Robert C. Sanders is an attorney who represents landowners in lawsuits and arbitrations against oil and gas producers for the underpayment of oil and gas royalties. He has:
• Won class certification in both royalty cases in which he requested certification;
• Won a $1.2M federal court jury verdict in one of those class actions; and
• Successfully argued royalty cases before the Ohio Supreme Court and two U.S. Courts of Appeal.
Oil and gas leases typically require the producer to pay the landowner a monthly royalty equal to an agreed upon share of the proceeds of the sale of the oil, natural gas (methane) and natural gas liquids (ethane, propane, butane, isobutene and pentane) produced and sold from the leased premises each month. The landowner’s share of the proceeds was traditionally 1/8 (12.5%), but has risen in recent years to as much as 1/5 (20%).
Oil and gas royalties are frequently underpaid. In some cases, the producer will calculate the royalties on less than the full amount of the well product sold. In other cases, the producer will calculate the royalties using a price that is less than the price actually paid by the buyer. Producers will sometimes sell the well product to an affiliated marketing company at an artificially low price in order to reduce the amount of the royalties. The marketing affiliate will then resell the product at the actual market price. In such cases, courts will sometimes disregard the first sale as a “sham” sale and require that the royalties be paid on the price paid in the first arms-length sale.
One of the most contentious issues in oil and gas royalty cases is the deduction of “post production costs.” The producer is always required to pay the costs of producing the oil and gas to the surface of the earth but, depending on the lease language and the law of the state, it may be permitted to deduct “post production costs” from the royalties, that is, costs incurred between the well and the point of sale. These costs typically include the costs of gathering, processing, treating, compression, marketing and transportation. Thus, for example, a royalty owner with a 1/8 royalty interest may be required to pay 1/8 of the post production costs (via the deduction of those costs from the royalties). In some cases, producers deduct post production costs when they are not entitled to do so under the lease language or state law. In other cases, they will inflate the costs.
Unfortunately, a landowner is rarely able to determine from the royalty statements attached to the royalty checks whether the royalties are correct. Knowing this, less scrupulous oil and gas producers will underpay the royalties in one or more of the ways mentioned.
Oil and gas leases typically remain in effect as long as oil and gas is continuously produced from the leased premises. This can be for generations. It is therefore vitally important that a landowner considering entering into an oil and gas lease take the time to understand the nuances and be guided by a competent oil and gas attorney. Once the royalty payments begin, the landowner will want to verify the accuracy of the payment. If the payments are incorrect and the producer will not make the necessary corrections, then the only recourse is to proceed to court or arbitration.
The various ways that an oil and gas producer can underpay royalties can be seen in the Arbitration Demand and Complaint filed on behalf of Ronald and Joetta Hale of Ohio against four energy companies. You can view this Arbitration Demand and Complaint by clicking on this link: Hale Arbitration Demand and Complaint.