PATRICK D. LEGGETT, et al., Plaintiffs Below, Petitioners,
EQT PRODUCTION COMPANY, et al., Defendants Below, Respondents.
Rehearing Granted: January 25, 2017
Submitted Upon Rehearing: May 2, 2017
Questions from the United States District Court for the
Northern District of West Virginia The Honorable Fredrick P.
Stamp, Jr., Judge Case No. 1:13-cv-00004-FPS
W. Masters, Esq., Richard A. Monahan, Esq., April D.
Ferrebee, Esq., The Masters Law Firm lc, Charleston, West
Virginia, and Michael W. Carey, Esq. Carey, Scott, Douglas
& Kessler, PLLC Charleston, West Virginia Attorneys for
K. Hendrickson, Esq., Carl L. Fletcher, Jr., Esq.,
Hendrickson & Long PLLC, Charleston, West Virginia,
Attorneys for Respondents.
M. Persinger, III, Esq. Persinger & Persinger, L. C.
Charleston, West Virginia Attorney for Amici Curiae West
Virginia Land and Mineral Owners' Association, West
Virginia Royalty Owners' Association, West Virginia Farm
Bureau, National Association of Royalty Owners, Appalachia,
and Lewis Maxwell Oil & Gas LLC Timothy M. Miller, Esq.
Mychal S. Schulz, Esq. Katrina N. Bowers, Esq. Babst,
Calland, Clements & Zomnir, P. C. Charleston, West
Virginia Attorneys for Amici Curiae West Virginia Oil and
Natural Gas Association and West Virginia Independent Oil and
Gas Association Michael J. Hammond, Esq. Dodaro, Matta &
Cambest, P. C. Canonsburg, Pennsylvania Attorney for Amicus
Curiae Bounty Minerals, LLC
JUSTICE WORKMAN concurs and reserves the right to file a
JUSTICE DAVIS dissents and reserves the right to file a
"'A de novo standard is applied by this
court in addressing the legal issues presented by certified
question from a federal district or appellate court.'
Syl. Pt. 1, Light v. Allstate Ins. Co., 203 W.Va.
27, 506 S.E.2d 64 (1998)." Syl. Pt. 2, Aikens v.
Debow, 208 W.Va. 486, 541 S.E.2d 576 (2000).
"Where the issue on an appeal . . . is clearly a
question of law or involving an interpretation of a statute,
we apply a de novo standard of review." Syl.
Pt. 1, in part, Chrystal R.M. v. Charlie A.L., 194
W.Va. 138, 459 S.E.2d 415 (1995).
"The primary rule of statutory construction is to
ascertain and give effect to the intention of the
Legislature." Syl. Pt. 8, Vest v. Cobb, 138
W.Va. 660, 76 S.E.2d 885 (1953).
"Judicial interpretation of a statute is warranted only
if the statute is ambiguous and the initial step in such
interpretative inquiry is to ascertain the legislative
intent." Syl. Pt. 1, Ohio County Comm'n v.
Manchin, 171 W.Va. 552, 301 S.E.2d 183 (1983).
"Where the language of a statute is free from ambiguity,
its plain meaning is to be accepted and applied without
resort to interpretation." Syl. Pt. 2, Crockett v.
Andrews, 153 W.Va. 714, 172 S.E.2d 384 (1970).
"When a statute is clear and unambiguous and the
legislative intent is plain, the statute should not be
interpreted by the courts, and in such case it is the duty of
the courts not to construe but to apply the statute."
Syl. Pt. 5, State v. General Daniel Morgan Post No. 548,
V.F.W., 144 W.Va. 137, 107 S.E.2d 353 (1959).
"The basic and cardinal principle, governing the
interpretation and application of a statute, is that the
Court should ascertain the intent of the Legislature at the
time the statute was enacted, and in the light of the
circumstances prevailing at the time of the enactment."
Syl. Pt. 1, Pond Creek Pocahontas Co. v. Alexander,
137 W.Va. 864, 74 S.E.2d 590 (1953).
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.
