October 13, 2019

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WV Supreme Court Holds that Post-Production Expenses are Allowable Deductions on Flat-Rate Leases

The West Virginia Supreme Court held (after rehearing) that reasonable post-production expenses actually incurred are allowable deductions under West Virginia's flat-rate statute, i.e., "that both the legislative intent and language utilized in West Virginia Code § 22-6-8 permits allocation or deduction of reasonable post-production expenses actually incurred by the lessee and more specifically permits use of the 'net-back' or 'work-back' method of royalty calculation.” 

In its Syllabus point 8, the Court stated:

8.  Royalty payments pursuant to an oil or gas lease governed by West Virginia Code § 22-6-8(e) (1994) may be subject to pro-rata deduction or allocation of all reasonable post-production expenses actually incurred by the lessee. Therefore, an oil or gas lessee may utilize the “net-back” or “work-back” method to calculate royalties owed to a lessor pursuant to a lease governed by West Virginia Code § 22-6-8(e). The reasonableness of the post-production expenses is a question for the fact-finder.

Click here for the full opinion and here for Justice Margaret L. Workman's concurring opinion.

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About this Author

Henry Lawrence, Steptoe Johnson Law Firm, Environment and Energy Litigation Attorney
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Hank Lawrence focuses his practice on energy and environmental litigation. He represents clients before federal, state, and appellate courts and administrative agencies in civil, criminal, and penalty proceedings. In addition, he provides client counseling and advice in permitting, compliance, and transactional matters involving energy and environmental statutes and regulations.  Mr. Lawrence is Head of the firm's Litigation Department.

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Bridget D. Furbee, Steptoe Johnson, Gas Industry Lawyer, Major Transactions Attorney
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Bridget Furbee focuses her practice in the area of energy law. She is the former in-house counsel for a major Fortune 500 energy company where she was responsible for legal issues related to gas exploration and production, including the development of major new geologic plays in West Virginia, Ohio, and Pennsylvania.  She has extensive experience in major transactions as well as litigation in the oil and gas industries.

(304) 933-8117