Representing West Virginia, Kentucky and North Carolina
The Marcellus Shale lies under much of northern Appalachia, 6,000 to 8,000 feet below the surface; the pores in the shale contain large quantities of natural gas. The shale layer becomes thicker from west to east beginning at about 50 feet in Ohio to more than 100 feet thick in central PA and NY.
Geologists have known about the gas in this area for years . It is reported that settlers as early as the 1600s noticed "burning springs" through out Appalachia. In the early 1800s oil and gas was discovered accidentally by salt well drillers. By 1840 natural gas was being used to evaporate brine water in Butler County, Pa.
It is the new technology of horizontal drilling, combined with hydraulic fracturing, that has turned recovering the gas locked in these rocks the big new “Shale Play”. It wasn't until about 2007 that Appalachia began turning heads in "the oil and gas states" Texas, Oklahoma, and Louisiana. Mineral owners in the Appalachian area began seeing Landmen knocking on doors to obtain gas leases.
NARO was established in 1981. The NARO Appalachia chapter began in October of 2008 to provide mineral owners some organized support, education and advocacy.
What is happening in West Virginia?
The 2018 Legislative session was a huge success for West Virginia Royalty Owners. The following is a list of the legislation that was supported by NARO Appalachia and other important mineral and landowner groups.
SB 360: The Flat Rate No Deductions Bill
SB 360 was sponsored by Senator Clements and the House Version, HB 4490 was sponsored by Delegates Harshbarger, Hollen, Paynter, R. Romine, Ward, Atkinson, Martin, Butler, Sypolt, Storch and Walters. The Senate bill was the bill that became law. At the beginning of the session we were hoping that somehow we could get this bill passed in spite of heavy opposition from one horizontal drilling company with large amounts of flat rate acreage, and due especially to the tireless advocacy of Senator Clements, the bill passed the Senate 34-0 and 96-2 in the House of Delegates.
The bill reverses the WV Supreme Court decision from Leggett Vs EQT. As many of you are aware, the Supreme Court reversed itself and said that on new 1/8th wells drilled on flat rate leases, companies can take post production expenses. Additionally, the decision sets up challenges to 1/8th at the well head leases currently protected from post production expenses by the Tawney Vs Columbia Natural Resources decision. Now, when applying for a permit to drill on flat rate leases, drillers must file an affidavit agreeing to pay 1/8th of the gross proceeds free of post-production expenses paid at the first sale to an unaffiliated third party purchaser in an arm’s length transaction. Hopefully, the Supreme Court gets the message sent by the legislature that here in West Virginia we are a market product rule state and not a net back state. We also do not want unscrupulous companies to continue selling gas to themselves and paying less to royalty owners and in state severance taxes, and not paying for liquids at all. That is what the unaffiliated purchaser language is designed to prevent. Other states in our region have taken notice, and hopefully PA will follow our lead and pass their Guaranteed Minimum Royalty Act. The Bill goes into effect 90 days from passage.
HB 4270: The Check Stub Bill or Transparency Bill
For years we have tried to get certain requirements for royalty check stubs and this year the legislature passed HB 4270 which requires that all royalty checks from horizontal wells contain certain basic information such as API number, amount of oil, gas, and NGL’s produced, price those products are sold for, and things like the owner’s share of the unit. The bill also requires quarterly reporting of production to the DEP, rather than the current annual reporting, and requires timely payment of royalties, 120 days from the first sale of oil and gas and 60 days from each following sale. Vertical wells were not included because vertical producers are in a very dire financial situation and are being forced out of business by large horizontal drillers, and we did not want to additional financial hardship to our small West Virginia producers. The bill goes into effect September 1, 2018.
HB 4268: Cotenancy Bill
HB 4268 was the cotenancy bill and was somewhat controversial. Our membership had broad consensus that cotenancy was appropriate and beneficial if done correctly and had strong protections for the surface and mineral owners, both consenting and non consenting owners. This is not forced pooling, it is a reform of how we deal with co-owners in dispute about whether to develop their oil and gas that they own together. The bill says that if 75 percent of co tenants consent to leases, that the minority cannot stop drilling. Those in the minority can then choose to be a carried interest owner, which means they become a partner in the well, or they can be deemed leased. The terms for the non-consenting owner are the highest royalty rate from the consenting owners free of post-production expenses and payable based on the sale to a third party unaffiliated purchaser. They would get an average bonus payment from the average bonus payment made to the consenting owners. NARO Appalachia and other land & mineral owner groups negotiated hard on this bill and we feel we got the necessary protections to make this bill fair to the non-consenting owner while also protecting the majority’s right to have the property developed and realize the benefit of their ownership in the form of royalties. This will also be a much better solution to the forced sales created by partition actions. The new law becomes effective 90 days from passage.
HB 4269: Partition Reform
This bill did not pass. For a variety of reasons, it never made it out of House Energy, and we will try to address the concerns of legislators and get this much needed reform passed next year.
This was a very important and productive session for royalty owners. The work is not done on issues such as post-production expenses, receiving payment on oil, gas, and NGL’s, and a whole host of other issues. This year was a great first step and we will continue to engage with the legislature on behalf of royalty owners to seek smart and fair solutions to these problems and encourage fair development in the State of West Virginia.