Patrick D. and Katherine F. Leggett v. EQT Production Co.

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
September 2016 Term FILED
_______________
November 17, 2016
released at 3:00 p.m.
No. 16-0136 RORY L. PERRY II, CLERK
SUPREME COURT OF APPEALS
_______________ OF WEST VIRGINIA
PATRICK D. LEGGETT; KATHERINE F. LEGGETT;
GEORGE D. MCKAIN, by his attorney in fact,
ANITA KATHRYN MCKAIN GREER;
and ADELE S. MCDOUGAL,
Plaintiffs Below, Petitioners
v.
EQT PRODUCTION COMPANY, a Pennsylvania corporation;
EQT CORPORATION, a Pennsylvania corporation; EQT ENERGY, LLC, a Delaware
limited liability company; EQT INVESTMENTS HOLDINGS, LLC, a Delaware limited
liability company; EQT GATHERING, LLC, a Delaware limited liability company; and
EQT MIDSTREAM PARTNERS, LP, a Delaware limited partnership,
Defendants Below, Respondents
____________________________________________________________
Certified Questions from the United States District Court
for the Northern District of West Virginia
FIRST CERTIFIED QUESTION ANSWERED
____________________________________________________________
Submitted: September 14, 2016
Filed: November 17, 2016
Marvin W. Masters, Esq. David K. Hendrickson, Esq.
Richard A. Monahan, Esq. Carl L. Fletcher, Jr., Esq.
April D. Ferrebee, Esq. Hendrickson & Long PLLC
The Masters Law Firm LC Charleston, West Virginia
Charleston, West Virginia Counsel for Respondents
Michael W. Carey, Esq. Timothy M. Miller, Esq.
Carey, Scott, Douglas & Kessler, PLLC Mychal S. Schulz, Esq.
Charleston, West Virginia Babst, Calland, Clements & Zomnir, P.C.
Counsel for Petitioners Charleston, West Virginia
Counsel for Amicus Curiae West Virginia
Howard M. Persinger III, Esq. Oil and Natural Gas Association
Persinger & Persinger, L.C.
Charleston, West Virginia
Counsel for Amici Curiae West Virginia
Land & Mineral Owners’ Association and
West Virginia Royalty Owners’ Association
JUSTICE BENJAMIN delivered the Opinion of the Court.
CHIEF JUSTICE KETCHUM dissents and reserves the right to file a dissenting Opinion.
JUSTICE LOUGHRY dissents and reserves the right to file a dissenting Opinion.
SYLLABUS BY THE COURT
1. “A de novo standard is applied by this court in addressing the legal
issues presented by a certified question from a federal district or appellate court.” Syl. pt.
1, Light v. Allstate Ins. Co., 203 W. Va. 27, 506 S.E.2d 64 (1998).
2. Whenever West Virginia Code § 22-6-8(e) (1994) requires the filing
of an affidavit as a prerequisite to obtaining an oil or gas drilling or reworking permit, the
averment in the affidavit that the landowner shall receive a royalty of not less than one-
eighth of the amount realized by the holder of the working interest “at the wellhead”
means that the royalty payment is not to be diluted by costs and losses incurred
downstream from the wellhead before a marketable product is rendered.
3. Whenever the lessee-owner of a working interest in an oil or gas
well must comply with West Virginia Code § 22-6-8(e) by tendering to the lessor-owner
of the oil or gas in place a royalty not less than one-eighth of the total amount paid to or
received by or allowed to the lessee, the statute requires in addition that the lessee not
deduct from that amount any expenses that have been incurred in gathering, transporting,
or treating the oil or gas after it has been initially extracted, any sums attributable to a
loss or beneficial use of volume beyond that initially measured, or any other costs that
may be characterized as post-production.
Benjamin, Justice:
This proceeding arises upon our acceptance of certified questions from the
United States District Court for the Northern District of West Virginia in connection with
the underlying civil action filed by plaintiffs Patrick D. Leggett, Katherine F. Leggett,
Anita Kathryn McKain Greer as attorney in fact on behalf of George D. McKain, and
Adele S. McDougal. The plaintiffs sued EQT Production Co. (“EQT”) and five related
entities,1 alleging royalty underpayments with respect to the plaintiffs’ ownership of oil
and gas interests that EQT is contracted to exploit. The district court granted summary
judgment to the related entities and partial summary judgment to EQT, see Fed. R. Civ.
