those cases are still moving forward to be litigated.

Permalink Reply by Barry D on October 27, 2017 at 11:06am

bo,

This is not good. The gas is valued at the well, but it's no good to anyone unless it's moved and sold.

Thus, by this decision, the operator is allowed to charge for the costs of moving the gas to market.

Remember, I am not an attorney, although I have played one on TV. I offer my opinion free of charge

and FWIW.

I would suggest that anyone dealing with a lease consult with a competent Oil and Gas Attorney, not

you cousin Vinnie Boom Box.

Permalink Reply by Becky on October 26, 2017 at 3:24pm
Permalink Reply by Brian Woodcock on October 27, 2017 at 2:46am

OKCorrect me if I am wrong. Ohio law now allows the guy who owns the property to get his money without any deductions, unless the individual lease words do not contain words that allows the gas company to include deductions. REmember we are dealing with the worst gas company in the business, they will get you exactly what the lease says. Hopefully PA courts will rule the same way in the future. Take note newbees. Your lease must include "Without any deductions".

Permalink Reply by James T Monyak on October 27, 2017 at 4:29am

My lease has the words "without any deductions, but also has words that allow deductions"  Since CHK is the lessee, they have legal resources to win this argument.

Permalink Reply by Dott on October 27, 2017 at 6:03am

James ,

You must be referring to a "Market Enhancement Clause" which begins with the word "However".  You are right I have been told that it was put in as a ploy to get people to think they had a no deduction lease but in reality allows the O&G company to take whatever deductions they want under the guise of "it was to enhance the product in order to sell it at a better price".  They began doing this in the leases when people started to realize that they could have no deduction leases.  This was the companies way around it.

Permalink Reply by Dott on October 28, 2017 at 4:10am

Carp 4,

This is an example of a Market Enhancement clause.  It leads you to believe that you will pay no deductions or if you do it will only be because you will be getting a better price but that is not necessarily true.  It was just a way for the company to be able to charge you deductions. They claim everything they do to it including transportation is enhancement.

Market Enhancement Clause is sometimes Titled as such and the paragraph states:

Such royalty to be calculated without deduction for the production, gathering, storing, separating, treatment, dehydrating, compressing, processing, transportation and marketing of Oil and gas and other products, provided however any such costs which result in enhancing the value of marketable oil and gas or other products to receive a better price that is less than or more than the price received by Lessee

Permalink Reply by Dott on October 29, 2017 at 5:50am

Carp,

It's hard to know for sure but your lease may be free from deductions, it seems so. Back in the 40's they did not play all of the word games they do now it seems, so you may have lucked out. But I am sure your royalty is less than what they were giving during the boom years. But in the end I would take a lower royalty over a lease that allows deductions of any kind because the Oil and Gas companies exploit it. Some owners have stated that 50% gets taken in deductions by some companies.  So sad and the government and courts seem to keep ruling in the Oil and Gas company favor.

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