For many years, Arnold and Mary Richards collected month-to-month royalty checks — most lately from $1,000 to $1,500 — for the natural gas sucked up from beneath their West Virginia farm by small, previous wells.
So in 2016, when EQT Corp. drilled six new gas wells, the Ritchie County couple anticipated to see their royalty payments skyrocket. The much-larger wells would acquire much more natural gas from the Marcellus Shale formation, which is fueling the growth within the state’s gas industry.
The Richards’ checks did develop significantly. However the couple additionally noticed one thing they didn’t anticipate: EQT was slicing the dimensions of these new checks.
EQT started deducting for what it stated was the price of transporting the gas, for processing the gas and even for state taxes. All informed, since November 2016, the Richardses calculated they have been lacking about $235,000 in royalties.
The Richardses had appeared intently at their lease agreements. The agreements said that EQT would give them 12.5 % of the income generated from the wells. They didn’t say something about permitting deductions. So the Richardses went to courtroom, submitting a federal go well with towards the corporate in February 2017.
“I only want the royalty that is due us, according to our lease,” Mary Richards informed a jury in Clarksburg this September.
Arnold and Mary Richards are the newest amongst hundreds of West Virginians who’ve watched the state’s natural gas producers whittle away at royalties promised to them, in accordance to a evaluate of courtroom data by the Charleston Gazette-Mail and ProPublica.
Typically, the businesses deduct quite a lot of “post-production” prices from gas proceeds, as seems to have occurred within the Richards’ case. Different occasions, they’ve prevented paying full royalties by creating shell corporations that, at the very least on paper, purchase the gas at lowered costs. These practices have gone on for many years.
Whereas the state Legislature and courts have each tried to make sure that residents are getting their justifiable share, gas corporations have merely shifted their techniques.
In 1982, the Legislature banned leases that restricted payments to just some hundred dollars a yr. The invoice declared an finish to the “continued exploitation of the natural resources of this state in exchange for such wholly inadequate compensation.”
Twenty years later, residents filed a collection of fits alleging they have been nonetheless being shortchanged. The lawsuits prompted a collection of settlements and a $400 million verdict in 2007.
But residents say these practices haven’t ended. A category-action lawsuit, filed in 2013 on behalf of greater than 10,000 people and corporations that personal gas, is about to go to trial in two weeks. It alleges that EQT — the state’s second-largest producer — continues to take improper deductions from royalties.
“It’s still going on, and they’re finding ways to disguise it,” stated Scott Windom, a Harrisville lawyer who represented the Richardses and who typically represents gas house owners in fights with producers.
EQT, in addition to different gas corporations and industry commerce teams, keep that they’ve executed nothing flawed, and that royalty payments are truthful and based mostly on lease language or state regulation.
Deduction of post-production prices from gas royalty payments is a technique that has “long been used in West Virginia and other states,” legal professionals for EQT argue within the ongoing class-action case. They made comparable arguments within the Richards’ case.
West Virginia’s natural gas industry has flourished, with manufacturing roughly tripling prior to now 5 years. State leaders painting the industry as the guts of a robust future financial system, maybe to exchange the declining coal enterprise.
However there are rising indications that natural gas is taking West Virginia down the identical path as coal, together with an extended and persevering with battle over how the income are divvied up amongst residents and out-of-state corporations which might be extracting natural assets from the land. And EQT is now suing to intestine the 1982 royalty regulation that was meant to give gas house owners a bigger piece of the industry pie.
Joshua Fershee, a West Virginia College power regulation professor, stated the variety of royalty disputes has elevated because the industry has grown, and they’re doubtless to proceed as gas manufacturing keeps increasing.
“These issues will keep playing out,” Fershee stated.
For Arnold Richards, the rationale to struggle is obvious: “It’s not because I don’t have enough money to live on. I do,” he testified. “I really worked hard all these years to get it, not pass it on to a corporation.”
After deliberating for just some hours, the jury ordered EQT to repay the Richardses the $192,000 in post-production prices that had been deducted from their royalty payments. U.S. District Decide Irene Keeley had already ordered the corporate to pay them almost $43,000 in taxes that had been deducted, for a complete of $235,000.
