American Oil and Gas Reporter - August 2017 - 111

Moody opines that the full consequences of the decision "will be uncertain
and unknown for quite some time, but
one thing is certain-the consequences
will be far-reaching."
Already, he observes, the decision is
being used in a variety of circumstances.
For example, the ERA was cited in an
appeal filed with the Pennsylvania Environmental Hearing Board of the routine
issuance of a permit by the Department
of Environmental Protection for spreading
brine from conventional wells as a dust
suppressant on municipal dirt roads.
Additionally, published reports indicate,
the environmental group PennFuture has
asked Allegheny County how it intends
to spend the estimated $450 million in
royalties expected to be paid over two
decades for leasing natural gas rights
under Pittsburgh International Airport and
Allegheny County Airport and the more
than $50 million anticipated from leasing
beneath a county park. Officials previously
have indicated the money will be used to
promote economic development, reducing
airline fees, upgrading park facilities and
funding capital projects, but PennFuture
wants assurances the funds will go only
toward protecting public natural resources.

Private Resources
Although PEDF is ostensibly about the
use of money from publicly owned natural
resources, Moody expresses concern about
what may be in store for the development
of private oil and gas reserves. He observes
that the majority opinion included a discussion of the ERA's legislative history,
and despite the limitation of the text of the
ERA to "public" natural resources, the
court noted that the principal drafter of the
amendment "opined that the trust nevertheless applied to 'resources owned by the
commonwealth and also to those resources
not owned by the commonwealth, which
involve a public interest.'"
"We can only wait and see what 'all
agencies and entities of commonwealth
government, both statewide and local,"
will do with this expanded, nontextual
scope of the ERA and how courts will
analyze state and local regulation of
private property under this approach,"
Moody acknowledges.
Garber and Lucas write that some of
the issues surrounding application of the
ERA may be resolved, or at least clarified,
in Gorsline v. Board of Supervisors of
Fairfield Township, which is pending before the Pennsylvania Supreme Court.
A local zoning board in Gorsline granted a conditional-use permit for a well in
a residential-agricultural district, but a
Lycoming County judge reversed that decision, relying on the Robinson Township

case, published reports indicate. In September 2015, the Commonwealth Court
reversed that ruling and determined that
the record did not support the trial court's
conclusion that the proposed use was incompatible with uses in an R-A district

or that such uses would cause environmental harm. The Commonwealth Court
noted that the operator's evidence before
the board showing compatibility was uncontradicted. The Supreme Court heard
oral arguments in March.
r

Industry Scores Two Victories
At West Virginia Supreme Court
CHARLESTON, W.V.-The West Virginia Supreme Court of Appeals announced a pair of decisions in May that
the Independent Oil and Gas Association
of West Virginia says seem to indicate
an increasingly pro-business attitude in
the state's high court.
IOGAWV Vice President Benjamin
Sullivan says Patrick D. Leggett et al v.
EQT Production Company et al not only
reaffirms that operators may deduct postproduction costs from royalty interests
in a certain class of wells, but may open
the door to a court review of whether
such deductions should be allowed for
most other West Virginia natural gas
wells.
Meanwhile, attorney George Patterson
with Bowles Rice LLP, in an article
written for IOGAWV's newsletter, says
Gastar Exploration Inc. v. Joyce Contraguerro will permit more drilling units
in the state.

Post-Production Deductions
The real importance of Leggett, says
Sullivan, who is general counsel and vice
president of land for Energy Corporation
of America, is in its relation to the West
Virginia Supreme Court's 2006 ruling in
Tawney v. Columbia Natural Resources
LLC. He describes Tawney as the state's
seminal ruling in which the court disallowed deductions under several types of
oil and gas leases for post-production
costs from royalties calculated "at the
wellhead," unless the lease set forth that
deductions were permitted.
However, he recalls that Tawney was
decided "very narrowly," and the Supreme
Court in 2006 was unwilling to certify it
to a class of wells known as flat-rate
conversion wells.
Sullivan explains that in 1982, the
West Virginia Legislature adopted West
Virginia Code § 22-6-8, which in essence
banned payment of flat-rate royalties
under leases in which the operator paid
the mineral owner a flat amount-such as
$100 a year-rather than a volumetric
royalty rate. Any well drilled after the
effective date of § 22-6-8 on an existing

flat-rate lease became known as a flatrate conversion well.
He points out that wells drilled prior
to the statute's effective date that were
not reworked or redrilled after the effective
date were not impacted by the statute.
Sullivan says natural gas leases signed
in West Virginia prior to natural gas deregulation in the 1990s typically required gas
be valued at the wellhead, but the term "at
the wellhead," generally was not defined
in the leases because both operators and
landowners understood that the gas would
be valued for royalty purposes after netting
out all post-production costs necessary to
move, process and sell the gas.
He says the West Virginia Supreme
Court in 2006 ruled against the industry,
finding that "at the wellhead" was ambiguous and should be construed against
the lease drafter, who was assumed by
the court to be the operator, even though
he contends evidence presented at trial
did not comport with that assumption.
Nevertheless, Sullivan says, the court
therefore found that post-production costs
could not be deducted unless the lease
specifically provided for same.
Because § 22-6-8 also uses the phrase
"at the wellhead" in relation to calculating
royalties for flat-rate conversion wells,
he says the U.S. District Court for the
Northern District of West Virginia asked
the West Virginia Supreme Court in a
certified question to determine whether
Tawney applied to flat-rate conversion
wells in the federal court's own consideration of Leggett.
In November 2016, the West Virginia
Supreme Court initially ruled 3-2 that a
Tawney type analysis did apply to flatrate conversion wells, and therefore postproduction deductions were not permitted.
However, Sullivan notes that one of the
justices voting in the majority was defeated
in last year's November general election,
and a few months later the Supreme
Court agreed to rehear Leggett.
"IOGAWV and the West Virginia Oil
& Natural Gas Association filed a joint
legal brief in support of permitting operators to deduct reasonable post-production
AUGUST 2017 111
American Oil and Gas Reporter - August 2017

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