Jacklin Romeo, Susan S. Rine, and Debra Snyder Miller v. Antero Resources Corporation

• Court: West Virginia Supreme Court
• Decided: November 14, 2024
• Docket: 23-589
• Status: Separate

Opinion

No. 23-589, Jacklin Romeo, Susan S. Rine, and Debra Snyder Miller v. Antero Resources Corporation FILED BUNN, Justice, dissenting: November 14, 2024 released at 3:00 p.m. C. CASEY FORBES, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA

I disagree with the majority’s opinion in this case. While I do not seek to

wholly abandon more than two decades of precedent set forth in Wellman v. Energy

Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), and expanded in Estate of Tawney

v. Columbia Natural Resources, 219 W. Va. 266, 633 S.E.2d 22 (2006),1 I instead would

have decided this case narrowly, based upon the reasoning justifying those cases’ outcomes

at the time they were decided and in consideration and context of the facts giving rise to

those decisions, rather than reading their syllabus points standing alone, as the majority

appears to do. See State v. McKinley, 234 W. Va. 143, 149, 764 S.E.2d 303, 309 (2014)

(acknowledging that an opinion’s “syllabus is not intended to be an exhaustive recitation

of every item decided in the case, and must be read in light of the opinion as a whole”); see

also Romeo v. Antero Res. Corp., ___ W. Va. ___, ___, ___ S.E.2d ___, ___ (2024)

(Walker, J., dissenting) (also quoting McKinley). In answering the certified questions from

the United States District Court for the Northern District of West Virginia, I would have

1 I agree with much of Justice Walker’s well-reasoned dissent in this case where she advocates for overruling our holdings in Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254 (2001), and Estate of Tawney v. Columbia Natural Resources, 219 W. Va. 266, 633 S.E.2d 22 (2006). See Romeo v. Antero Res. Corp., ___ W. Va. ___, ___, ___ S.E.2d ___, ___ (2024) (Walker, J., dissenting). However, rather than fully overruling those cases, as I explain here, I would interpret them based upon their historical underpinnings and applicable facts. 1 interpreted Wellman, and particularly its point of sale language in Syllabus point 4,2 to

mean that oil and gas producers must bear post-production costs only until the oil or gas

reaches the first available point of sale where it can be sold—not to the location where the

oil or gas (or byproducts) are actually sold. I further would rein in Tawney’s overreach, set

forth in its Syllabus point 10,3 that refuses to allow parties to actually contract regarding

what, if any, post-production costs may be charged to the royalty owner under an oil and

gas lease without including in those leases particular mandatory provisions identified by

the Tawney Court. The majority’s application of Tawney, and rejection of generally

accepted principles of contract law, is particularly troubling here, as the leases at issue do

not appear to reflect that the parties contemplated any express or implied duty to market

natural gas liquids (“NGLs”) when they entered the leases. Instead, I would refuse to apply

Tawney to NGLs and further would limit Tawney’s application to the type of products

2 “If an oil and gas lease provides for a royalty based on proceeds received by the lessee, unless the lease provides otherwise, the lessee must bear all costs incurred in exploring for, producing, marketing, and transporting the product to the point of sale.” Syl. pt. 4, Wellman, 210 W. Va. 200, 557 S.E.2d 254. 3 Tawney provides, in Syllabus point 10:

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 indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.

219 W. Va. 266, 633 S.E.2d 22. 2 considered by that Court. Ultimately, I would not leave West Virginia as an admitted

minority of one, where oil and gas producers pay all post-production costs to the actual

point that the oil or gas —or byproducts—are actually sold. Maj. op. at 13 (acknowledging

“our ‘point of sale’ rule may make West Virginia a minority of one”). The majority’s

opinion extends Tawney’s “gap filler” provisions, purportedly related to the implied

covenant to market, to such an extent that the right to freely contract is not only inhibited,

but fully incapacitated by the requirement that the contracting parties must use magic words

and clairvoyance to memorialize their arms-length transactions. See SWN Prod. Co., LLC

v. Kellam, 247 W. Va. 78, 98, 875 S.E.2d 216, 236 (2022) (Walker, J., dissenting).

A. “Marketable” Does Not Mean Sold

Throughout our oil and gas jurisprudence, the Court has discussed the

origins of oil and gas producers’ duty to market—what it means, how it arose, how it is

interpreted, and how it can be express or implied. But an examination of the underpinnings

of our case law reveals the Court’s repeated emphasis on the role of the producer in getting

a product to a marketable condition and to a point of sale—not, necessarily, sold. The

majority wrongly rejects this conclusion by determining that a producer complies with its

duty to market only by completing the sale of the product (and, in turn, bears post-

production costs to that point).