An EQT spokeswoman declined to touch upon the decision within the Richards’ case, on whether or not the corporate plans to attraction or on the class-action case that’s headed for trial.
Again within the Day
Sixty-seven years in the past, Arnold and Mary Richards received married. They have been each about 18 years previous. A number of years later, in 1954, they purchased their farm, on Rock Camp Run outdoors Harrisville.
As a part of the deal, the Richardses acquired the rights to about half of the natural gas underneath the farm. In these days, gas wasn’t in excessive demand. There have been wells on the Richards’ land, however they have been small and solely drilled vertically.
The possession of land and mineral rights in West Virginia is complicated and complicated, even for a lot of who reside within the state.
Somebody might personal the floor land, whereas another person owns the coal, oil or gas beneath. Typically, as within the Richards’ state of affairs, individuals personal each the floor and the gas under. A lot of the natural gas in West Virginia is produced underneath lease agreements, during which an proprietor or house owners of the gas lease it to a manufacturing firm. Many leases are many years, or typically greater than a century, previous. Within the early 1900s, natural gas leases that paid $100 to $300 a yr have been thought-about affordable, perhaps even beneficiant. Again then, most drillers have been after oil, and natural gas was principally an undesirable byproduct.
As the marketplace for gas elevated, in manufacturing, residence heating and electrical energy, the industry has grown. Newer leases pay a share of the income generated, so gas house owners make more cash as manufacturing will increase. Leasing practices even have modified in order that many leases have set phrases, typically 5 years, quite than being open-ended.
With the industry rising, West Virginians who owned their natural gas pushed efficiently in 1982 to guarantee they might get a much bigger reduce of the income. Lawmakers handed a invoice outlawing these flat-fee leases that paid just some hundred dollars a yr. The invoice declared that such preparations had been “unfair, oppressive” and “an unjust hardship on the owners of the oil and gas.”
The brand new regulation solely utilized to conditions by which each the gas lease was an previous flat-fee association and the nicely was new, drilled after the 1982 regulation took impact. So as to get a state allow for such wells, gas corporations would have to pay the gas house owners at the least 12.5 % of the income collected from the gas. (Because the Richardses already acquired that, the brand new regulation did nothing for them.)
For greater than 40 years, Arnold Richards drove an hour every method every day from Ritchie County to DuPont’s plant close to Parkersburg, the place he labored as a millwright. The couple additionally labored their farm, and once they had the prospect and had some cash saved up, they purchased extra of the gas reserves beneath the farm.
Then, in 2014, the Richardses appeared to get excellent news. EQT purchased the gas leases to their land. By then, corporations have been utilizing superior hydraulic fracturing and horizontal drilling to seize bigger and bigger quantities of gas. EQT needed to do this on the Richards’ farm.
To take action, the corporate needed to change the lease, to permit it to “pool” the gas reserves, drilling into the Richards’ gas from an adjoining piece of property. The couple went together with it, agreeing to a brand new “pooling clause” of their lease, however not to another modifications. The brand new wells have been drilled in 2016.
However when the primary verify arrived, Arnold Richards observed that EQT had taken out manufacturing prices. He referred to as the corporate to ask what was happening.
The corporate has paid the Richardses $935,000 in royalty payments, however it will have been greater than one million dollars with out the deductions. The corporate “didn’t give us any satisfaction,” Mary Richards stated later in courtroom.
So the couple went to see Rod and Scott Windom, a father-son authorized group in close by Harrisville, the county seat. The Windoms filed a lawsuit for the couple in February 2017.
“An Awful Lot of Charges That We Didn’t Know About”
The Richards’ lawsuit wasn’t the primary towards EQT or different producers over royalties, and it wouldn’t be the final.
Maybe probably the most vital problem to West Virginia natural gas leasing practices got here a few decade in the past when a instructor couldn’t decipher the accounting statements on the stubs the gas firm despatched him.
Garrison Tawney grew up in Roane County and went to Marshall College, in Huntington. Round 1940, he got here again residence to train faculty and have a tendency the household farm close to Looneyville. He retired from the varsity system in 1976, however stored working his hay and cattle.
Tawney’s spouse, Freda Winery Tawney, owned natural gas reserves she had inherited from her household. In 1989, the Tawneys leased these gas reserves to Columbia Natural Assets. Their new leases paid them 12.5 % of the gross sales.
