At the Well Weekly – Oil and Gas Update for Week Ending 10/27/2017 – Federal Court Says Ohio Supreme Court Would Adopt “At the Well” Rule for Royalty Calculations

Natural gas prices in Appalachia haven’t rebounded much since our last report, hovering around $1/MMBtu amidst a small decline in the rig count, but the good news is that the Brent Crude surpassed its $60/bbl benchmark earlier in the week. In Appalachia, a federal court in Ohio took a shot at predicting how the state supreme court would deal with oil and gas leases that provide for royalty payments based on the “market value at the well.”  Here’s the week in review: 

The Rig Count  oil

  • The national rig count is down at (Source: BakerHughes).
  • The rig count in the Marcellus is down at 42. (Source: BakerHughes).
  • The rig count in the Utica is flat at 30. (Source: BakerHughes).

Commodity Prices  oil-prices

  • The Henry Hub natural gas spot price is up at $2.93/MMBtu as of 10/27/2017. (Source: EIA).
  • In the Marcellus and Utica region, spot prices are mixed as of 10/27/2017. At Dominion South in northwest Pennsylvania, spot prices are up at $1.23/MMBtu. On Transco’s Leidy Line in northern Pennsylvania, spot prices are down at $0.80/MMBtu.  (Source: EIA).
  • Oil prices are up at $60.51/bbl as of 10/27/2017. (Source: WSJ).

Developments in Appalachia mountains

  • Federal Court Says Ohio Supreme Court Would Adopt “At the Well” Rule for Royalty Calculations. A federal court in Ohio concluded that the Ohio Supreme Court would adopt the “at the well” rule for royalty calculations such that a lease with a royalty clause that says royalties will be paid based on “market value at the well” means that royalties are calculated based on the value of the gas at that location.  Lutz v. Chesapeake, — F. Supp. 3d —, No. 4:09-CV-2256, 2017 WL 4810703 (N.D. Ohio Oct. 25, 2017).  This decision follows an Ohio Supreme Court opinion declining to answer a certified question from this same federal court about whether Ohio follows the “at the well rule” (calculating royalties based on the value at that location) or the so-called “marketable product rule” (calculating royalties when the natural gas is in its first marketable condition downstream of the wellhead).
  • WV Supreme Court Settles Ambiguous Oil and Gas Reservation. The Supreme Court of West Virginia recently concluded that a deed in which a grantor attempted to reserve a one-half oil and gas interest was ambiguous and concluded that the grantor never intended to do so because the grantor never paid taxes on the one-half oil and gas interest after the conveyance. Gastar Expl. Inc. v. Rine, — S.E.3d —, No. 16-0962, 2017 WL 4766726 (W. Va. Oct. 19, 2017).
  • Tennessee Court Says Oil and Gas Deposits are Subject to Property Tax in Addition to Severance Tax Upon Extraction. A court of appeals in Tennessee held that the taxes assessed upon the taxpayer’s oil and gas deposits are property taxes and not an unlawful additional severance tax imposed on as-extracted oil and gas that generate separate revenues for the property owner.  The Coal Creek Company v. Anderson County, — S.E.3d —,   E201700661COAR3CV, 2017 WL 4457589 (Tenn. Ct. App., October 5, 2017).

Developments beyond Appalachia us-map

  • Wyoming Supremes Hold that Probate Ruling on ORRI Interest Governs. The Wyoming Supreme Court held that an overriding royalty interest passed through a residuary clause in fee to the wife of the testator and then to a trust for the testator’s beneficiaries even though the will said the ORRI would pass to the testator’s wife for life and then to a separate foundation (the plaintiff), concluding that an interceding probate ruling holding that the ORRI passed to the testator’s wife in fee through the residuary clause (as opposed to granting a life estate) supersedes the testator’s will and could not be challenged here.  Lon V. Smith Foundation v. Devon Energy Corporation, — P.3d —, Nos. S-17-0021, S-17-0022, and S-17-0023, 2017 WY 121, 2017 WL 4510653 (Wyo. Oct. 10, 2017).
  • ND Supreme Court Rejects Claim that Oil and Gas Lease Didn’t Cover all the Landowner’s Interests. The Supreme Court of North Dakota held that a lease granting oil and gas rights in “all that certain tract of land situated in Mountrail County” was unambiguous and conveyed all the interests that the plaintiff-landowners owned in the 160-acre parcel covered by the lease even though the plaintiff-landowners claimed they only intended to lease 60 of 80 acres.  Hallin v. Inland Oil & Gas Corp., — N.W.2d —, No. 20170145, 2017 ND 254, 2017 WL 4639287 (N.D., October 17, 2017).
  • Colorado Federal Court Says Class Royalty Plaintiffs Need not Exhaust Admin Remedies before COGCC Because Agency Lacks Jurisdiction to Interpret Royalty Clause. A federal court in Colorado denied a bid by an oil and gas lessee to dismiss a class action brought by royalty owners to recover post-production costs deducted from royalty payments incurred between the wellhead and the first point of marketability, concluding that the Colorado Oil and Gas Conservation Commission lacks jurisdiction to interpret contracts and therefore the class plaintiffs were not required to exhaust remedies before that agency to get a fact determination of where the gas first became “marketable.”  Clark v. Augustus Energy Resources, LLC, — F. Supp. 3d —, No. 15-CV-00835-KLM, 2017 WL 4838735 (D. Colo., Oct. 26, 2017).
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At the Well Weekly
Welcome to At the Well Weekly, a blog designed for busy folks in the oil and gas industry. If you haven’t read a thing during the week, our hope is that you can breeze through the update and be up to speed on the basics such as current rig counts, commodity prices, and case law updates on legal issues of interest in Appalachia and elsewhere.
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