Stolen Royalties: Are the Oil and Gas Companies Deducting Too Much? 

Stolen Royalties: Are the Oil and Gas Companies Deducting Too Much? 

“They’re stealing my royalties.”

“They’re taking deductions for everything.”

“They’re not paying me what they’re supposed to.”

The idea is the same, no matter how you phrase it: oil and gas mineral owners throughout the Ohio Valley believe that the oil and gas industry is improperly taking deductions and underpaying royalties at any chance they get. 

Oftentimes, people simply don’t understand how payments are calculated, but that’s not always the case. Don’t rule out the company on the other end of the agreement as the reason for your less-than-expected royalty payments. Foul play may be involved. To identify which is the problem, you have to understand the law and your lease.

Your Oil and Gas Law 

West Virginia is what we call a “market product” state.

That means that the oil and gas companies in our area are responsible for all costs and expenses incurred to transform raw, “at-the-well” gas into gas that is a “marketable”, ready to sell product.

Gas must be compressed, transported, and processed to some degree before it is marketable. Once the gas is marketable, the oil and gas company will deduct costs from royalty payments for any costs and expenses after that point.

Your  Oil and Gas Lease

While the West Virginia rule is extremely favorable to mineral rights owners, it is only the default rule. If your oil and gas lease states that the oil and gas company may deduct costs and expenses and specifies which costs and expenses for which it may deduct, then the oil and gas company is free to deduct for the actual and reasonable costs of those services.

That is what the West Virginia Supreme Court held in the Estate of Garrison Tawney v. Columbia Natural Gas Resources in which CNR had been deducting production costs unspecified in the lease agreement.

The most important parts of the lease are the specified costs and expenses for which the company will deduct. If this is not specified, it’s easier for the company to deduct more than is necessary.

Pennsylvania takes the opposite approach. The oil and gas company can deduct for costs and expenses unless the lease states otherwise.

Ohio has yet to make a decision on this issue; however, the Ohio Supreme Court will soon decide the issue when it rules on a certified question in the case of Lutz v. Chesapeake Appalachia, L.L.C.

For the typical West Virginia oil and gas owner, the issues are many within this legal web.

What makes a product “marketable”?  Is it a certain chemical composition or could it be a number of compositions?  At what physical point does the gas become “marketable”?  In a transmission pipeline?  In a processing facility?  At an actual “market”? Does a lease allow for deductions at all?  What is the effect of a “market enhancement” clause?

I counsel clients on these and related issues all of the time. Sometimes the answer is simple. Other times, my suspicion meter flies off the charts.

Only an individual review of your lease and royalty statements will tell if you are being cheated. If you think you’re being cheated or are unsure if you are, Gold, Khourey, and Turak are here to help you. Give us a call at (304) 845-9750 to schedule your free consultation.

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