However to Garrison Tawney, the numbers by no means appeared to add up. Ultimately, he turned to an area lawyer. Tawney and his lawyer began investigating and ultimately sued once they found Columbia was taking numerous deductions from the gas income earlier than it calculated royalties.
Firm legal professionals tried to clarify away the transfer. They pointed to Federal Power Regulatory Fee orders aimed toward deregulating the pipeline industry. Beforehand, gas had been bought by the producer on the bodily “wellhead” to the pipeline firm. Underneath the brand new FERC-ordered system, it was routinely bought at a distant level of sale following processing and transportation.
“The only logical way to calculate royalties,” legal professionals for the West Virginia Oil and Natural Gas Affiliation argued in a quick supporting Columbia Gas within the Tawney case, “is to permit gas lessees to deduct the lessor’s proportionate share of post-production expenses from the total price received at the point of sale.”
Corporations like Columbia Gas began deducting the prices of processing and delivery gas to pipelines earlier than they calculated the royalties for individuals just like the Tawneys. They only didn’t inform them they have been doing it. Accounting statements to gas house owners continued to listing “Your Share Prod. Charges” as “0.00.”
Tawney died at age 90, about two years earlier than the three-week trial in Roane County Circuit Courtroom in January 2007, however he had advised his story underneath oath in a deposition, a part of which was learn to the jury.
“Well, the only thing I know, that I was thinking that we was getting one-eighth of the production [12.5 percent] without any modification or deductions,” Tawney testified. “But I didn’t know that they was going to do what they did, which was take out an awful lot of charges that we didn’t know about.”
By then, the lawsuit was a class-action on behalf of 10,000 gas house owners, and jurors got here again with a $400 million verdict for Tawney and the opposite gas house owners. A lot of the cash — about $271 million — was to punish the businesses concerned. Sharing the legal responsibility have been NiSource, which had, at one level, owned Columbia Gas, and Chesapeake Power, which later purchased Columbia.
The decision set off a firestorm of protest from the gas industry.
In a Charleston Gazette story, Chesapeake Power spokesman Scott Rotruck in contrast it to “getting clobbered with a big, roundhouse punch in the first round.” Rotruck advised the Charleston Every day Mail that the punitive injury award was “almost like capital punishment for a parking violation.”
Chesapeake and NiSource tried to attraction the decision, particularly the punitive damages portion. The state Supreme Courtroom turned them down in Might 2008.
Chesapeake’s colourful CEO, Aubrey McClendon — recognized for accumulating wine, vintage maps and classic motor boats — wasn’t pleased, and he let West Virginia officers realize it. Inside every week of the Supreme Courtroom’s refusal to hear its attraction, Chesapeake dropped plans to construct a brand new regional company headquarters in Charleston, anticipated to value $30 million to $40 million. The corporate had already bought land and damaged floor for the workplace constructing. (McClendon died in Might 2016, in a one-car crash, a day after being indicted on federal fees that he rigged bids for oil and gas leases.)
In October 2008, Chesapeake and NiSource dropped an attraction to the U.S. Supreme Courtroom and settled the case for $380 million.
Within the three years after the Tawney verdict, a minimum of three different class-action instances towards gas producers in West Virginia have been settled for a complete of greater than $80 million on behalf of some 35,000 gas house owners.
That included a few $30 million settlement by Equitable — as EQT was then recognized — with about 10,000 class members who had gas leases with the corporate.
Regardless of the anticipated doom from industry leaders, natural gas exercise in West Virginia skyrocketed within the decade after the Tawney case. At the moment, Southwestern Power, which, in 2014, purchased Chesapeake’s West Virginia operations, is the third-largest producer within the state.
“They Have Arrogantly Disrespected the Law in West Virginia”
After years of litigation, some residents — and even landowners and their legal professionals with years of expertise in gas points — contend they nonetheless aren’t positive what’s being deducted from their royalty checks.
In January 2014, U.S. District Decide Joseph R. Goodwin informed EQT that its leases with W.W. McDonald Land Co. didn’t permit it to deduct bills like “meals and entertainment,” “uniforms,” “meter operation and repair” and “personal property taxes” from the payments it made to the corporate, which had sued EQT.
