WV Supreme Court Holds that Post- Production Expenses are Allowable Deductions on Flat-Rate Leases
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Colorado The West Virginia Supreme Court held (after rehearing) that reasonable post-production expenses actually incurred are allowable deductions under West Virginia’s flat-rate statute, i.e., “that both the legislative intent and language utilized in West Virginia Code § 22-6-8 permits allocation or deduction of reasonable post-production expenses actually incurred by the lessee and more specifically permits use of the ‘net-back’ or ‘work-back’ method of royalty calculation.” In its Syllabus point 8, the Court stated: 8. Royalty payments pursuant to an oil or gas lease governed by West Virginia Code § 22-6-8(e) (1994) may be subject to pro-rata deduction or allocation of all reasonable post-production expenses actually incurred by the lessee. Therefore, an oil or gas lessee may utilize the “net-back” or “work-back” method to calculate royalties owed to a lessor pursuant to a lease governed by West Virginia Code § 22-6-8(e). The reasonableness of the post-production expenses is a question for the fact-finder. Following a fatal home explosion on April 17, 2017, in Firestone, CO, investigations have linked an old severed flowline to the explosion that killed two people and injured two others. The flowline to a vertical well that was drilled in 1993 had been cut, although it was not disconnected or capped. In 2015, the Town of Firestone approved construction of a neighborhood and this home was placed within 200 feet of the well and only six feet from the flowline. Ownership of the well has changed hands several times over the years and the investigation into circumstances and details surrounding the severing of the flowline remain under investigation.
Hank Lawrence chairs Steptoe & Johnson’s Litigation Department and focuses his practice on energy litigation. Hank.lawrence@steptoe-johnson.com
Bridget D. Furbee focuses her practice in the area of energy law. She is the former in-house counsel for a major Fortune 500 energy company where she was responsible for legal issues related to gas exploration and production, including the
development of major new geologic plays in West Virginia, Ohio and Pennsylvania. Bridget.furbee@steptoe-johnson.com
the Colorado Oil and Gas Conservation Commission (COGCC). The NTO gave all operators in the State of Colorado 30 days to inspect existing flowlines and verify that flowlines not in use are properly abandoned. In addition, active flowlines within 1,000 feet of any occupied building required pressure testing to ensure integrity. Oil and gas companies voluntarily shut in thousands of vertical wells in northeastern Colorado as a precaution and cities have undertaken inspection of abandoned wells and flowlines within their jurisdictions. In August, Colorado Governor John Hickenlooper issued a press release following the state’s three month review of oil and gas operations. “At the time of the explosion,
In May, a “Notice to Operators” (NTO) was issued by
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