LOUGHRY CHIEF JUSTICE.
case is before the Court upon certified questions presented
by the United States District Court for the Northern District
of West Virginia regarding whether this Court's decision
in Tawney v. Columbia Natural Resources, L.L.C., 219
W.Va. 266, 633 S.E.2d 22 (2006), has "any effect"
upon whether a lessee of an oil and/or gas lease subject to
West Virginia Code § 22-6-8 (1994) may deduct
post-production expenses from the lessor's royalty. Upon
original hearing, a majority of this Court reformulated the
certified question and held that royalties paid pursuant to
leases which were subject to West Virginia Code § 22-6-8
could not be "diluted" by costs incurred downstream
from the wellhead, nor could amounts attributable to loss or
beneficial use of volume be deducted prior to calculation of
upon careful review of the briefs on rehearing, the appendix
record, the arguments of the parties and amici curiae,
the applicable legal authority, we conclude 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
FACTS AND PROCEDURAL HISTORY
petitioners Patrick D. Leggett, et al (hereinafter "the
petitioners") are owners of a 75% undivided interest in
the gas estate of a 2, 000-acre tract in Doddridge County.
Certain wells on the property are "flat-rate"
wells, i.e. wells for which the lease provides for
payment of a sum certain per well, per year. In 1982, the
Legislature enacted the predecessor of West Virginia Code
§ 22-6-8,  which provides that permits for flat-rate
wells will not be issued unless the lessee swears by
affidavit that it will pay the lessor no less than one-eighth
"of the total amount paid to or received by or allowed
to [the lessee] at the wellhead for the oil or gas
so extracted, produced or marketed[.]" (emphasis added).
petitioners filed suit against respondent EQT Production
Company and affiliated companies (hereinafter
"EQT") for underpayment of royalties, resulting
from EQT's deduction of certain costs incurred for the
gathering and transporting of the gas to the interstate
pipeline. In particular, EQT takes the full price it obtains
by selling the gas at the interstate pipeline and deducts
"some" of the costs ("midstream" costs or
"post-production" costs) incurred after it is
extracted,  but before it reaches the market at the
pipeline. EQT maintains that the only way to capture the
statutorily-required "wellhead" price is to utilize
this so-called "net-back" or "work-back"
method which deducts post-production expenses from the sales
price to duplicate the "wellhead" price. The
petitioners contend that neither West Virginia Code §
22-6-8(e) nor the common law of West Virginia permit
deduction or allocation of costs in this manner for purposes
of royalty calculation.
the District Court certified the following questions to this
Court pursuant to the Uniform Certification of Questions of
Law Act, West Virginia Code § 51-1A-1 (1996) et
1. Does Tawney v. Columbia Natural Resources,
L.L.C., 219 W.Va. 266, 633 S.E.2d 22 (2006), which was
decided after the enactment of West Virginia Code §
22-6-8, have any effect upon the Court's decision as to
whether a lessee of a flat-rate lease, converted pursuant to
West Virginia Code § 22-6-8, may deduct post-production
expenses from his lessor's royalty, particularly with
respect to the language of "1/8 at the wellhead"
found in West Virginia Code § 22-6-8(e)?
2. Does West Virginia Code § 22-6-8 prohibit flat-rate
royalties only for wells drilled or reworked after the
statute's enactment and modify only royalties paid on a
per-well basis where permits for new wells or to modify
existing wells are sought, or do the provisions of West
Virginia Code § 22-6-8 abrogate flat-rate leases in
STANDARD OF REVIEW
Court has consistently held that "'[a] de
novo standard is applied by this court in addressing the
legal issues presented by certified question from a federal
district or appellate court.' Syl. Pt. 1, Light v.
Allstate Ins. Co., 203 W.Va. 27, 506 S.E.2d 64
(1998)." Syl. Pt. 2, Aikens v. Debow, 208 W.Va.
486, 541 S.E.2d 576 (2000). Moreover, "[w]here the issue
on an appeal . . . is clearly a question of law or involving
an interpretation of a statute, we apply a de novo
standard of review." Syl. Pt. 1, Chrystal R.M. v.
