“At the Wellhead” Language and Use of the Net-Back Method in Pennsylvania

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

Is Kilmer to be construed broadly or narrowly?

In Coastal Forest Res. Co. v. Chevron U.S.A., No. 2:20-cv-1119, 2021 U.S. Dist. LEXIS 89675 (W.D. Pa. May 11, 2021), the United States District Court for the Western District of Pennsylvania had before it the issue of whether the Pennsylvania Supreme Court’s decision in Kilmer v. Elexco Land Servs., Inc., 605 Pa. 413, 990 A.2d 1147 (Pa. 2010) should be read as providing an industry wide interpretation of the term “at the wellhead” as permitting the use of the net-back method to recoup post-production expenses, or whether it is limited to the context of whether the method violates Pennsylvania’s Guaranteed Minimum Royalty Act (“GMRA”), 58 P.S. § 33, repealed by Oil and Gas Lease Act, 58 P.S. § 33.3 (2013). To put it another way, in Coastal Forest Res., the district court addressed the question of whether Kilmer should be given broad construction, covering all instances where the term, “at the wellhead,” is used or whether Kilmer was narrowly focused on whether leases using that term run afoul of the GMRA.

In Coastal Forest Res., Coastal Forest Resources Company (“Coastal Forest”) asserted claims for breach of contract and accounting against Defendants, Chevron U.S.A., Inc.; Chevron Appalachia, L.L.C.; and Atlas America, L.L.C. (collectively “Chevron”), contending that Chevron’s use of the net-back method to recover post-production costs violated the terms of its oil and gas lease (“Lease”). Chevron filed a Motion to Dismiss the Complaint under Federal Rule of Civil Procedure 12(b)(6), arguing that Coastal Forest’s claims failed as a matter of law because the Lease’s language governing royalties incorporates the “at the wellhead” term that the Pennsylvania Supreme Court held in Kilmer permits the recovery of post-production costs. The district court granted Chevron’s Motion to Dismiss, holding that the Kilmer decision must be read broadly. As such, Coastal Forest could not prevail on its breach of contract and accounting claims.