P. 56(a), reserving its ruling on the remaining aspects of the plaintiffs’ claims against
EQT pending our disposition of the certified questions.
I. FACTUAL AND PROCEDURAL BACKGROUND
The order of certification recites the undisputed material facts on which the
district court relied, the salient portions of which follow. Pursuant to a written agreement
originally executed in Doddridge County in 1906, EQT is the successor lessee of certain
mineral interests on the subject property, upon which nine oil and gas wells have been
drilled. The plaintiffs are among the successor lessors, whose undivided interests
1
EQT’s sister entities EQT Energy, LLC; EQT Investments Holdings, LLC; EQT
Gathering, LLC; and EQT Midstream Partners, LP; together with their parent, EQT
Corporation, were separately named as defendants.
1
collectively amount to seventy-five percent of the entirety of the oil and gas extracted by
virtue of the 1906 lease. Of the total interest, the Leggetts own twelve and one-half
percent, Mr. McKain owns twelve and one-half percent, and Ms. McDougal owns fifty
percent.
With respect to a few wells that were in place before 1982, EQT pays a flat-
rate royalty of three hundred dollars annually, in conformance with the terms of the
original lease. The majority of the wells, however, are subject to the controlling “flat-rate
statute” set forth in West Virginia Code § 22-6-8 (1994), initially enacted in 1982. On
those wells, EQT pays a one-eighth royalty notwithstanding the lease. The statute
provides in pertinent part:
(a) The Legislature hereby finds and declares:
(1) That a significant portion of the oil and gas underlying
this state is subject to development pursuant to leases . . .
wherein the owners of such oil and gas are paid upon a
royalty or rental basis known in the industry as the annual flat
well royalty basis, in which the royalty is based solely on the
existence of a producing well, and thus is not inherently
related to the volume of the oil and gas produced or marketed;
(2) That continued exploitation of the natural resources of this
state in exchange for such wholly inadequate compensation is
unfair, oppressive, works an unjust hardship on the owners of
the oil and gas in place, and unreasonably deprives the
economy of the state of West Virginia of the just benefit of
the natural wealth of this state;
(3) That a great portion, if not all, of such leases . . . have
been in existence for a great many years and were entered
into at a time when the techniques by which oil and gas are
2
currently extracted, produced or marketed, were not known or
contemplated by the parties, nor was it contemplated by the
parties that oil and gas would be recovered or extracted or
produced or marketed from the depths and horizons currently
being developed by the well operators;
(4) That while being fully cognizant that the provisions of
section 10, article I of the United States Constitution and of
section 4, article II of the Constitution of West Virginia,
proscribe the enactment of any law impairing the obligation
of a contract, the Legislature further finds that it is a valid
exercise of the police powers of this state and in the interest
of the state of West Virginia and in furtherance of the welfare
of its citizens, to discourage as far as constitutionally possible
the production and marketing of oil and gas located in this
state under the type of leases or other continuing contracts
described above.
(b) In the light of the foregoing findings, the Legislature
hereby declares that it is the policy of this state, to the extent
possible, to prevent the extraction, production or marketing of
oil or gas under a lease . . . which is not inherently related to
the volume of oil or gas produced or marketed[.]
Id. (emphasis added).
The flat-rate statute manifests the Legislature’s recognition that evolving
technology and changing market conditions had, at least by 1982, fundamentally altered
the underlying assumptions historically governing the contractual relationship between
the owners of oil and gas in place and the business interests engaged in extracting and
transporting those minerals for profit. To advance the Legislature’s stated policy of
eradicating unfair and inadequate compensation to owners of valuable oil and gas
interests, the flat-rate statute prohibits the issuance of permits for new drilling or for the
3
reworking of existing wells unless a copy of the lease or a suitable abstract thereof
accompanies the permit application. See id. § 22-6-8(c). Where such lease or abstract
discloses an underlying flat-rate compensation agreement, the statute dictates that the
drilling permit likewise be withheld. See id. § 22-6-8(d). A permit may only be issued in
such an instance if the applicant files
an affidavit which certifies that the affiant is authorized by
the owner of the working interest in the well to state that it
shall tender to the owner of the oil or gas in place not less
than one eighth of the total amount paid to or received by or
allowed to the owner of the working interest at the wellhead
for the oil or gas so extracted, produced or marketed before
deducting the amount to be paid to or set aside for the owner
of the oil or gas in place[.]
