WV co-tenancy and lease integration

Started March 13, 2017 at 09:41 am by @Perrylkeaton in Marcellus Shale

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03/13/17 09:41:47AM

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.

Leo Schumacher
03/13/17 10:40:02PM @leo:

What does the bill do in terms of...

- inclusion of 100% of a mineral right's owner's minerals into the pool, instead of partial minerals.  An owner will not have any ability to lease any partial rights not included

- prompt development of the minerals?  If there is no up-front signing bonus, mineral owners should not have to wait more than a year to begin to receive royalty payments

- termination of the lease for non-compliance by the oil and gas producers?

- prompt payment instead of waiting 18 months for the 1st check?

- ensuring that an owner's minerals are fully developed, instead of just one well that holds 1000 acres by production?

- proper calculation by the WV Tax Department of the present value of the wells that mineral owner's must pay tax?  If the oil and gas company shuts in the well, well property taxes must still be paid

- why does the legislature not ask an oil and gas attorney who represents mineral owners to review the terms to verify they are as she would include them for her client?  sorry, but I don't want the legislature writing my oil and gas contract with the oil and gas company on my behalf.  Everything anyone reads says get an attorney, and the state is taking away the right to be self represented????

EJ Ohio
03/14/17 05:36:19PM @ej-ohio:

Leo,  you have obviously confused the legislature with someone who actually cares about what happens to your property rights.

Unfortunately you and I don't have the $$$$$$$ like O/G companies to write our own legislation.

You pose a lot of good questions but I would be surprised if any are addressed in any legislation.

You are expected to be happy with what you are given and don't ask for more.  Didn't you get the memo? (snark)

Leo Schumacher
03/15/17 11:30:50AM @leo:

Smile, and yes, I understand.  It is so aggravating the legislature is literally taking on the role of negotiating a contract that binds us, yet denies us proper representation.  This is exactly what the British did with tea in the colonial days! This was the exact reason we got rid of the British government, so why is the WV legislature acting like it?  It is sad, it is so wrong, the legislature does not care. I remember clearly that some of them ran for office last November claiming they represented the people; how they lie.  Mineral owners should always have the right to buy and sell in a free market.  They should never lose that.

I also want to mention the issue of well property taxes.  The tax rate is actually higher than the highest income tax rate in the state.  And it is possible to pay the well tax, and never receive any royalty for the year.  It is possible to have a negative income (this situation exists for me today.  The gas company paid $0 in royalties, and the State of WV charged me a tax bill on the well.  Tell me how proper that is).  The legislature is ignoring this,  denying mineral owners the ability to decline to participate in a well because of the unfair property tax.

In summary, the State of WV is taking away a mineral owner's free market ability, forcing them into an unfair legally binding contract which pays next to nothing, then taxes at a rate higher than the highest income tax rate.  The legislature, if this bill passes, will ensure that owners receive almost nothing, and the state and oil and gas company gets it all.  So much for any planning and capability to get a return that helps to plan for college education, health care, retirement, or charitable causes.

Nancy Mosley
03/15/17 09:35:19PM @nancy-mosley:

Leo, when you refer to a "well property tax" what do you mean? The county property tax? or something from the state of WV?

Leo Schumacher
03/16/17 01:01:35AM @leo:

I think it is officially a county tax.  Similar to how a value of your home is appraised, any wells for which you are included are appraised for their present value.  The WV State Dept of Taxation is the organization that calculates the present value of your well.  They send that calculated value to the county, which sends you a tax bill at the time it sends your property taxes (my understanding).  The county, again in my understanding, will use a percentage of the appraised value.  Since the process is similar to the property tax for a home, I call the tax a well property tax, which might not be fully accurate.

The problem is, when I received the assessed value from the State Tax Department, the assessment did not provide any information on how the value was calculated.  There is not a single formula that shows the value.  There is no production data, no price data, not even the numbers of acres, or the decimal interest.  I repeatedly asked the state to show me how they calculated the value, what is the precise formula they used.  They refused and I still today cannot determine how they arrived at the value.  In my opinion, they seem to have arbitrarily picked a value.  I cannot challenge their value, because they refuse to show how they got it.  I have an idea what my tax bill will be, and if correct, it will be far higher than the highest income tax rate the state has.  That is just wrong.  Also, the assessment is a present value calculation of the well, which means it is a determination of the remaining value, the remaining minerals, within the well.  If the oil and gas company shuts-in the well and pays no royalty, the present value, and thus the tax liability remains the same.  I cannot find a correlation between royalty income and tax liability.  The income is gone, but the tax remains.  I pay a tax for a year in which I receive no income.  In fact, this happened to me for tax year 2016.  It is a shallow well, not to the Marcellus or Utica shale formations, but I was charged a tax, and I received $0 royalty payment.

I know this subject is complicated.  I welcome everyone's thoughts that can add to my understanding for the subject. 