The decide famous that the leases in query allowed deductions just for “compressing, desulphurization and/or transporting gas” from the nicely to the purpose of sale. Usually, the decide noticed, deductions are allowed provided that they’re spelled out within the lease and are “actually incurred” and “reasonable.”
“I find that meals and entertainment, uniforms, meter operations and repair, and personal property taxes are not costs of compression, desulphurization, or transportation,” the decide wrote.
The McDonald Land case was notable in one other method. It alleged that, after authorized challenges to the apply of deducting post-production prices from royalty payments, EQT reorganized its operations in an effort to maintain pocketing these deductions for itself.
Between 2000 and 2005, EQT produced gas owned by W.W. McDonald and transported it to an interstate pipeline, the place it was marketed to third events. EQT paid the prices of transporting and advertising the gas, and handed on a few of these prices to W.W. McDonald.
Then, in January 2005, EQT reorganized. It shaped separate entities, together with EQT Gathering Inc. and EQT Power. A special EQT arm, EQT Manufacturing, was the one which had the McDonald leases and was producing its gas.
In 2005, EQT Manufacturing beginning promoting the gas to its personal sister firm, EQT Power. EQT Power, after contracting with yet one more spinoff to acquire and transport the gas, would then promote it to a 3rd social gathering at a better worth than the corporate initially paid.
EQT Manufacturing argued in courtroom that when it began that association, it was not improperly deducting transportation prices when it paid McDonald Land’s royalties.
Legal professionals for McDonald Land, although, responded that the results of the complicated setup was “exactly the same”: EQT might maintain paying much less in royalties.
Goodwin concluded that EQT’s new system — the corporate calls it a “work-back methodology” — wasn’t allowed in West Virginia.
“The defendants cannot calculate royalties based on a sale between subsidiaries at the wellhead when the defendants later sell the gas in an open market at a higher price,” Goodwin wrote in a 36-page ruling in November 2013. “Otherwise, gas producers could always reduce royalties by spinning off portions of their business and making nominal sales at the wellhead.”
Through the years, natural gas corporations have used quite a lot of methods and methods to scale back the royalties they pay to West Virginians who lease them gas.
- Flat charges: Some gas corporations proceed to implement century-old leases that pay gas house owners flat charges — as little as $100 a yr — regardless of how a lot natural gas is produced from older wells.
- Deductions: Gas corporations deduct numerous prices — for transporting and processing gas, for instance — from the royalties they pay.
- Promoting to themselves:Some gas corporations have created an internet of affiliate corporations, promoting to these associated companies at decrease prices to masks the precise gross sales quantities and subsequently scale back royalties.
EQT and McDonald Land reached a confidential settlement in August 2015, however, by then, a brand new class-action lawsuithad been filed towards EQT, alleging the corporate hadn’t ended the apply. That case, in U.S. District Courtroom in Wheeling, includes roughly eight,000 leases and 10,000 class members, courtroom data present.
“They have arrogantly disrespected the law in West Virginia,” wrote legal professionals for the gas house owners presently suing EQT. “They are intelligent, smart and knowledgeable in this industry. … Instead of preparing to comply with the law, they set about and prepared to dodge it and find and invent arguments to disobey the law.”
EQT legal professionals argue the corporate’s royalty cost strategies “are not a sham,” they usually urged that the class-action case be thrown out.
Whereas a last determination has not been issued within the case, U.S. District Decide John Preston Bailey has already ruledthat, as a matter of regulation, numerous EQT subsidiaries are the dad or mum firm’s “alter ego” and may’t be used to assist scale back royalty payments to gas house owners. The lead named plaintiff is the Kay Co., a small landowning agency named for its founder, James Kay, a well known coal government who was president of Royal Coal and Coke Co. The trial is slated to begin on Nov. 27.
Different royalty fits towards EQT, and towards different gas producers like Antero, are pending in West Virginia courts. (The lead lawyer for gas house owners within the class-action case, and in a number of different such instances, is Charleston lawyer Marvin Masters, who’s amongst a gaggle of native buyers who purchased the Charleston Gazette-Mail this yr.)