Charlie A.L., 194 W.Va. 138, 459 S.E.2d 415
(1995). With this standard of review in mind, we proceed to
the remaining certified question.
review of EQT's petition for rehearing, this Court
determined that substantial justice required us to revisit
the prior opinion issued in this matter to ascertain whether
the previous majority had misapprehended certain points of
law. See W.Va. R. App. Proc. 25(b) ("A petition
for rehearing is granted only in exceptional cases. The
petition shall . . . state with particularity the point of
law or fact which in the opinion of the petitioner the Court
has overlooked or misapprehended[.]"). While an
admittedly uncommon occurrence, rehearing exists expressly
for the purpose of ensuring that opinions which are not
well-founded due to misapprehension of the issues, the law,
or the facts are rectified. Justice demands this procedural
remedy, which this Court has judiciously utilized when the
issues or outcome demand it. See Knotts v. Grafton City
Hosp., 237 W.Va. 169, 786 S.E.2d 188 (2016) (reversing
and remanding upon rehearing after original affirm);
W.Va. Reg'l Jail & Corr. Facility Auth. v.
A.B., 234 W.Va. 492, 498, 766 S.E.2d 751, 757 (2014)
(stating that "public policy concerns raised by our
initial opinion" compelled rehearing); Hosaflook v.
Consolidation Coal Co., 201 W.Va. 325, 329, 497 S.E.2d
174, 178 (1997) (twice granting rehearing in Human Rights Act
case); Haines v. Kimble, 221 W.Va. 266, 654 S.E.2d
588 (2007) (rehearing granted); Committee on Legal Ethics
of West Virginia State Bar v. Farber, 191 W.Va. 667, 447
S.E.2d 602 (1994) (same); Jewell v. Maynard, 181
W.Va. 571, 383 S.E.2d 536 (1989) (same); Dadisman v.
Moore, 181 W.Va. 779, 384 S.E.2d 816 (1988) (same);
Turner v. State Compensation Comm'r, 147 W.Va.
145, 126 S.E.2d 379 (1962) (same); Garges v. State
Compensation Comm'r, 147 W.Va. 188, 126 S.E.2d 193
(1962) (same); Ellis v. Henderson, 142 W.Va. 824, 98
S.E.2d 719 (1957) (same); Reese v. Lowry, 140 W.Va.
772, 86 S.E.2d 381 (1955) (same); Bailey v. Baker,
137 W.Va. 85, 70 S.E.2d 645 (1952) (same); State v.
Gilliland, 51 W.Va. 278, 41 S.E. 141 (1902) (same).
Court has observed, reconsideration upon rehearing is often
facilitated by a more focused and clearer presentation of the
arguments by the parties, who commonly have a better
understanding of the Court's characterization of the
dispositive issues following an initial opinion. See
Caperton v. A.T. Massey Coal Co., 223 W.Va. 624, 667,
679 S.E.2d 223, 266 (2008), rev'd and remanded,
556 U.S. 868 (2009) (Albright, J., dissenting) (noting that
"[t]he more narrow and focused legal arguments and
supporting facts of the rehearing process" aided in
determination); A. B., 234 W.Va. at 498, 518-19, 766
S.E.2d at 757, 777-78 (stating that briefs submitted seeking
rehearing compelled Court to grant rehearing and criticizing
respondent for attempting to supplement inadequate record on
rehearing to meet issues discussed in initial opinion);
Haines, 221 W.Va. at 272-73, nn.3 and 5, 654 S.E.2d
at 594-95, nn.3 and 5 (discussing additional arguments and
attempts to supplement the appendix to meet issues raised in
initial opinion). Oftentimes, briefs upon rehearing pierce
through any insufficiency or imprecision of argument which
may have affected the Court's initial offering. This is
particularly the case where a matter is before the Court on
the necessarily limited record often submitted upon certified
question. When a petition for rehearing compels the Court to
conclude that the law may have been misapprehended, neither
hubris nor sanctimony should give the Court pause in granting
rehearing to correct any such error of law or fact. As
Justice Frankfurter stated, "[w]isdom too often never
comes, and so one ought not to reject it merely because it
comes late." Henslee v. Union Planters Nat'l
Bank & Trust Co., 335 U.S. 595, 600 (1949)
(Frankfurter, J., dissenting).