Nancy Mosley
03/16/17 11:32:58AM @nancy-mosley:

Leo, I know that the property tax, as you correctly said being calculated at the State Tax Dept. , is based on production of the year before the tax is calculated, then charged in the year after that. Thus it is about a 2 year delay from production to tax bill. Why they won't tell you how they calculate it, I don't understand. It was several years ago when I asked about this, and was told that they get information from the producer (the company) about how much royalty was paid per well per royalty owner. The state then tells the county that and they calculate the property tax based on their tax rate. For non producing property there is a different calculation.

The production (volume) for the wells are due in to the Office of Oil and gas by the end of March (I think) each year, then are input into their database after that. So the figures coming in now are for 2016 production. Probably the same to the state tax department. The taxes that will come out in July from the counties is for what was reported last year, so 2017 taxes reflect 2015 production.

Maybe that helps a little.

Leo Schumacher
03/16/17 12:30:52PM @leo:

Thanks Nancy! What is received on the bill is a calculated assessment value of the well, for your share.  My understanding is the calculated value of the well, which is a present value determination, is not solely based on the past production.  To get a value, it must determine the future production estimate, and the future pricing.  The past production serves to show how much depletion the well provides so that the remaining production estimate can be calculated.  This is not, again in  my understanding, simply a tax on what royalty was received in the past.

There are several questions, I think issues, with this, as I see:

a) What price did the oil and gas company provide for past production?  If it used its net realized price, which is different than the value at the well head, then the well's assessed value differs from a present value calculation based upon royalty payments received.  The assessed value using realized pricing overstates the true present value. I believe the assessed value does use the realized pricing (also note the significant deductions lease holders may have, which should lower the assessed value)

b) Is the price the oil and gas company gave to the tax department an average price of the wells in one specific unit, or from the average price it receives for all its units, or is it specific to each owner's royalty amount as per their lease?  If it is an average and not lease specific, then the assessed tax value will be unequally (and thus unfairly) allocated to lease holders.  I believe it is some form of an average price

c) Is the price calculation an average from all the oil and gas producers across the state, or from the specific company that holds your lease?  If it is the average across the state, it would further add to the inequality.  For example, if Equity realizes a higher price for its gas than Chesapeake, the average price would be greater than simply Chesapeake's.  If your lease is with Chesapeake, then your well's assessment value would be more highly assessed due to the weighting from Equity

d) Is the production calculation an average from all wells in the state, or is it specific to one company and all it units, or is it specific to the unit for one's lease? 

e) Is the future price estimate going to be the same price as the price used for royalty payments minus deductions? 

f) Is the future production estimate an average across the state, or is it for the company's units, or is it specific to the unit where the lease resides?

g) What decimal interest was used, or where can it be shown, how many acres and what percent of the wells, or units, was used to calculate my specific present value assessment?

h) If a well is shut-in, will the present value of the well's assessment change?  I think it remains the same, because this is a present value calculation.  A present value is a value that discounts all future estimated income to today's value.  Since no minerals are taken from a shut-in well, the estimated future production and income remain.  It is possible the estimated pricing, and the future interest rates can change, but the mineral quantity remains the same.

The above are questions I had, and the tax department refused to provide information.  They pointed me to their tax website for reference and stated the calculation exists there.  However, I was not able to determine the calculation, after spending days reading it, let alone translate the website content into a specific equation that applies to my specific mineral holdings, and lease.  Perhaps others can read and provide insight, which is welcome. The tax department would not disclose any data to me that would help me simply determine their equation was correct. There was no ability for me to put together any argument to a tax review board to demonstrate the assessment value was incorrect, because there was no formula or data made available.  As I wrote in the above paragraphs, I have many questions, but no answers.

03/16/17 01:27:53PM @pete:

I have a formula from them but I don`t think it would be of much help
it is an xls(excel) spread sheet and i cannot attach it here. pm me with your email and I will send it---flush well year 1, flush well year 2, or settled well

Leo Schumacher
03/17/17 07:06:35AM @leo:

Thank you.  I will pm you.  I may already have the spreadsheet, but I can compare yours and mine.  Mine is from the WV Tax website. Still prefer, and think it right, the state to provide the actual formula used to create the liability they are forcing me to accept

03/16/17 11:18:45AM @pete:

A BILL to amend and reenact §37‑7‑2 of the Code of West Virginia, 1931, as amended; and to amend said code by adding thereto a new chapter, designated §37B‑1‑1, §37B‑1‑2, §37B‑1‑3, §37B‑1‑4, §37B‑1‑5, §37B‑1‑6 and §37B‑1‑7, all relating to real property generally; providing an exception to waste for certain oil and gas development; providing a short title; providing declarations of public policy and legislative findings; providing definitions; providing that consent for the lawful use of the oil and gas mineral property by three‑fourths of mineral interest owners is permissible, not waste and not trespass; providing that cotenants are not liable for damages for as a result of the lawful use of oil and gas mineral property when an accounting is provided and a pro rata share of revenues and costs are distributed to or reserved for each unknown or unlocatable cotenant; allowing for an acreage weighted average royalty interest, free of post‑production expenses, to each nonconsenting cotenant; permitting for the joint development by horizontal drilling of multiple adjacent leases held by the same operator if the operator has a surface use agreement with all surface owners whose tracts may be disturbed by joint development; providing that royalties distributed to royalty owners affected by joint development may not be reduced by post‑production expenses; providing for severability of provisions.

