Energy companies can deduct production costs

SALEM, Ohio — A U.S. District Court in Akron has ruled that oil and gas companies can deduct certain production fees from royalty payments, when contracts specify an “at the well” payment.

According to the U.S. District Court, Northern District of Ohio Eastern Division, “at the well” value would be determined by “where the gas is to be valued” for determining the landowners’ royalty payments.

This means that certain production and marketing costs can be deducted from royalty payments.

A group of landowners had filed a lawsuit in 2009 against Chesapeake Appalachia, Columbia Energy Group and NiSource, arguing that post-production costs were inappropriately deducted from the royalty payments.

Plaintiffs included Regis and Marion Lutz, of Warren; Leonard Yochman, Joseph Yochman, of Diamond; and C.Y.V., LLC, also of Diamond.

Landowner share

The plaintiffs stated that their contracts entitled them to one-eighth of the value of gas produced each month, and that they believed it should be calculated by “multiplying the volumes produced by the market price of gas at the time of production,” and then dividing that amount by eight.

Chesapeake could not be reached for comment.

Production costs

According to the court’s decision, Ohio’s contract laws would lead to the conclusion that “location” for valuing the gas was at the well, allowing for production costs to be deducted.

Courts in other energy-producing states, including Texas and Pennsylvania, have said the language allows energy companies to assign costs to royalty holders.

Attorney Robert C. Sanders, who represents the plaintiffs, declined to comment on the record, saying parts of the case were still pending, including plaintiffs whose contracts did not include the same “at the well language.”

Second case

A similar case in the same court seeks class certification, alleging that Chesapeake breached its contract with landowners by paying royalties that were below the volume of gas sold, and inappropriately deducting gathering and production costs.

That case was filed in December 2015 by plaintiffs Dale and Melinda Henceroth, of Lisbon; Ruth Burchfield, Kensington; James and Toni Burchfield, Kensington; Marilyn Wendt, Texas; Janet K. Cooper, Hanoverton; Wilford L. Copeland, Hanoverton; and Virgil and Karen Barnes, Carrollton.

The plaintiffs allege that Chesapeake “breached the leases by not paying the royalty on the full amount of gas that it produced and sold.”

The plaintiffs also allege that deductions to royalty payments “were grossly inflated,” because of collusion and self-dealing between Chesapeake and its midstream partners.