MORGANTOWN — Pittsburgh-based natural gas producer EQT wants to have a new West Virginia law protecting certain gas well royalty payments declared unconstitutional.
EQT offered arguments why its federal court lawsuit shouldn’t be dismissed.
EQT filed its lawsuit against state Department of Environmental Protection Secretary Austin Caperton in mid-April in the U.S. District Court for the Northern District of West Virginia. At the end of May, Caperton filed his motion to dismiss the suit.
The most recent filing is EQT’s memorandum opposing Caperton’s motion.
Royalty owners have publicly worried that an EQT victory in this case could set the state to topple a broader court ruling applying to deductions from all royalties.
Background
The law being challenged was created via SB 360 during the 2018 legislative session. It was drafted to counter a state Supreme Court ruling, in a case called Leggett, allowing gas producers to deduct post-production expenses from royalties on wells drilled on certain types of leases.
Specifically, under a 1982 law, new wells drilled under old flat-rate leases wouldn’t be permitted unless the new wells were paid based on volume — a one-eighth royalty. Through federal deregulation, gas once sold at the point of extraction is now sold further down the pipeline after being processed. EQT and other producers deduct the processing costs.
SB 360, which took effect May 31, the day Caperton moved to the suit dismissed, calls for a royalty based on “the gross proceeds, free from any deductions for post-production expenses, received at the first point of sale to an unaffiliated third-party purchaser in an arm’s length transaction.”
EQT contends that the law violates the U.S. Constitution, which says no state shall make any law impairing the obligation of contracts. The state’s 1982 Flat-Rate Statute and its revision under SB 360 both impair contracts.
The arguments
- Caperton argued that EQT’s suit, by naming him in his capacity as secretary and seeking monetary damages, violates the 11th Amendment of the U.S. Constitution, which prohibits suing a state.
EQT counters that the law puts a state permit in front of its right to extract gas, so it has no recourse but to sue the state.
- Caperton said the law doesn’t impair EQT’s contractual rights. It doesn’t stop EQT from drilling; it just modifies royalty payments to stop EQT’s “windfall profits” from changes in how gas is sold. Guarding the royalty owners’ interests serves a legitimate public purpose.
He also argues that the federal Contract Clause doesn’t bar states from exercising their police powers for the public good, even when those powers affect existing contracts.
EQT counters that the law alters a specific, bargained-for payment term by conditioning permits on a modification of those payments. The landowners agreed to a certain safe, fixed payment and EQT took the risks of extracting the gas and developing new technologies.
The law doesn’t benefit the general public, EQT said, only a small group of royalty owners. It is those landowners, not EQT, that are seeing windfall profits.
“Rather than limiting lessors to the gains they expected to receive … the Flat-Rate statute bestows on lessors a more lucrative extraction-based royalty that they could not possibly have expected,” EQT said.
- Caperton argues that at the time of the original leases, some of them 100 years ago, companies were drilling for oil and gas was a cheap waste product. The parties couldn’t have known about technological advances or the increased value of gas.
EQT argued, again, that the landowners traded a safe income for EQT’s risks, and that by fixing a price for gas (including free gas for home use), the landowners understood the value of gas.
While this case has limited application to certain old leases, West Virginia Royalty Owners Association President Tom Huber has previously said an EQT victory here could at least partly close the door on another state Supreme Court ruling, called Tawney, that prohibits deductions from other royalty checks where the leases don’t specifically allow for them.
