Natural gas royalties lawsuit hinges on transaction date
A class-action lawsuit over natural gas royalties hinges on the question of when the company sold the gas, an industry expert said Friday.
“The issue of when title passes will likely be the most important aspect of this trial,” said Steven Townsend of ShaleAdvice LLC.
Nine Greene County property owners claim in the lawsuit that Energy Corporation of America improperly charged them for transmission and marketing costs when it sold the gas extracted from their properties to its marketing affiliate, Eastern Marketing Corp.
The company contends it paid royalties without deductions on what Eastern Marketing paid it, which was the price at which Eastern Marketing sold the gas to third parties minus the transport and marketing costs. Consequently, Energy Corp. did not charge the owners any transport or marketing costs.
Robert Sanders, one of the attorneys for the property owners, declined to comment. Lawyers for the company could not be reached.
The amount in dispute is about $354,000 in transport costs and $891,000 in marketing fees on gas sold between 2006 and 2012, according to court documents.
The property owners sued the company in November 2010. Their case goes before a federal jury Monday with U.S. Magistrate Judge Robert Mitchell presiding.
“The jury, as it does in most civil cases, needs to follow the money,” Townsend said.
If the company pays the 12.5 percent royalties on one price and then moves and markets the gas at a higher price, the property owners should not be charged, he said.
“The royalty owner should be getting the benefit of the higher sale price of the gas since they are paying for the transportation and marketing fees that raise the price,” Townsend said.
Pennsylvania has a law requiring gas royalties to be at least 12.5 percent, but beyond that, the issue is controlled by the leases both sides signed, said Ross Pifer, a Penn State law professor and director of the Agricultural Law Resource and Reference Center.
“At its core, it is a contract matter,” he said.
The state Supreme Court in 2010 upheld the industry practice of using the “net-back method” of calculating royalties, which pays a royalty based on 12.5 percent of the sale price minus 12.5 percent of the cost of bringing the gas to market.
With the exception of the minimum royalty required by state law, the property owner and the company could agree on any cost-sharing plan by spelling it out in the lease.
Traditionally, the companies pay all the costs of getting the gas out of the ground and the owners pay a share of getting the gas to the buyer.
Other disputes over those costs have included companies trying to deduct management fees and other indirect costs from royalties, he said.
While the West Virginia Supreme Court ruled in 2007 that companies cannot deduct any post-production cost that’s not spelled out in the lease, Pennsylvania does not have a similar ruling, he said.
Most leases in Pennsylvania don’t include those details, he said.
“For the most part, they are very imprecise,” Pifer said.
Brian Bowling is a staff writer for Trib Total Media. He can be reached at 412-325-4301 or firstname.lastname@example.org.