While the majority interprets Wellman, particularly Syllabus point 4, to

provide that post-production expenses must be borne by the producer until the product is

3 actually sold, the discussion of “point of sale” and “marketable” in Wellman and its progeny

contradicts that interpretation, instead indicating that when the Court originally considered

the issues in Wellman, the duty to market was only to make a product marketable, not sold.

Certainly, the Wellman Court ultimately concluded that “[i]f an oil and gas lease provides

for a royalty based on proceeds received by the lessee, unless the lease provides otherwise,

the lessee must bear all costs incurred in exploring for, producing, marketing, and

transporting the product to the point of sale.” Syl. pt. 4, Wellman, 210 W. Va. 200, 557

S.E.2d 254. Yet, in reaching this holding, as the Wellman Court discussed a producer’s duty

to market oil and gas for the royalty owner before it announced Syllabus point 4, the Court

recognized that producers sought to charge royalty owners with expenses to both transport

oil and gas “to a point of sale” and to treat the oil and gas “to put it in a marketable

condition,” calling these costs collectively “post-production expenses.”4 Id. at 210, 557

S.E.2d at 264 (emphasis added). In determining what, if any, of these costs must be paid

by the producer alone, the Court recognized the duty to market, which could be express (in

4 The Wellman Court noted that

there has been an attempt on the part of oil and gas producers in recent years to charge the mineral owner with a pro rata share of various expenses connected with the operation of an oil and gas lease such as the expense of transporting oil and gas to a point of sale, and the expense of treating or altering the oil and gas so as to put it in a marketable condition. To escape the rule that the lessee must pay the costs of discovery and production, these expenses have been referred to as “post- production expenses.”

210 W. Va. at 210, 557 S.E.2d at 264. 4 the lease) or implied, with the rationale being that “the duty to market embraces the

responsibility to get the oil or gas in marketable condition and actually transport it to

market.” Id. (emphasis added). Then, when considering that rationale, the Wellman Court

explained that, in West Virginia, “a lessee impliedly covenants that he will market oil or

gas produced.”5 Id. at 211, 557 S.E.2d at 265 (emphasis added) (citing Robert Tucker

Donley, The Law of Coal, Oil and Gas in West Virginia and Virginia §§ 70 & 104 (1951)).

The language used in Wellman complies with the plain language definition of the term

marketable, which Merriam-Webster’s Dictionary defines, as its first meaning, as “fit to be

offered for sale in a market.” Merriam-Webster Online, https://www.merriam-

webster.com/dictionary/marketable (last visited Nov. 13, 2024). When reading the

Wellman decision as a whole, not just as a stand-alone syllabus point, the Court plainly

meant that producers must bear post-production expenses, under the express or implied

duty to market, until the product is marketable—not until the product is actually sold.

In Tawney, the Court reiterated Wellman’s reasoning, quoting the language

from Wellman that the “rationale” regarding the express or implied duty to market

5 In reaching this conclusion, the Wellman Court cited with approval courts from Kansas, Colorado, and Oklahoma, which the Wellman Court interpreted to, like West Virginia, hold that “a lessee impliedly covenants that he will market oil or gas produced.” Wellman, 210 W. Va. at 211, 557 S.E.2d at 265. Courts in Kansas, Colorado, and Oklahoma have expanded the producer’s “implied duty to market” gas by creating a “first marketable product” doctrine. Patricia Proctor et. al., Moving Through the Rocky Legal Terrain to Find A “Safe” Royalty Clause or A “New” Market at the Well, 19 Tex. Wesleyan L. Rev. 145, 149 (Fall 2012). Instead of following this trend, the majority now rejects any reliance on those states’ authority to assist us with the question before the Court now. Maj. op. at 16. 5 “‘embraces the responsibility to get the oil or gas in marketable condition and actually

transport it to market,’”—which does not include any requirement that the products must

be transported to the point where a sale is completed. See Tawney, 219 W. Va. at 271, 633

S.E.2d at 27 (emphasis added) (quoting Wellman, 210 W. Va. at 210, 557 S.E.2d at 264).