pertains to the question presented in this case, upon initial
hearing, the majority concluded that West Virginia Code
§ 22-6-8(e) contains an ambiguity which must be
construed in a manner which effectuates the "overarching
remedial intent" of the statute to "ensur[e] the
future flow of adequate compensation to oil and gas
landowners." Such construction, according to the
previous majority, must not "curtail 
compensation" which was intended to "right past
wrongs" and therefore prohibits dilution of royalty
payments by post-production costs. Coupled with the common
law implied covenant to market previously recognized with
respect to oil and gas leases, the majority concluded that
royalties must remain "supremely constant, "
impervious to "facile downward manipulation" by the
lessee and therefore post-production costs for
"gathering, transporting, or treating" may not be
rehearing, with all due regard to the previous majority's
consideration of the admittedly complex and subversively
entangled issues implicated in this case, we conclude that it
did, in fact, misapprehend the applicability of certain
common law principles and exceeded its charge in its
interpretation of the subject statute.
W.Va. Code § 22-6-8 and Valuation of Royalties Prior
initially outlined above, the petitioners contend that
post-production costs incurred by an oil or gas lessee may
not be allocated to the lessor in calculation of the
lessor's royalty. The petitioners maintain that West
Virginia Code § 22-6-8(e)'s provision that the
lessor must be paid "one-eighth of the total amount paid
to or received by or allowed to the owner of the working
interest at the wellhead" is ambiguous with respect to
payment of such costs; therefore, the statute should be
construed in a manner which maximizes its remedial purpose.
To maximize its remedial purpose, the petitioners contend
that the phrase "at the wellhead" should be
construed to prohibit allocation of post-production costs to
lessors. The petitioners further urge that this construction
is consistent with West Virginia's common law purportedly
aligning itself with several "marketable product
rule" states which require the lessee to bear all
post-production costs incurred until the product is
maintains that the statute is not ambiguous since "at
the wellhead" is a very precise and definite location.
However, acknowledging that federal deregulation of the
industry has altered the point of sale away from the
wellhead, EQT argues that the only way to mathematically
calculate the "at the wellhead" price for which it
is obligated by statute is to utilize the
"net-back" or "work-back" method. This
method, as employed by EQT, utilizes the interstate pipeline
sales price and makes deductions for post-production
costs; the resulting figure is that upon which
the royalty is paid and therefore purports to
"duplicate" a wellhead price. Commensurately, EQT
urges the Court to join those states which have formally
adopted the "at the well" rule regarding cost
allocation, which permits pro rata allocation and/or
deduction of post-production expenses as between the lessee
and lessor. With this understanding of the parties'
positions, we proceed to examine the statute and applicable
place the parties' arguments into proper context, it is
first critical to understand the purpose and operation of
West Virginia Code § 22-6-8 and the change in the
marketplace for oil and gas sales resulting from what is
commonly referred to within the industry simply as
"deregulation." West Virginia Code § 22-6-8
was originally enacted in 1982 to prohibit lessees from
continuing to capitalize on older, "flat-rate"
leases. The statute explains that these leases were entered
when the techniques by which oil and gas are currently
extracted, produced or marketed, were not known or
contemplated by the parties, nor was it contemplated by the
parties that oil and gas would be recovered or extracted or
produced or marketed from the depths and horizons currently
being developed by the well operators.
W.Va. Code § 22-6-8(a)(3). The Legislature then declared
that the statute was enacted because
continued exploitation of the natural resources of this state
in exchange for such wholly inadequate compensation is
unfair, oppressive, works an unjust hardship on the owners of
the oil and gas in place, and unreasonably deprives the
economy of the State of West Virginia of the just benefit of
the natural wealth of this State[.]
W.Va. Code § 22-6-8(a)(2). Recognizing, apparently, that
invalidating such leases altogether may run afoul of the
Constitution,  the Legislature set out to lawfully
"discourage . . . the production and marketing of oil
and gas" under such leases. W.Va. Code §
22-6-8(a)(4). Accordingly, to avoid unconstitutionally
impairing the contractual obligation, the statute simply
prohibits the issuance of permits under such leases.
Subsection (d) therefore provides:
[N]o such permit shall be hereafter issued for the drilling
of a new oil or gas well, or for the redrilling . . . of an
existing oil or gas production well, where or if the right to
extract, produce or market the oil or gas is based upon a
lease or leases or other continuing contract or contracts
providing for flat well royalty[.]