Id. § 22-6-8(e) (emphasis added).
On December 7, 2012, the plaintiffs filed a complaint in the Circuit Court
of Doddridge County against EQT and the related entities, which, on January 10, 2013,
the defendants removed to the United States District Court for the Northern District of
West Virginia. The operative Amended Complaint, filed in the district court on May 9,
2014, alleges that the defendants “have and continue to take deductions, reduce plaintiffs’
royalty payments, overcharge plaintiffs for the deductions that they do charge plaintiffs,
and otherwise reduce plaintiffs’ royalty on volume and/or price and/or by taking
unauthorized deductions.” The defendants employ several means to reduce the royalties
paid, according to the plaintiffs, but primarily “by establishing various subsidiaries for
the purpose of selling its gas and charging off to lessors the expenses which the law of
4
West Virginia does not allow unless the lease specifically provides for the same and then
only when the amounts deducted are reasonable and actually incurred.” The plaintiffs
contend in their Amended Complaint that “Defendants had an affirmative duty to pay to
plaintiffs the true and correct royalty due them,” imposed, inter alia, “either by virtue of
the lease agreement, by virtue of W. Va. Code § 22-6-8, and/or by virtue of the
contractual duty of good faith and fair dealing in all contracts[.]”
The plaintiffs asserted claims for breach of contract, for breach of fiduciary
duty, and for fraud, seeking compensatory and punitive damages. By its dismissal order
of March 17, 2015, and summary judgment order entered January 22, 2016, following the
conduct of discovery, the district court: (1) awarded judgment in full to the related
entities, concluding that none of them were signatories to the lease and could not
otherwise be held derivatively liable; and (2) granted judgment to EQT on all of the
plaintiffs’ claims except for that alleging breach of contract. With respect to the contract
claim, the district court indicated its intention to certify to this Court certain questions of
law relevant to its resolution. After soliciting written submissions from the parties as to
how such questions should be formulated, the district court entered the subject order of
certification on February 10, 2016, which was received in this Court on February 16,
2016. By Order entered April 6, 2016, we docketed for oral argument the following two
certified questions:
1. Does Tawney v. Columbia Natural Resources, L.L.C.,
219 W. Va. 266, 633 S.E.2d 22 (2006), which was decided
5
after the enactment of West Virginia Code § 22-6-8, have any
effect upon the Court’s decision as to whether a lessee of a
flat-rate lease, converted pursuant to West Virginia Code
§ 22-6-8, may deduct post-production expenses from his
lessor’s royalty, particularly with respect to the language of
“1/8 at the wellhead” found in West Virginia Code § 22-6­
8(e)?
2. Does West Virginia Code § 22-6-8 prohibit flat-rate
royalties only for wells drilled or reworked after the statute’s
enactment and modify only royalties paid on a per-well basis
where permits for new wells or to modify existing wells are
sought, or do the provisions of West Virginia Code § 22-6-8
abrogate flat-rate leases in their entirety?
II. STANDARD OF REVIEW
In accordance with the Uniform Certification of Questions of Law Act, W.
Va. Code §§ 51-1A-1 to -13 (1996), as adopted in West Virginia:
The supreme court of appeals of West Virginia may answer a
question of law certified to it by any court of the United
States or by the highest appellate court or the intermediate
appellate court of another state or of a tribe or of Canada, a
Canadian province or territory, Mexico or a Mexican state, if
the answer may be determinative of an issue in a pending
cause in the certifying court and if there is no controlling
appellate decision, constitutional provision or statute of this
state.
Id. § 51-1A-3. “A de novo standard is applied by this court in addressing the legal issues
presented by a certified question from a federal district or appellate court.” Syl. pt. 1,
Light v. Allstate Ins. Co., 203 W. Va. 27, 506 S.E.2d 64 (1998); accord syl. pt. 1, Bower
v. Westinghouse Elec. Corp., 206 W. Va. 133, 522 S.E.2d 424 (1999) (“This Court
6
undertakes plenary review of legal issues presented by certified question from a federal
district or appellate court.”).
