The Market Enhancement Clause – Be Careful How You Word It

By Paul R. Yagelski, Esquire
Rothman Gordon
Pittsburgh, Pennsylvania

Does a market enhancement clause require the producer to show that its deductions resulted in a net increase in the value of the oil and/or gas or other products produced from the leased premises in order that post-production costs may be deducted?

In Tennant v. Range Res.-Appalachia, LLC, 2021 U.S. Dist. LEXIS 17940 (W.D. Pa. September 21, 2021), Plaintiffs James S. Tennant and Sara J. Tennant (the “Tennants”) and John W. McIlvaine and Alica L. McIlvaine (the “McIlvaines”) claimed that Defendant Range Resources-Appalachia, LLC breached certain oil and gas leases between the parties by failing to demonstrate that post-production costs deducted from their royalty payments resulted in a net increase in the value of gas produced under those leases.

The Tennants owned the oil and gas underlying 99.15625 acres in Washington County, Pennsylvania. The McIlvaines owned the oil and gas underlying two parcels of property in Washington County: a 22.6487 acre parcel and a 29.98 acre parcel. On September 10, 2013, Plaintiffs entered into identical oil and gas leases with Defendant covering the Tennant property, the McIlvaine 22 acre property and the McIlvaine 29 acre property (collectively, “the Leases”). The Leases contained a royalty clause pursuant to which Defendant agreed to pay Plaintiffs “[f]or gas and other hydrocarbons produced with gas . . . as royalty for the gas, saved and sold from the Leased Premises, eighteen percent (18%) of the net amount realized by [Range] for the sale and delivery of such gas.” The royalty clause authorized the deduction of Plaintiffs’ pro-rata share of certain specified post-production costs.