Nancy Mosley
03/16/17 11:37:21AM @nancy-mosley:

Pete, do you know what it means to say that the royalty payment (under the proposed bill) to nonconsenting cotenants would be free of post production costs? Does this really mean a cost free royalty or is there some hidden meaning?

03/16/17 01:14:26PM @pete:

yes that is about all it would mean, without a lease they could sell at any value meaning it could be a dollar when the market is at 13, you have no lease so everything is open, no right to audit, no upfront payments---the only people making out here is the oil/gas company

03/16/17 10:56:52PM @pete:
Grub law firm
The Doddridge County Circuit Court recently granted our Motion for Summary Judgment in a trespass case against EQT Production Company. The case is an extremely important one for surface landowners in West Virginia. Essentially, our clients argued that EQT unlawfully trespassed on their land when it drilled nine horizontal wells into neighboring tracts of land (from our client’s property). The Court agreed.

This landmark ruling affirms the rights of West Virginia surface landowners and holds that EQT did not have an implied right to drill horizontal well bores into neighboring tracts (from our clients' property). Therefore, absent express consent from the surface property owner, EQT’s conduct was a trespass.

The trial on damages is set to begin on April 24th in West Union, West Virginia.

03/20/17 01:02:40PM @sally:

One of the best explanations of why the Legislature should not pass SB 576!

Oil, gas and the Legislature

MAR 19, 2017

At the request of some large out-of-state oil and gas companies, some of the state senators introduced SB 576 to allow forced pooling of the Marcellus Shale, one of the most valuable oil and gas formations on the planet.

EQT, based in Pittsburgh, wants to unitize old leases and storage fields that were leased a century ago, or many decades past when flat rate wells and $1/acre/year storage was common. Families have waited decades to be able to modernize the leases signed in the 1800s or the storage leases that were signed under duress as it is now known how much/acre the storage companies make each year.

Old leases, if one was lucky, called for a royalty of 12.5 percent (1/8) but leases nowadays range from the 20 percent royalty paid to the state of West Virginia to 25 percent in “historical” oil and gas sections of the nation. In addition, bonuses of several thousand dollars/acre are routinely paid.

The companies do not want to have to deal with landowners and pay fair bonuses and royalties and they definitely do not want anyone checking on the meters, especially the weights and measures folks. Thus, just have the legislature pass a bill that lets them do as they please without having to answer to anyone and just pay whatever royalties, severance taxes and county ad valorem taxes that they are of a mind to.

Two of the companies have threatened to leave the state if they do not get their way. Of course this is absurd. There are now many new fractionation plants and an ethane cracker is on the way at Monaca, Pa., a fertilizer plant is in the works in Ohio and two methanol plants are in the works in W.Va. There are piles of pipe all over northern West Virginia and the new hotels continue to be built.

The legislature should reject forced pooling and instead require that all sales meters for oil natural gas and natural gas liquids be state tested and that copies of the measurements be sent to the mineral owners and the state tax department along with sales figures from arm’s length sales transactions.

This area is in the middle of the largest oil and gas field on the planet. West Virginia and the land and mineral owners rightly deserve to be paid world class royalties (and taxes) from the orderly development and utilization of our resources.

Alvin Engelke


03/20/17 03:03:04PM @pete:

the legislators really need to address the deductions and how a royalty
check could end up in a negative number(meaning you owe them for selling your gas) deductions began when deregulation started and now are used to
reduce a fictionalized royalty to zero or below.they continue to waste time and tax dollars for the large corporations instead of its citizens.

03/23/17 12:19:10PM @pete:

  URGENT - Call members of the WV Senate Judiciary Committee TODAY

SB 576 has been re-written.  Farm Bureau LIKES the new language on co-tenancy.

However, WE CANNOT SUPPORT the language as written under section 37-B-1-5 on joint development or damages.


Senator Trump – Chair (304) 357-7980

Senator Weld - Vice-Chair (304) 357-7984

Senator Azinger (304) 357-7970

Senator Beach (304) 357-7919

Senator Clements (304) 357-7827

Senator Cline (304) 357-7807

Senator Ferns (304) 357-7918

Senator Jeffries (304) 357-7866

Senator Karnes (304) 357-7906

Senator Maynard (304) 357-7808

Senator Miller (304) 357-7959

Senator Ojeda (304) 357-7857

Senator Romano (304) 357-7904

Senator Rucker (304) 357-7957

Senator Smith (304) 357-7995

Senator Swope (304) 357-7843

Senator Woelfel  (304) 357-7956

West Virginians deserve #fairdevelopment





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