III. ANALYSIS
The parties’ dispute centers on the permissibility of certain gross
deductions taken by EQT prior to calculating the plaintiffs’ net one-eighth proportionate
royalty on the wells for which permits were issued after enactment of the flat-rate statute.
In accordance with its current commercial practice, EQT sells the gas emanating from the
wellheads to another sister entity, EQT Energy, LLC, at a discounted price in
consideration of certain “post-production” expenses. Those so-called “post-production”
expenses, which include the estimated costs of gathering and of transportation of the
natural gas to the interstate pipeline, are paid to yet another sister entity, EQT Gathering,
LLC. In addition, because some of the gas is either lost or used in the compression
process, EQT determines the royalty payable to the plaintiffs only on the volume of gas
actually reaching market. The plaintiffs maintain that such deductions downstream from
the physical wellhead are prohibited by the statute, specifically the decree in West
Virginia Code § 22-6-8(e) that lessor royalties are to be no less than one-eighth the
amount allowed to the owner of the working interest “at the wellhead,” a term whose
meaning we had occasion to consider during the course of our Tawney decision.
7
In Tawney, we were confronted with deciding whether lease terms such as
“at the wellhead,” “at the well,” and “net all costs beyond the wellhead,” inherently
expressed the parties’ clear intent that the lessee deduct post-production costs from the
royalties payable to lessors. We characterized those costs in a fashion reminiscent of the
ones in the instant matter, i.e., “delivery of gas from the well to the [transmission
company’s] point of delivery, . . . processing of the gas to make it satisfactory for
delivery into [the] transportation line, and losses of volume of gas due to leaks in the
gathering system or other volume loss from the well to the . . . line.” Tawney, 219 W.
Va. at 269, 633 S.E.2d at 25. We acknowledged a split of authority concerning the
clarity required in gas leases, and we detailed the analysis adopted by the Colorado courts
that, absent specific language targeting the allocation of post-production costs, the
lessee’s implied covenant to market the gas precluded it from recovering any portion of
those costs from the lessor. See id. at 270–71, 633 S.E.2d at 26–27 (citing Rogers v.
Westerman Farm Co., 29 P.3d 887 (Colo. 2001)).
Colorado’s recognition of the lessor’s implied covenant to market oil and
gas comported with our own interpretation of the law, expressed in Wellman v. Energy
Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001).
The rationale for holding that a lessee may not charge a lessor
for “post-production” expenses appears to be most often
predicated on the idea that the lessee not only has a right
under an oil and gas lease to produce oil or gas, but he also
8
had a duty, either express, or under an implied covenant, to
market the oil or gas produced. The rationale proceeds to
hold the duty to market embraces the responsibility to get the
oil or gas in marketable condition and actually transport it to
market.
Id. at 210, 557 S.E.2d at 264. In deference to the implied covenant, “the lessee must bear
all costs incurred in exploring for, producing, marketing, and transporting the product to
the point of sale,” that is, “unless the lease provides otherwise.” Syl. pt. 4, id. Thus, our
ultimate holding in Tawney that ambiguous lease language such as “at the wellhead” was
ineffective to permit the lessee to deduct post-production costs from the lessor’s royalty
payments left us to fall back on “our generally recognized rule” in Wellman that the
implied covenant to market thrust those costs wholly upon the lessee. Tawney, 219 W.
Va. at 272, 633 S.E.2d at 28.2 This approach to royalty valuation that we share with
Colorado, Oklahoma, and Kansas is variously referred to as the “marketable product
2
We instructed specifically that
language in an oil and gas lease that is intended to allocate
between the lessor and lessee the costs of marketing the
product and transporting it to the point of sale must expressly
provide that the lessor shall bear some part of the costs
incurred between the wellhead and the point of sale, identify
with particularity the specific deductions the lessee intends to
take from the lessor’s royalty . . . and indicate the method of
calculating the amount to be deducted from the royalty for
such post-production costs.
Tawney, 219 W. Va. at 274, 633 S.E.2d at 30. A lease providing that the lessor’s royalty
is to be determined “at the well” or “at the wellhead” is ambiguous and, construed against
the lessee drafter, cannot overcome the effective presumption that the implied covenant
to market controls. See id.
