CHARLESTON, W.Va. — Supporters of a new law dealing with post-production expenses on drilling projects say they’re frustrated by a federal lawsuit filed this past week by EQT Corporation.
EQT filed its lawsuit Thursday in U.S. District Court for the Northern District of West Virginia.
The lawsuit names Austin Caperton, director of the state Department of Environmental Protection, as the representative of the Justice administration who would have to enforce the new law.
EQT is one of the largest natural gas companies operating in West Virginia. One of its board members, Bray Cary, serves as a citizen volunteer in the Justice administration, providing advice and policy analysis for the governor.
Gov. Jim Justice signed the bill that would take effect May 31.
EQT says the law violates the U.S. Constitution’s contract clause and due process clause.
“The Flat-Rate Statute thus substantially impairs EQT’s vested drilling rights under its flat-rate leases and imposes unconstitutional conditions on EQT’s exercise of its property rights under those contracts,” wrote lawyers for the company.
Those who have supported the bill’s passage expressed criticism of EQT’s lawsuit.
“I am disappointed that it has happened,” said Senator Charles Clements, R-Wetzel, a main advocate for the bill that passed the Legislature this past session. “I hope the law goes into effect and the people of West Virginia get what’s due to them.
“This is good for the people of West Virginia. That’s what our job is about.”
Tom Huber, president of the West Virginia Royalty Owners Association, also expressed irritation over the lawsuit.
“EQT’s greed knows no bounds. This lawsuit is the work of a bully and a company that exemplifies the worst practices of the oil and gas industry,” Huber stated.
“West Virginia deserves better than the exploitative practices of EQT.”
The situation the bill was intended to address evolved over the years as drilling operations have become larger and more complex.
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 says it has committed to developing better technology over the years, but — rather than negotiate for amended leases — royalty owners have elected to go to the Legislature.
The company’s lawyers wrote, “the Flat-Rate Statute severely disrupts the contractual expectations of EQT, which has invested significantly in improving the extraction of natural gas, premised on its ability to enjoy the returns of such investments.”
EQT’s lawyers wrote that the company has about 1,700 leases in West Virginia that were enacted before the states flat-rate statute that are now affected.
EQT operates about 5,000 wells overall in West Virginia, overall, the company wrote.
Among oil and gas producers in West Virginia, EQT believes that it holds the largest number of unmodified flat-rate leases.
“The Flat-Rate Statute infringes on EQT’s vested drilling rights under its flat-rate leases,” the lawyers for EQT wrote.
The company contends that West Virginia’s laws have curtailed its growth.
“EQT’s business development and expansion in the State are inhibited when it cannot rely on the terms of the many contracts it has executed with West Virginian lessors,” its lawyers wrote.
“For 2018 alone, despite similar acreage holdings in both States, EQT has only 28 wells planned for West Virginia, as compared to 122 in Pennsylvania. West Virginia’s attempts to alter economics of EQT’s flat rate leases have increased costs and forced EQT to look elsewhere for development opportunities.”
The company contends that the new law is ill-advised and benefits only a few.
“Far from benefiting West Virginians generally or solving a broad and general social or economic problem, the Flat-Rate Statute creates a windfall for a special interest: a small but vocal faction of private lessors.”
Senator Clements took exception to that line.
“I disagree with that statement completely. Yes, it’s at EQT’s expense but it’s not a vocal group,” Clements said. “What we’re doing is for the good of the people of West Virginia.”