Reed Smith In-depth

Recent opinions from federal courts in Pennsylvania and West Virginia provide further insight as to the interpretation of various royalty clauses in oil and gas leases. While the Western District of Pennsylvania found in favor of the lessee and dismissed the complaint with prejudice, the Northern District of West Virginia granted summary judgment in favor of the plaintiff lessors and denied summary judgment to the lessee. In addition, the U.S. Bankruptcy Court for the Southern District of Texas approved a settlement agreement reached by Chesapeake Energy, resolving about $150 million in royalty claims.
Tubes for liquefied oil gas


On May 11, 2021, Judge William S. Stickman IV of the Western District of Pennsylvania granted a motion to dismiss the complaint in favor of the defendants, Chevron U.S.A., Inc., Chevron Appalachia, L.L.C., and Atlas America, L.L.C. (collectively, the defendants) in the case of Coastal Forest Resources Company v. Chevron U.S.A., Inc., et al., No. 2:20-cv-1119. The plaintiff, Coastal Forest Resources Company (Coastal Forest), asserted claims for breach of contract and accounting, arguing that the defendants had violated their oil and gas lease by using the net-back method to recover post-production costs. The court found that the lease at issue “unquestionably calls for the calculation of royalties ‘at the wellhead’” and that under Pennsylvania’s landmark royalty case, Kilmer v. Elexco Land Services, 990 A.2d 1147 (Pa. 2010), “‘at the wellhead’ language means that the net-back method may be used for calculation.”

In Kilmer, the Pennsylvania Supreme Court held that “the [Guaranteed Minimum Royalty Act] should be read to permit the calculation of royalties at the wellhead, as provided by the net-back method.” Coastal Forest argued that the Kilmer decision was narrowly limited to the construction of the Guaranteed Minimum Royalty Act (GMRA) and “was not meant to provide an expansive definition that would allow the net-back method to be used in all instances where the ‘at the wellhead’ language is present.” The court disagreed with Coastal Forest, holding that Kilmer “must be read broadly.” The court reasoned that because there was not a “GMRA-specific definition of ‘at the wellhead’ or ‘net-back method,’” the Kilmer court “took a broader view as to how they are treated in the oil and gas industry” and concluded that the net-back method does not violate the GMRA. Furthermore, the Kilmer court “could not limit its interpretation of the ‘at the wellhead’ language to the confines of the GMRA” and instead “applied it to the interpretation of the contractual language that was already well established in the oil and gas industry.”

Accordingly, the court granted the defendants’ motion to dismiss, holding that Coastal Forest “failed to plead a plausible claim for breach of contract,” and, as such, “accounting cannot be awarded as a remedy.” Coastal Forest’s claims were dismissed with prejudice.

West Virginia

Judge Irene M. Keeley of the Northern District of West Virginia recently decided cross-motions for summary judgment in Corder v. Antero Resources Corporation, which involved claims for breach of contract related to alleged improper deductions of post-production costs from royalty payments. The plaintiffs had several leases with the defendant, Antero Resources Corporation (Antero). The issue in this matter was “whether the gas from the Plaintiffs’ properties must be processed before it may enter an interstate pipeline and be transported to the point of sale.” Antero argued that it could choose to either sell the gas in its raw form or process the gas and by-products if it would be more profitable. The plaintiffs, on the other hand, argued that the gas must be processed to separate the natural gas liquids before being sold on the market. For the calculation of royalties, Antero stated that when the gas is sold in raw form, the plaintiffs are not charged processing costs, and no costs are deducted for dehydrating, compressing, or gathering the unprocessed gas for delivery into the pipeline system. When the gas is processed, Antero averred that it may charge the plaintiffs a portion of the processing costs, depending on the lease’s language.