9
rule” or the “first marketable product rule.” See Appalachian Land Co. v. EQT Prod.
Co., 468 S.W.3d 841, 850 (Ky. 2015) (Abramson, J., dissenting). In counterpoint, a
majority of eleven jurisdictions adhere to the “at the well” rule, whereby post-production
costs “incurred after the gas is severed and reaches the wellhead” are deducted from the
eventual sale price before the lessor’s royalty is calculated. See Appalachian Land Co.,
468 S.W.3d at 843.3
Here, as EQT hastens to point out, our task of analysis pertains not to a
lease, but to a statute. Whereas we may construe any ambiguity in an oil and gas lease
against its drafter (typically the lessee), no such canon of construction governs our
understanding of traditional notions of statutory interpretation. There are other ways to
discern the intent of the Legislature with respect to an ambiguous enactment, however,
and there is no doubt that our holdings in Wellman and Tawney compel the conclusion
3
Compare Piney Woods Country Life Sch. v. Shell Oil Co., 726 F.2d 225, 230–31
(5th Cir. 1984) (applying Mississippi law); S Bar B Ranch v. Omimex Canada, Ltd., 942
F. Supp. 2d 1058, 1062–63 (D. Mont. 2013); Emery Res. Holdings, LLC v. Coastal
Plains Energy, Inc., 915 F. Supp. 2d 1231, 1237, 1241–42 (D. Utah 2012); Atl. Richfield
Co. v. California, 214 Cal. App. 3d 533, 541–42, (Cal. Ct. App. 1989); Baker v. Magnum
Hunter Prod., Inc., 473 S.W.3d 588, 591–95 (Ky. 2015); Babin v. First Energy Corp.,
693 So. 2d 813, 815 (La. Ct. App. 1997); Schroeder v. Terra Energy, Ltd., 565 N.W.2d
887, 894 (Mich. Ct. App. 1997); Bice v. Petro-Hunt, L.L.C., 768 N.W.2d 496, 502 (N.D.
2009); Creson v. Amoco Prod. Co., 10 P.3d 853, 863 (N.M. Ct. App. 2000); Kilmer v.
Elexco Land Servs., Inc., 990 A.2d 1147, 1158 (Pa. 2010); Heritage Res., Inc. v.
NationsBank, 939 S.W.2d 118, 122–23 (Tex. 1996), with Rogers v. Westerman Farm
Co., 29 P.3d 887, 902 (Colo. 2001); syl. pt. 3, Gilmore v. Superior Oil Co., 388 P.2d 602
(Kan. 1964); Wood v. TXO Prod. Corp., 854 P.2d 880, 882–83 (Okla. 1992); syl. pt. 1,
Tawney, 219 W. Va. 266, 633 S.E.2d 22.
10
that the same words—“at the wellhead”—used in the same industry context are as
ambiguous in the flat-rate statute as they are in a lease. Simply put, the language
lacks definiteness. In other words, it is imprecise. While the
language arguably indicates that the royalty is to be calculated
at the well or the gas is to be valued at the well, the language
does not indicate how or by what method the royalty is to be
calculated or the gas is to be valued. For example, notably
absent are any specific provisions pertaining to the marketing,
transportation, or processing of the gas.
Tawney, 219 W. Va. at 272, 633 S.E.2d at 28.
The statute provides no more detail than the Tawney leases as to gas
valuation, royalty methodology in general, or the allocation of costs in particular. The
absence of clear, unambiguous language gives rise to the uncertainty that there may be
more than one way by which the holder of a working interest in an oil or gas well can
comply with West Virginia Code § 22-6-8(e)’s command that the landowner’s royalty be
calculated “at the wellhead.” It thus becomes necessary that we resort to traditional rules
of statutory construction to accurately discern the intent of the Legislature. See syl. pt. 1,
Farley v. Buckalew, 186 W. Va. 693, 414 S.E.2d 454 (1992) (“A statute that is
ambiguous must be construed before it can be applied.”); State v. Gen. Daniel Morgan
Post No. 548, Veterans of Foreign Wars, 144 W. Va. 137, 144, 107 S.E.2d 353, 358
(1959) (“[I]n the interpretation of a statute, the legislative intention is the controlling
factor; and the intention of the legislature is ascertained from the provisions of the statute
by the application of sound and well established canons of construction.”).
