New court ruling relates to retroactivity of flat rate royalty law

GO-WV News

by Katrina Bowers 

In Williams v. EQT Corp., No. 43-2020-C-26 (Ritchie Co. Cir. Ct. W. Va. Aug. 26, 2021), the Honorable Michael D. Lorensen, sitting by appointment in the Circuit Court of Ritchie County, West Virginia (“Court”), entered an Order finding that the 2018 amendments to W. Va. Code § 22-6-8(e) (“Flat Rate Statute”) did not apply retroactively to permits for oil or gas wells (“permits”) issued before the effective date of the amendments to the Flat Rate Statute.

The plaintiffs, successors in interest to a 1913 lease providing for a flat rate payment of four hundred dollars per year for each and every natural gas well drilled on the leasehold estate (“Lease”), challenged deductions by an operator for severance tax and certain post-production expenses from their royalties.

The West Virginia Legislature addressed the issue of flat-rate leases in 1982, when it enacted the Flat Rate Statute prohibiting the issuance of permits where the right to produce was based upon a lease providing for a flat-rate royalty, unless the permit applicant submitted an affidavit certifying that it would pay the lessor no less than one-eighth of the total amount paid or received by or allowed “at the wellhead” for the oil and gas extracted, produced, or marketed (“permit procedure for flat-rate leases”). Id. at *5-6.

In 2017, the Supreme Court of Appeals of West Virginia addressed the payment of royalties pursuant to flat-rate leases and held that royalty payments subject to the Flat-Rate Statute “may be subject to pro-rata deduction or allocation of all reasonable post-production expenses actually incurred by the lessee.” Id. at *6 (quoting Syl. Pt. 8, Leggett v. EQT Prod. Co., 239 W. Va. 264, 800 S.E.2d 850 (2017)).

The following year, the West Virginia Legislature amended the Flat Rate Statute with its passage of Senate Bill 360, which became effective May 31, 2018. Williams at *7. Similar to the original Flat-Rate Statute, the amended Flat-Rate Statute retained the permit procedure for flat-rate leases. However, unlike the original Flat-Rate Statute, the amended Flat Rate-Statute replaced the “at the wellhead” language with a requirement to pay a one-eighth royalty based on the first unaffiliated sale, free from post-production expenses. Id. at *8. The amended Flat-Rate Statute contained no provision stating that the amendment should be applied retroactively. Id. at *9.

In determining that it was “clear” that the 2018 amendment should not be applied retroactively to permits issued to the operator prior to the effective date of the amendment, the Court focused on four factors. First, Senate Bill 360 does not include any language demonstrating an intent for retroactive application. Second, Senate Bill 360 by its own language stated that it was to be effective ninety days from its passage. Third, the permit procedure for flat-rate leases in the amended Flat-Rate Statute provided that “no such permit shall be hereafter issued . . . .” Id. at *11 (quoting W. Va. Code § 22-6-8(d) (emphasis added)). Fourth, language in the initial version of Senate Bill 360 noting that it was intended to “clarify” the royalty owed was removed and replaced with a caption stating that Senate Bill 360 was “modifying the permit issuance prohibition” in the final version of the bill. Id. at *11.

This decision aligns with a decision from the United States District Court for the Northern District of West Virginia finding that the 2018 amendments to the Flat-Rate Statute do not apply retroactively. Corder v. Antero Res. Corp., No. 1:18CV30, 2021 WL 1912383, at *13 (N.D.W. Va. May 12, 2021).

Click here to view the article online in the October issue of GO-WV News.