W.Va. Code 22-6-8(d). To avoid this prohibition, a permit
applicant must file an affidavit certifying that it will
tender to the owner of the oil or gas in place not less than
one eighth of the total amount paid to or received by or
allowed to the owner of the working interest at the
wellhead for the oil or gas so extracted, produced or
marketed before deducting the amount to be paid to or set
aside for the owner of the oil or gas in place, on all such
oil or gas to be extracted, produced or marketed from the
Code § 22-6-8(e) (emphasis added). In short, to get a
permit to re-drill wells governed by a flat-rate lease, the
lessee must agree to pay the lessor a one-eighth royalty
instead of a flat rate.
parties are in agreement that when West Virginia Code §
22-6-8 was enacted, oil and gas sales occurred "at the
wellhead, " i.e. at the point where the product
first emerges from the ground or literally, the head of the
well. Interstate pipeline operators purchased the product and
undertook the expense of preparing the oil or gas for sale at
market in a useable or "marketable" form. In 1978,
Congress began to "deregulate" the natural gas
market, which turned interstate pipeline operators into
common carriers. As a result, oil and gas are no longer
sold "at the wellhead, " but rather are sold
downstream of the wellhead, typically at the interstate
pipeline. Importantly, one of the effects of this change is
that the sales price is enhanced from the wellhead price
because it is now a marketable, useable product when it is
first sold at market, rather than the raw, "sour"
gas which was sold from the wellhead. However, as a
result, expenses to "clean" or "sweeten"
the gas, gather and/or compress the gas, and transport the
gas are incurred after it is extracted but before it is sold,
i.e. "post-production" costs. This case
presents the issue of whether the lessee must bear all such
post-production expenses or whether it may pro-rata allocate
them to the lessor and deduct them from the royalty paid by
operation of West Virginia Code § 22-6-8(e). The
parties' briefing indicates that they believe that
implicit within that query is whether this Court will apply
its previously-articulated common-law version of the
"marketable product rule" or adopt the "at the
well" rule of cost allocation.
Wellman v. Energy Resources, Inc. and Tawney v. Columbia
determine the applicability of either of these schools of
thought to the statute at issue, it is necessary to examine
West Virginia's common law as pertains to allocation of
costs in an oil and gas lease. As noted above, the District
Court phrased the certified question in terms of whether
Tawney v. Columbia Natural Resources has "any
effect" upon the determination of whether use of the
phrase "at the wellhead" in West Virginia Code
§ 22-6-8 permits allocation and deduction of
post-production costs before calculation of royalties. The
petitioners urge that both Tawney and its
predecessor, Wellman v. Energy Resources, Inc., 210
W.Va. 200, 557 S.E.2d 254 (2001), firmly establish West
Virginia as a "marketable product" rule state,
which rule provides that the implied duty to market requires
the lessee to bear all costs until the product is rendered
"marketable." EQT, however, maintains that both
Wellman and Tawney are inapplicable to the
statute at issue and urge an interpretation which mirrors the
"at the well" rule, permitting use of the
"net-back" method to calculate royalties "at
the wellhead." We will examine each case in turn.
the District Court and parties' pre-emptive focus on
Tawney, it is Wellman which forms the
foundation of the current state of West Virginia's law on
deduction of post-production costs. In Wellman, the
Court addressed an action brought by the lessors seeking
termination of certain oil and gas leases and damages for
failure to pay proper royalties. Id. at 204, 557
S.E.2d at 258. The leases provided for natural gas royalties
of "'one-eighth (1/8) of the market value of such
gas at the mouth of the well[.]'" Id. The
lessee deducted "certain expenses" before
calculating royalties. Id. at 209, 557 S.E.2d at
263. In resolving the question of whether such expenses were
properly deductible, the Court noted the widely adopted
position that "costs of discovery and production"
are not chargeable against a royalty. Id. at 210,
557 S.E.2d at 264. The Court then stated that "[i]n
spite" of this position, oil and gas producers had begun
deducting costs for transporting and "treating or
altering" the oil and gas after it is
"produced" to put it into marketable condition.