11
In that vein, we must keep in mind that the flat-rate statute was
indisputably enacted to right past wrongs. See, e.g., State ex rel. McGraw v. Scott
Runyan Pontiac-Buick, Inc., 194 W. Va. 770, 777, 461 S.E.2d 516, 523 (1995) (“Where
an act is clearly remedial in nature, we must construe the statute liberally so as to furnish
and accomplish all the purposes intended.”) (citations omitted). We need not guess at the
Legislature’s purpose in enacting § 22-6-8, for the wrongs intended to be redressed are
starkly revealed in the legislative findings and declarations indelibly engraved into the
statute itself. Specifically, the sovereign is directed to do everything within its power “to
prevent the extraction, production or marketing of oil or gas under a lease . . . which is
not inherently related to the volume of oil or gas produced or marketed.” W. Va. Code
§ 22-6-8(a)(4)(b). The flat-rate statute certainly accomplishes that particular aim, at least
for wells permitted after its effective date, regardless of whether landowners’ royalties
are calculated using the “marketable product” rule or the “at the well” rule.
However, the Legislature was careful to note in addition that the
exploitation of mineral resources without adequate compensation paid to landowners “is
unfair, oppressive, works an unjust hardship on the owners of the oil and gas in place,
and unreasonably deprives the economy of the state of West Virginia of the just benefit
of the natural wealth of this state.” Id. § 22-6-8(a)(2). It would have been perversely
inconsistent with the overarching remedial intent of the flat-rate statute for a Legislature
so passionately dedicated to ensuring the future flow of adequate compensation to oil and
12
gas landowners to have purposefully provided a mechanism of royalty valuation
specifically designed to curtail that compensation. We therefore hold that, whenever
West Virginia Code § 22-6-8(e) (1994) requires the filing of an affidavit as a prerequisite
to obtaining an oil or gas drilling or reworking permit, the averment in the affidavit that
the landowner shall receive a royalty of not less than one-eighth of the amount realized
by the holder of the working interest “at the wellhead” means that the royalty payment is
not to be diluted by costs and losses incurred downstream from the wellhead before a
marketable product is rendered.
EQT attempts to avoid the result mandated by § 22-6-8, contending first
that the statute’s enactment failed to transform the essence of the underlying agreement
between the parties, which has always been manifested in a flat-rate lease. EQT insists
that the implied covenant to market does not apply to a flat-rate arrangement, because the
owner is paid the same regardless of whether the gas is sold. That argument conveniently
ignores that although the terms of the lease have remained strictly effective with respect
to the wells permitted prior to the enactment of the flat-rate statute, the statutory
provisions set forth in § 22-6-8 unquestionably altered the basis of the parties’ bargain
going forward. Logic and common sense dictate that the implied covenant to market
arises in connection with the wells on the lease whereas the royalty payment to the
owners, required after 1982 by the flat-rate statute, instead depends on the volume of gas
produced.
13
Second, according to EQT, the statutory term “at the wellhead” is not
ambiguous when considered within the historical context of the industry. When the flat-
rate statute was enacted in 1982, prior to deregulation, pipeline companies purchased the
gas from lessee-producers at the wellhead and then undertook the subsequent gathering
and transportation expenses. The lessee paid the lessor’s royalty based on the price it
received from the pipeline company. Over the ensuing years, the industry practice has
evolved such that the lessee has assumed the responsibility for gathering and transporting
the gas to the pipeline companies, the latter acting merely as interstate carriers. The
downstream price remained essentially unaffected regardless of which entity bore the
expense of gathering and transportation, but when those marketability aspects were
transferred to the lessees upstream, the lessees turned to the lessors (with whom they
shared contractual privity) to recover a portion of the costs. In Wellman, we offered the
following observations on that practice:
[A] distinguishing characteristic of the landowner’s royalty is
that it is not chargeable with any of the costs of discovery and
production . . . . In spite of this, there has been an attempt on
the part of oil and gas producers in recent years to charge the
landowner with a pro rata share of various expenses
connected with the operation of an oil and gas lease such as
the expense of transporting oil and gas to a point of sale, and
the expense of treating or altering the oil and gas so as to put
it in marketable condition. To escape the rule that the lessee
must pay the costs of discovery and production, these
expenses have been referred to as “post-production
expenses.”
