Please ensure Javascript is enabled for purposes of website accessibility
Home / Courts / 4th Circuit / Contract – Oil and gas lessee may shift portion of post-production costs

Contract – Oil and gas lessee may shift portion of post-production costs

Where an oil and gas lease provided a method for calculating the amount to be deducted from the royalty for post-production costs, it sufficiently rebutted the presumption that the lessee bears all post-production costs and allowed an allocation of some of those costs to the lessors.

Background

Equinor USA Onshore Properties and SWN Production Company appeal a district court’s decision granting summary judgment in favor of Travis Young and Michelle Bee Young. The Youngs sued Equinor and 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 district court agreed with the Youngs, holding that the lease failed to properly provide for the method of calculating post-production costs.

Analysis

In Tawney v. Columbia Natural Resources, LLC, 633 S.E.2d 22 (W. Va. 2006), the West Virginia Supreme Court of Appeals held that an oil and gas lease must satisfy a three-pronged test to rebut a presumption that the lessee bears all post-production costs and to thereby allocate some of those costs to the lessor. Specifically, the lease must (1) “expressly provide that the lessor shall bear some part of the [post-production] costs”; (2) “identify with particularity the specific deductions the lessee intends to take from the lessor’s royalty” and (3) “indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.”

Here the parties agree that the lease expressly provides that the Youngs will bear post-production costs, satisfying the first prong. For the most part, the parties also agree that the lease identifies post-production costs with particularity, thus satisfying the second prong.

The Youngs half-heartedly argue that the catchall and depreciation provisions fail the second prong. But they don’t identify any deductions actually taken under the catchall provision that would affect the analysis. Nor does the court see any imprecision or impropriety in the depreciation provision, so long as the costs deducted are limited to those accrued while providing post-production services—a restriction conceded by SWN and Equinor. Thus, the lease satisfies Tawney’s second prong.

The parties’ dispute centers on the third prong—that is, whether the lease adequately “indicates the method of calculating the amount to be deducted from the royalty for such post-production costs.” The district court found that the lease fails on this third prong of Tawney because it “merely states that the lessee will deduct post-production costs,” yet “says absolutely nothing as to how those costs would be calculated, other than to leave the amount of the deduction wholly to the lessee’s discretion.” In short, said the court, the lease lacks a “mathematical formula” that would constitute a “method of calculation.”

But Tawney doesn’t demand that an oil and gas lease set out an Einsteinian proof for calculating post-production costs. By its plain language, the case merely requires that an oil and gas lease that expressly allocates some post-production costs to the lessor identify which costs and how much of those costs will be deducted from the lessor’s royalties. These conditions may be satisfied by a simple formula, like the one here.

That method is simply to add up all of the identified, reasonable and actually incurred post-production costs, and deduct them from SWN and Equinor’s gross proceeds. The amount is then adjusted for the Youngs’ fractional share of the total pooled acreage and their royalty rate.

Vacated and remanded.

Young v. Equinor USA Onshore Properties Inc. (Lawyers Weekly No. 001-133-20, 17 pp.) (Albert Diaz, J.) Case Nos. 19-1334 and 19-1335. Dec. 2, 2020. From N.D. W.Va. (John Preston Bailey, J.) Elbert Lin for Appellants. Jeremy Matthew McGraw for Appellees.


Leave a Reply

Your email address will not be published. Required fields are marked *

*