By Paul R. Yagelski, Esquire
Rothman Gordon, Pittsburgh, Pennsylvania
In Young v. Equinor USA Onshore Properties, Inc., 982 F.3d 201 (4th Cir. 2020), the Fourth Circuit Court of Appeals dealt with the issue as to whether an oil and gas lease satisfied the three-prong test necessary under West Virginia law to rebut the presumption that the lessee bears all post-production costs.
Plaintiffs, Travis Young and Michelle Bee Young (the “Youngs”), sued Equinor USA Onshore Properties, Inc. (“Equinor”) and SWN Production Company (“SWN”) to challenge the deduction of post-production costs from royalties paid to the Youngs pursuant to an oil and gas lease between the parties. The United States District Court for the Northern District of West Virginia agreed with the Youngs, holding that the lease failed to properly provide for the method of calculating post-production costs, granting summary judgment in favor of the Youngs. Equinor and SWN appealed. The Fourth Circuit vacated and remanded to the district court to enter judgment for SWN and Equinor.
The Youngs are Lessors of 69.5 acres of land in Ohio County, West Virginia (the “Property”). SWN (as the lessee) and Equinor (as an assignee under the lease) have the rights to drill and operate wells on the Property for the production and sale of oil and gas. In exchange, the Youngs receive royalties based on a share of the proceeds. Specifically, the lease’s royalty clause: (1) grants the Youngs a royalty share equal to “fourteen percent of the net amount realized” by SWN and Equinor; (2) states that post-production costs shall be deducted from the “gross proceeds” to calculate the net amount realized; (3) specifies seven types of such post-production costs, including a “catchall” provision for “any and all other” post-production costs; and (4) allows SWN and Equinor to either contract with others to perform the post-production operations or perform them using their own pipelines and equipment, in which case post-production costs also include the “reasonable depreciation and amortization expenses related to such facilities, together with Lessee’s costs of capital and a reasonable return on its investment.”
In addition to the royalty clause, the lease also provided that royalty payments are to be proportional to the Youngs’ actual ownership percentage of the Property in the event that they divest some of their leased fee interest. The lease also allowed SWN and Equinor to pool or combine the Property with other lands to create drilling or production units. In the event of such pooling, which happened in this case, royalty payments are to be proportional to the Property’s share of the total land acres included in the unit. The lease also expressly disclaimed the duty to market the resources on the Property during the “primary term or any extension of term of this Lease.” In the absence of such a provision, West Virginia’s default rule is “that a lessee impliedly covenants that he will market oil or gas produced” on leased land. Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E. 2d 254, 265 (2001).