As you know, the West Virginia Senate introduced SB 244 earlier this session, which was a bill relating to co-tenancy and lease integration. SB 244 was a bill that allowed gas companies the automatic right to pool old leases without the permission of the royalty owners and to lease a simple majority of owners in a tract before drilling instead of leasing all the owners which they are currently required to do. WVROA opposed this bill as well as other groups concerned with property rights.
The opposition to SB 244 brought about stakeholder meetings at the capitol around the issue of co-tenancy and lease integration, sometimes also called joint development, forced pooling, or whatever its proponents choose to call it. Senator Trump brought all the stakeholders together and heard our concerns, and crafted a new bill to replace SB 244. Friday, the product of those meetings and Senator Trump’s efforts was introduced in the Senate, SB 576.
WVROA’s main concern has been and always will be post production expenses. We feel that it is already difficult to obtain a no deduction lease from gas companies, and any legislation that limits our negotiating power in such significant ways MUST prohibit post production deductions from royalties where the lease does not specifically grant the right of gas companies to take them. We stressed this point over and over again in stakeholder’s meetings, however SB 576 does not adequately address this issue. In fact, the language implies that the 1/8th statute’s language “at the wellhead” allows for deductions, and as many old leases use “at the wellhead” because before the late 1980’s the wellhead was the point of sale and there were no post production expenses, that language effectively does the opposite of what we were asking for. Furthermore, SB 576 essentially grants immunity to producers that in our view have taken deductions for years that they were not entitled to, essentially stealing money from West Virginia Royalty Owners. Rather than be no post production deductions, the language is better characterized as pro-post production deductions.
The provisions of co-tenancy also got worse for royalty owners. Where SB 244 treated the non-consenting royalty owners as working interest owners, (meaning they retained 8/8ths of the gas produced from their share minus costs) the new co- tenancy of SB 576 simply gives the non-consenting 1/3rd of owners a weighted royalty average without deductions but also without up-front money. So while the percentage of owners that can be forced into development has shrunk, the terms of being forced in have become much worse and do not serve as adequate motivation for gas companies to try to negotiate leases in good faith.
The one area of improvement to the concept in SB 576 is that on leases that are subject to lease integration, the gas companies need to obtain surface use agreements. We feel this is a positive development as we support the property rights of fellow West Virginia property owners. We feel the vast potential of gas production from horizontal drilling should be done fairly and responsibly, and that it can be done while treating surface owners, mineral owners, and producers fairly. SB 576 needs a lot of work to be characterized as fair in our opinion, and while we were eager to strike a deal if we received protection from deductions, that is not what we see in SB 576. Therefore, WVROA OPPOSES SB 576 as introduced.