CHARLESTON, W.Va. — The natural gas company EQT contends in a federal court filing that West Virginia is acting improperly with police power because of legislative changes to a royalties law.
EQT is asking for a federal judge to deny the state’s motion to dismiss the company’s lawsuit filed earlier this year in U.S. District Court in the Northern District of West Virginia.
The changes passed by the Legislature dealt with whether companies like EQT may deduct post-production expenses on drilling projects from royalty owners.
EQT has been operating with many leases established long before modern horizontal drilling practices. The company contends royalty owners reached agreements knowing they would receive consistent payments while the company took a risk.
In a July 20 filing, lawyers for EQT wrote, “West Virginia decided that the contracts were not favorable enough to a specific class of lessors, so it required EQT to pay the lessors more than the parties agreed.
“Although the Legislature invokes its ‘police power’ and suggests that the law the benefits the ‘economy of the state,’ those vague and unsubstantiated statements cannot justify the law — especially at this early stage, when the Court must accept EQT’s factual allegations as true.”
In United States constitutional law, police power represents the capacity of states to regulate behavior and enforce order for the betterment of the health, safety, morals, and general welfare of citizens.
EQT contends the legislation was hatched specifically to help a relatively small group of royalty owners, rather for a broader good.
“The flat-rate statute does not serve any broad societal interest; it does not even purport to benefit all natural-gas legislators in the state. Instead, the beneficiaries are a narrow class of oil and gas interest holders who are parties to the contracts. Worse, the flat-rate statute disproportionately burdens EQT as the holder of the most unmodified flat-rate leases in the state.”
EQT filed the original federal lawsuit in April against the state Division of Environmental Protection and its cabinet secretary, Austin Caperton.
Last month, lawyers for the agency filed a motion to dismiss a lawsuit. The state is represented by outside counsel from Bailey & Glasser.
“Having lost the debate in the halls of the West Virginia Legislature, EQT now turns to federal court seeking damages and coercive relief against the State, challenging the constitutionality of the State’s long-standing and legitimate economic regulation of the payment of royalties for oil and gas produced on flat-rate leases,” began a memorandum filed by lawyers for the state.
Gov. Jim Justice signed the bill that took effect May 31.
In addition to the basic conflict, it presents an awkward position for the Justice administration, which has EQT board member Bray Cary as senior adviser.
The situation the bill was intended to address evolved over the years as drilling operations have become larger and more complex.
EQT’s filing claims the company was responding to an incentive to evolve and that royalty owners should have anticipated that when they reached their initial agreements.
“Over time, as EQT began to collect the rewards of the risks it undertook, while the royalty payments remained the same, lessors (or, in most cases their successors in interest) grew dissatisfied with the terms to which they were bound in the contract, and they used their substantial political clout to lobby the West Virginia Legislature to modify the parties’ rights under the leases.”
Back in the 1980s, lawmakers passed legislation requiring old flat rate oil and gas leases pay 1/8 royalty to leaseholders on any new drilling permits. The legislation was silent on post-production expenses.
Post-production expenses could include — but not be limited to — costs related to severance taxes, pipelines, surface facilities, telemetry, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or natural gas and their constituents.
For 30 years, advocates of the bill contend, practice was to pay the royalty owner a check without subtracting post-production expenses.
Once EQT and other companies started subtracting post-production expenses, the issue went to court.
Patrick Leggett, a royalty owner from West Virginia, filed suit — saying the 1980s statute did not allow post-production expenses to be taken out of the royalty payment.
The Supreme Court at first ruled in his favor.
But in 2016, with a new court that took shape after the election of Justice Beth Walker, the court reversed itself.
The bill passed by the Legislature included language to prevent the 1/8th royalties from being subject to post-production expenses.
EQT, in its latest filing, contends the state is on shaky constitutional ground governing contractual agreements between private parties.
“Put simply,” EQT writes, “the Constitution prevents West Virginia from doing what it did here: interfering in private contracts for the purpose of picking winners and losers.”