Wellman Court briefly acknowledged the split of
authority regarding deduction of such post-production costs
and discussed the rationale of those states holding that such
costs are not properly deductible from the lessor's
royalty. Id. at 210, 557 S.E.2d at 264. The Court
noted that pursuant to the implied covenant to market,
such "duty to market embraces the responsibility to get
the oil or gas in marketable condition and actually transport
it to market." Id. Noting simply that like
other marketable product rule states, "West Virginia
holds that a lessee impliedly covenants that he will market
oil or gas produced[, ]" the Court quickly concluded
that "unless the lease provides otherwise, the lessee
must bear all costs incurred in exploring or, producing,
marketing, and transporting the product to the point of
sale." Id. at 211, 557 S.E.2d at 265, Syl. Pt.
4. The Court then went a step further,
holding that where the lease provides for apportionment of
any such costs, they must be "actually incurred"
and "reasonable." Syl. Pt. 5, Wellman, 210
W.Va. 200, 557 S.E.2d 254.
Wellman as background, we therefore turn to the
Tawney decision to ascertain the scope and import of
its holdings. Tawney answered a certified question
tantalizingly similar to the instant certified question which
inquired whether an oil and gas lessee must "bear all
costs incurred in marketing and transporting" the
product where the lease states that royalties are to be
calculated "at the well, " or "at the
wellhead[.]" 219 W.Va. at 268, 633 S.E.2d at 24.
Respondent Columbia Natural Resources ("CNR")
sought to take monetary deductions for post-production costs
as well as volume deductions before calculating the
landowners' royalty on the involved leases. Id.
at 269, 633 S.E.2d at 25. As in this case, CNR argued that
since gas is not sold at the wellhead, "the only logical
way to calculate royalties at the wellhead is to permit
lessees to deduct the lessors' proportionate share of
post-production expenses[.]" Id. at 270, 633
S.E.2d at 26. The Tawney Court accepted, without
further analysis, Wellman's reliance on the
implied duty to market and resultant holding that a lessee
must "bear all costs incurred in exploring for
producing, marketing, and transporting the product to the
point of sale[.]" Id. at 272, 633 S.E.2d at 28
(quoting Syl. Pt. 4, Wellman, 210 W.Va. 200, 557
S.E.2d 254). The Court then narrowed the issue to whether the
leases' "at the wellhead" language was
sufficient to alter this "generally recognized
rule." Tawney, 219 W.Va. at 272, 633 S.E.2d at
Tawney Court found the "at the wellhead"
language ambiguous because it was "imprecise" and
did not "indicate how or by what
method the royalty is to be calculated or the gas is to
be valued." Id. at 272, 633 S.E.2d at 28
(emphasis in original). Having found such language ambiguous,
the Court noted the absence of language evidencing "an
intent by the parties to agree to a contrary rule" and
stated that if CNR desired to pro-rate expenses with the
landowners, it "could have written into the leases
specific language which clearly informed the lessors exactly
how their royalties were to be calculated and what deductions
were to be taken from the royalty amounts for post-production
expenses." Id. at 272, 274, 633 S.E.2d at 28,
30. Citing the "'general rule as to oil and gas
leases . . . that such contracts will generally be liberally
construed in favor of the lessor, and strictly as against the
lessee, '" the Court then construed the lease
against CNR and held that the "at the wellhead"
language was insufficient to allow deduction of
post-production expenses. Id. at 273, 633 S.E.2d at
29 (quoting Syl. Pt. 1, Martin v. Consolidated Coal &
Oil Corp., 101 W.Va. 721, 133 S.E. 626 (1926)). Resting
entirely on the premise that CNR could simply have negotiated
for and/or included in their leases language regarding cost
allocation, the Court issued the following syllabus point
setting forth the criteria for expressing such an intention
in an oil and gas lease:
Language in an oil and gas lease that is intended to allocate
between the lessor and lessee the costs of marketing the
product and transporting it to the point of sale must
expressly provide that the lessor shall bear some part of the
costs incurred between the wellhead and the point of sale,
identify with particularity the specific deductions the
lessee intends to take from the lessor's royalty (usually
1/8), and ...