In two monumental November 14, 2024 spilt decisions, the West Virginia Supreme Court gives oil and gas lessees a huge win and makes doing business in West Virginia more expensive for oil and gas producers.

In Wellman v. Energy Resources., Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), the Supreme Court of Appeals of West Virginia held that, unless the lease provides otherwise, if an oil and gas lease provides for a royalty based on proceeds received by the lessee, the lessee must bear all costs incurred in exploring for, producing, marketing, and transporting the product to the point of sale. See Syl. Pt. 4, Wellman v. Energy Resources., Inc.,210 W. Va. 200, 557 S.E.2d 254 (2001). The court reaffirmed that holding in Syl. Pt 1, Estate of Tawney, 219 W. Va. 266, 633 S.E.2d 22 (2006). On November 14, 2024, West Virginia’s highest court released two opinions that refine Wellman and Estate of Tawney and make doing business in West Virginia more expensive for oil and gas producers.

In Romeo v. Antero Resources Corporation, Appeal No. 23-589, a class action, the plaintiffs contend Antero breached the terms of the royalty provisions in their oil and gas leases by failing to pay them the full one-eighth royalty specified in the leases. More specifically, the plaintiffs contend that pursuant to Wellman and Estate of Tawney, Antero was prohibited from deducting postproduction costs from the gross sale proceeds of the gas in calculating the plaintiffs’ royalties. In response, Antero argued that under Wellman and Estate of Tawney, (i) such deductions are prohibited only until the oil and gas reach the first available market, not the point of sale; and (ii) royalties are not payable on the byproducts of the gas produced from plaintiffs’ wells like natural gas liquids (“NGLs”), and even if royalties are payable on byproducts like NGLs, producers are entitled to deduct the postproduction costs incurred in marketing the byproducts.

In its November 14 opinion in Romeo, the West Virginia Supreme Court held that West Virginia is a “point of sale” state, not a “first available market” state, and West Virginia’s marketable product rule extends beyond gas to require a lessee to pay royalties on byproducts like natural gas liquids (NGLs). The court also held that under West Virginia law, lessors do not share in the cost of processing, manufacturing, and transporting NGLs to sale, and for oil and gas leases containing an in-kind royalty provision, there is an implied duty to market under West Virginia law. Finally, the Romeo majority held that the Wellman and Estate of Tawney requirements for the deductions of post-production expenses apply to leases containing an in-kind royalty provision.

In its November 14 opinion in Kaess v. BB Land, LLC, Appeal No. 23-522, the West Virginia Supreme Court held that for oil and gas leases containing an in-kind royalty provision, there is an implied duty to market for oil and gas. And, the Wellman and Estate of Tawney requirements for the deductions of post-production expenses apply to leases containing an in-kind royalty provision.

Notably, Romeo and Kaess were both 3-2 split decisions. Justice William R. Wooten wrote the majority opinion. He was joined by Justice John A. Hutchison and Judge Dave Hardy who was sitting by assignment. Justices Elizabeth D. Walker and C. Haley Bunn dissented in both cases.  For more information on these important cases, please contact us.