- Associated Press - Friday, May 26, 2017

CHARLESTON, W.Va. (AP) - West Virginia’s highest court on Friday ruled that natural gas companies can deduct post-production costs from the royalties paid to landowners for mineral rights.

The Supreme Court’s 4-1 decision was a reversal of its ruling in November. The dissent from Justice Robin Jean Davis was not immediately available from the court.

At stake is whether landowners or production companies will get more money in flat-rate leases. West Virginia gas production is starting to boom.

The lawsuit was filed in federal court by West Virginia landowners against EQT Production Co., based in Pittsburgh. The federal judge asked the West Virginia high court about the related state statute and case law.

The Supreme Court majority concluded Friday that the intent of state legislators and the West Virginia Code’s language permits deduction “of reasonable post-production expenses actually incurred” by the gas company leasing the mineral rights. Chief Justice Allen Loughry wrote the ruling.

A 1982 state law set minimum royalties of 12.5 percent of gas produced at the wellhead.

Loughry acknowledged that statute was meant by lawmakers to address unfair “exploitation” of West Virginia’s natural resources for “wholly inadequate” compensation of the mineral owners.

However, he wrote that the marketplace has since changed with deregulation, now that oil and gas are no longer sold at the wellhead but downstream, typically at the interstate pipeline. The companies incur expenses to gather, compress and transport the gas before selling it downstream, establishing an enhanced downstream price on which royalties are based, he wrote.

“We do not believe that permitting lessors to benefit from royalties based upon an enhanced, downstream price without commensurately sharing in the expense to create the enhanced value effectuates the ‘adequate’ and ‘just’ compensation sought by the statute,” Loughry wrote. The landowners in this case “seek to unfairly maximize their royalty payments without commensurately bearing the cost of achieving that maximum value.”

The court split 3-2 in its November ruling favoring the West Virginia landowners’ bid to block deductions.

In a concurring opinion Friday, Justice Margaret Workman wrote that the expense-deduction method approved by the court majority shouldn’t be abused to harm landowners. The Legislature should enact specific protections to assure the pro-rated expense deductions are actually incurred costs and both reasonable and fair, she said.

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