Furthermore, the Court—recently—interpreted Wellman’s syllabus points to

mean that West Virginia is “firmly cemented . . . as a ‘marketable product rule’ state,

meaning that the lessee bears all post-production costs incurred until the product is first

rendered marketable, unless otherwise indicated in the subject lease.” Kellam, 247 W. Va.

at 83, 875 S.E.2d at 221 (emphasis added). As the Supreme Court of Colorado explained,

this “first-marketable product rule” provides “that the point where a marketable product is

first obtained is the logical point where the exploration and production segment of the oil

and gas industry ends, is the point where the primary objective of the lease contract is

achieved, and therefore is the logical point for the calculation of royalty.” Rogers v.

Westerman Farm Co., 29 P.3d 887, 904 (Colo. 2001), as modified on denial of reh’g (Aug.

27, 2001) (quotation marks and citation omitted).

Even considering the Court’s prior recognition that post-productions costs are

attributable to the producer only until the product is first rendered marketable in Wellman,

Tawney, and Kellam, and that the product must be transported to market, not necessarily a

final place of sale, the majority continues to interpret the term “the point of sale” quite

literally, with a strict construction to mean the very end point of sale, instead of when the

6 product is first able to be sold. Even in its discussion of the words “marketing” and

“marketable,” the majority appears to purposefully obfuscate the Court’s original

discussion in Wellman, which was quoted in Tawney, and later explained in Kellam. The

majority twists the meaning of the word marketable to mean actually sold.6 This

construction can lead to potentially ludicrous consequences; as the majority’s author

suggested through an erudite question at oral argument, the majority’s decision could result

in the producer bearing all costs for converting products from a well into something entirely

different such as plastics, while still having to pay royalty holders a percentage of the sale

price, all without that situation being contemplated or bargained for in the lease. In other

words, under the majority’s approach, where is the logical end for a producer’s duty to bear

all the costs—or is there one?

Yet, the majority’s reasoning in answering the first certified question appears

to be “because we’ve always done it that way,” as the majority interprets the Court’s prior

case law to mean that that producers must pay post-production costs until the actual sale of

6 The Court’s lack of flexibility in this case regarding the meaning of “point of sale” is, practically, converse to the Court’s construction of these syllabus points in another oil and case decision made this term, Kaess v. BB Land, LLC, No. 23-522, ___ W. Va. ___, ___ S.E.2d ___ (2024). In Kaess, the Court interpreted the wording of Wellman’s syllabus points in a loosey-goosey fashion, stretching the meaning of the syllabus points specifically addressing leases with proceeds royalty provisions to extend to leases that are in-kind leases. See generally ___ W. Va. ___, ___ S.E.2d. ___. As Justice Walker aptly noted in her dissent, which I joined, the majority of the Court in Kaess “muddl[ed] the distinction between different types of leases,” ultimately “lo[sing] sight of the fact that the language of the in-kind royalty lease controls.” Id. at ___, ___, ___ S.E.2d. at ___, ___ (Walker, J. dissenting). 7 the oil, gas, or byproducts, rather than at the first available point of sale, contending that

history mandates this interpretation and ultimate result. Maj. op. at 14. This approach

rejects a good faith examination of what “point of sale” should and does mean in the

broader context of our jurisprudence, is short sighted, and is, in my estimation, results-

oriented rather than “legally sound.” See State v. Sutherland, 231 W. Va. 410, 417, 745

S.E.2d 448, 456 (2013) (acknowledging that “we will part ways with precedent that is not

legally sound”). For these reasons, I dissent from the majority’s conclusion that producers

must pay post-production costs until the oil or gas, or byproducts, are actually sold, rather

than at the first point the oil or gas is able to be sold.

B. Tawney Should Not Apply to NGLs

Turning to the majority’s resolution as to the second certified question

relating to producers’ obligation to pay post-production costs for NGLs until the NGLs are

sold, the majority’s conclusion of this issue is equally misguided. Because the bedrock

principles of the freedom to contract are judicially limited by Tawney, Tawney should be

construed narrowly and only applied where necessary; its application is particularly

problematic when applied to NGLs given the leases at issue here.