“Outdated Statutory Language”
Regardless of the flurry of settlements it triggered, the Tawney case didn’t finish the apply of corporations taking post-production deductions from royalty checks. EQT continued taking such deductions from a few of its leases, arguing that the 1982 regulation meant to profit landowners truly allowed the corporate to pay them much less.
That place received them sued once more, by Patrick and Katherine Leggett, house owners of natural gas reserves in Doddridge County.
In that case, the state Supreme Courtroom dominated in November 2016 that the corporate couldn’t take such deductions. However then, a brand new justice, Beth Walker, took workplace and voted to rehear the case. In a choice made controversial by investments Walker’s husband had had within the natural gas industry, the courtroom, in Might 2017, reversed itself and determined in EQT’s favor. What that meant was that, for flat-fee leases and wells drilled after 1982, post-production bills could possibly be deducted from the royalty payments.
However the Supreme Courtroom additionally urged lawmakers to think about the impacts of the ruling, with one justice urging the Legislature to rewrite “outdated statutory language” to handle “significant changes” within the gas industry.
When lawmakers got here to Charleston for his or her annual legislative session in January 2018, they heeded the courtroom’s name, taking over a invoice to overturn the second ruling within the Leggetts’ case and banning post-production deductions for gas house owners with leases since 1982.
“If this decision is allowed to stand, it will shift millions if not billions of dollars out of West Virginians’ pockets — West Virginia farmers’ and mineral owners’ pockets — into the hands of out-of-state corporations,” Farm Bureau lobbyist Dwayne O’Dell informed one committee. “We want those folks to be able to stay in business and develop the oil and gas here, but at the same time, we want our people well cared for.”
Nobody from the gas industry spoke up publicly throughout two committee hearings, so the measure moved shortly, passing the Senate unanimously and the Home by a vote of 96-2.
Gov. Jim Justice signed the invoice and it took impact on Might 31. EQT is now suing the state in federal courtroom, difficult this yr’s laws and all the 1982 royalties regulation.
The Richards Trial
The invoice didn’t cease gas corporations from taking deductions from the royalty payments made to individuals like Arnold and Mary Richards, whose leases already required a 12.5 % cost.
That introduced them 4 months later to the federal constructing in Clarksburg in mid-September for a trial — the primary time both of them had been in federal courtroom, apart from as soon as years in the past when Mary was a juror in a federal case.
Through the trial, EQT lawyer David Hendrickson defined that EQT Manufacturing bought the Richards’ gas to a sister firm. The sister firm paid them the worth of the gas, minus transportation prices, and that ultimate worth was what ETQ Manufacturing based mostly the couple’s royalties on. Hendrickson stated that’s not the identical as EQT Manufacturing taking deductions.
“We’re paying the fair market value of what we received for the gas,” Hendrickson stated.
Each Arnold and Mary Richards testified, briefly, telling jurors the story of their farm, their gas leases and the way they have been shocked to instantly have EQT taking deductions from their royalty checks.
The Richardses are of their 80s now. They’ve grownup youngsters, grandchildren and a few great-grandchildren. By the point the case reached trial, it was purely a contracts case. They weren’t in search of some big, multimillion-dollar punitive injury award. They only needed the royalties they thought have been coming to them.
“We want our children to have the fruit from our labor, rather than give it to someone that doesn’t, I don’t want to say doesn’t deserve it, because they did a fine job getting it produced, but I have nothing against them, other than the fact that I just want what’s due our family,” Arnold Richards advised the jury. “That’s about all the reason I’m here.”
Earlier than the decision within the Richards’ favor, Scott Windom informed jurors in his closing argument that Hendrickson was asking them to take his phrase that the payments are truthful, and never to look too intently at EQT’s new system.
“EQT reminds me a little bit of the great magnificent Oz in the movie, ‘The Wizard of Oz,’” Windom stated. “He’s pulling the levers and making the smoke and the noise and the lights behind the curtain and Dorothy and Toto look behind there and he says, ‘Oh, don’t pay attention to what you see, only pay attention to what I’m telling you.’”
Ken Ward Jr. covers the surroundings, office security and power, with a give attention to coal and natural gas, for the Charleston Gazette-Mail. E mail him at [email protected] and comply with him on Twitter at @kenwardjr.
Ken Ward Jr.
Ken Ward Jr.
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