Wellman, 210 W. Va. at 209–10, 557 S.E.2d at 263–64 (alterations deleted).
14
The remedial application of the flat-rate statute together with the implied
covenant to market recognized in Wellman and Tawney demand that the statutorily
mandated one-eighth proportionate royalty paid to the lessor-owners of oil and gas
interests, here the landowners, remain supremely constant, immune from the facile
downward manipulation of such a royalty by working interest holders, here EQT, and
their associates. Accord, W.W. McDonald Land Co. v. EQT Prod. Co., 983 F. Supp. 2d
790, 804 (S.D. W. Va. 2014) (“The defendants cannot calculate royalties based on a sale
between subsidiaries at the wellhead when the defendants later sell the gas in the open
market at a higher price. Otherwise, gas producers could always reduce royalties by
spinning off portions of their business and making nominal sales at the wellhead.”). In a
properly functioning royalty system, lessor-owners of oil and gas interests are accurately
cast as suppliers of raw materials necessary to develop a finished product. For such raw
materials, such lessor-owners are paid a one-eighth proportionate price accounted for as a
cost of goods sold. Lessor-owners do not sign on to be the lessee’s business partner or a
participant in a joint venture with the lessee, and they should not be compelled to assume
risks or expenses that would typically be associated with that sort of role.
All the preceding inevitably leads us back to the first certified question,
which asks simply whether our 2006 decision in Tawney has “any effect” on the proper
construction of the statutory term “at the wellhead,” enacted in 1982 as part of West
Virginia Code § 22-6-8, in connection with the minimum royalty payments due owners of
15
oil and gas in place subject to flat-rate leases. Through our discussion, we have
demonstrated that Tawney and our earlier precedents, particularly Wellman, indeed
inform the analysis of the issue, but the question as formulated, we believe, imprecisely
addresses the particular dispute between the parties.
We therefore reformulate the question, in accordance with the discretion
afforded us by West Virginia Code § 51-1A-4, as follows:
Whenever the lessee-owner of a working interest in an oil or
gas well must comply with West Virginia Code § 22-6-8(e)
by tendering to the lessor-owner of the oil or gas in place a
royalty not less than one-eighth of the total amount paid to or
received by or allowed to the lessee, does the statute require
in addition that the lessee not deduct from that amount any
expenses that have been incurred in gathering, transporting,
or treating the oil or gas after it has been initially extracted,
any sums attributable to a loss or beneficial use of volume
beyond that initially measured, or any other costs that may be
characterized as post-production?
We answer that question in the affirmative.
We decline to answer the second certified question, because it is not
properly before us. The Amended Complaint limits its reach to the royalty deductions
taken by EQT regarding the more recently drilled lease wells that are subject to the flat-
rate statute. We can discern no claim with respect to the older wells that were drilled
prior to the statute’s enactment and for which the plaintiffs continue to receive an annual
royalty of three hundred dollars, regardless of the volume of gas produced. It is thus
16
irrelevant for the purposes of the instant litigation whether West Virginia Code § 22-6-8
abrogated flat-rate leases in their entirety. See W. Va. Code § 51-1A-3 (1996) (providing
that the Supreme Court of Appeals of West Virginia may answer a certified question of
law “if the answer may be determinative of an issue in a pending cause in the certifying
court”); State ex rel. Advance Stores Co., Inc. v. Recht, 230 W. Va. 464, 468–69, 740
S.E.2d 59, 63–64 (2013) (“[T]his Court will not address a certified question if it is not
dispositive of a controlling issue in the case.”).4
IV. CONCLUSION
Pursuant to the foregoing, we answer the first certified question, as
reformulated, in the affirmative, and we decline to answer the second certified question.
First Certified Question Answered.
4
We wish to acknowledge the contributions of the West Virginia Land and
Mineral Owners’ Association and the West Virginia Royalty Owners’ Association, which
jointly filed an amicus curiae brief in support of the plaintiffs. We are equally
appreciative of the contribution of the West Virginia Oil and Natural Gas Association,
which filed an amicus curiae brief in support of EQT.
17