First, Tawney’s specific requirements regarding what detailed language must

be in a lease before a royalty owner may bear any post-production costs rejects traditional

principles of contract law. As the Court recognized long ago, “[i]mplied covenants . . . are

only justified on grounds of legal necessity, and to effectuate the purposes of the contract.” 8 Allen v. Colonial Oil Co., 92 W. Va. 689, 695, 115 S.E. 842, 844 (1923). However,

Tawney’s requirements permit courts to “supersede the express terms with an implied

covenant.” Kellam, 247 W. Va. at 98, 875 S.E.2d at 236 (Walker, J., dissenting). The

Tawney Court creates unnecessary roadblocks to the parties’ freedom to contract when it

defines, in a Syllabus point, the particular language to include in a lease for post-production

costs to be shared. Instead of allowing the parties to contract at will, Tawney’s Syllabus

point 10 provides an almost impossible path for parties seeking to agree that royalty owners

will pay any post-production expenses, as the lease “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 indicate the method of calculating the amount to be

deducted from the royalty for such post-production costs.” Syl. pt. 10, in part, Tawney, 219

W. Va. 266, 633 S.E.2d 22 (emphasis added).

Still, the Tawney opinion gives no indication that the Court then

contemplated any post-production costs outside of the transportation and processing costs

of oil and gas; particularly, it gives no indication that its syllabus point would also apply to

NGLs, or, specifically “the costs incurred in processing, fractionating, and transporting

residue gas and natural gas liquids to the point of sale,”7 at the time the Court issued

Tawney. Nor does it appear, on the face of the leases at issue here, that the parties to the

7 Maj. op. at 23; Syl. pt. 9, in part, id. 9 leases contemplated NGLs at the time the leases were executed. In concluding that these

post-production costs for NGLs must be borne entirely by the producers, the majority

seems to base its reasoning on the simple idea of basic contract principles, finding the

leases are ambiguous and therefore applying Tawney. The majority states that

the dispositive question before us is whether the petitioners’ leases contain clear, unambiguous language indicating the parties’ agreement that royalties will be paid on the net sale price of residue gas and/or NGLs , i.e., the mineral owners’ proportionate share of the sale price less their proportionate share of the costs incurred by the producer after the point at which the wet gas was rendered marketable.

Maj. op. at 20.

For both leases considered in the certified questions, the majority concludes

that the leases are ambiguous as “to whether, when, and how royalties are payable to the

lessor, and completely silent with respect to whether, when, and how postproduction costs

may be deducted from the royalties.” Maj. op. at 22 (repeating this language with respect

to both leases). Ultimately, the majority expands Tawney and holds that

absent express language in a gas lease sufficient to satisfy the requirements set forth in syllabus point ten of Estate of Tawney v. Columbia Natural Resources, L.L.C., 219 W. Va. 266, 633 S.E.2d 22 (2006), a producer/lessee may not deduct from a mineral owner/lessor’s royalties a proportionate share of the costs incurred in processing, fractionating, and transporting residue gas and natural gas liquids to the point of sale.

Maj. op. at 23; Syl. pt. 9, id. I disagree with this conclusion. I would have decided this case

by limiting Tawney’s application of lease language requirements only to the types of

10 products discussed in the Tawney opinion, and not expanded its application to novel issues

relating to excess post-production costs to an already marketable product to yield refined

products like NGLs.8 See, e.g., Mittelstaedt v. Santa Fe Mins., Inc., 954 P.2d 1203, 1209

(Okla. 1998) (“We conclude that dehydration costs necessary to make a product

marketable, or dehydration within the custom and usage of the lessee’s duty to create a

marketable product, without provision for cost to lessors in the lease, are expenses not paid

from the royalty interest. However, excess dehydration to an already marketable product is

to be allocated proportionately to the royalty interest when such costs are reasonable, and

when actual royalty revenues are increased in proportion to the costs assessed against the

royalty interest. It is the lessee’s burden to show that the excess dehydration costs charged

against the royalty interest occurred to a marketable product, i.e., that the cost is a post-

production cost.”).

In summary, to the extent that the majority contends that its conclusions are

merely a simple, logical application of Wellman and Tawney, I disagree. Rather, the

majority’s answers to the Northern District’s certified questions stretch the principles

8 Furthermore, the majority’s reliance on Corder v. Antero Resources Corp., 57 F.4th 384 (4th Cir. 2023), to justify its outcome in the case is the epitome of circular reasoning. The majority states that the Fourth Circuit Court of Appeals rejected Antero’s “first point of marketability approach” there. Maj. op. at 12 n.11. Yet—as the majority recognizes—in analyzing whether Tawney applied to the leases at issue in that case, the Fourth Circuit concluded that “Because the West Virginia Supreme Court [of Appeals] has not adopted a contrary rule, we conclude that the Tawney requirements apply through the point of sale.” Corder, 57 F.4th at 397; Maj. op. at 12 n.11. The majority’s analysis amounts to, in simple terms, “this is what the Fourth Circuit said we might do, so we better do it.” 11 established in these cases well beyond the syllabus points’ original contemplation.

Accordingly, I respectfully dissent.