The PIOGA Press
This article is an excerpt from The 2021 Babst Calland Report, which represents the collective legal perspectives of Babst Calland’s energy attorneys addressing the must current business and regulatory issues facing the oil and natural gas industry. The full report is available online at reports.babstcalland.com/the-2021-babst-calland-report-1.
Pennsylvania royalty cases
In two recent cases litigated by Babst Calland, courts applying Pennsylvania law reaffirmed that operators were entitled to deduct post-production costs from royalty payments based on lease language containing references to “at the wellhead” provisions. On April 28, 2021, the Court of Common Pleas of Butler County in Dressler v. PennEnergy Resources considered this issue where the lease provided that the gas royalty was to be paid based on “gas sold at the well.” The court held that phrase equated to “at the wellhead” language, which mandates using the net back method for calculating royalties―thus justifying post-production cost deductions.
A nearly identical decision was rendered by the United States District Court for the Western District of Pennsylvania less than two weeks later in Coastal Forest Resources Co. v. Chevron USA, Inc. There, the district court held that the lease’s royalty provision containing “at the wellhead” language had to be broadly interpreted to also allow for post-production cost deductions. Both cases relied on the Pennsylvania Supreme Court’s decision in Kilmer v. Elexco Land Servs., Inc., where “at the wellhead” was defined, to justify their holdings. It is likely that the two decisions will help temper further royalty litigation on the propriety of post-production deductions.
Oil and gas lease negotiations are not covered by the Pennsylvania Unfair Trade Practices and Consumer Protection Law
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