SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated

CourtWest Virginia Supreme Court
DecidedJune 14, 2022
Docket21-0729
StatusSeparate

This text of SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated (SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated) is published on Counsel Stack Legal Research, covering West Virginia Supreme Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

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SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated, (W. Va. 2022).

Opinion

FILED June 14, 2022 released at 3:00 p.m. EDYTHE NASH GAISER, CLERK SUPREME COURT OF APPEALS OF WEST VIRGINIA

No. 21-0729 – SWN Production Company, LLC and Equinor USA Onshore Properties Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated

Chief Justice Hutchison, concurring:

I wholeheartedly concur with the majority opinion’s assessment that Estate

of Tawney v. Columbia Natural Resources, L.L.C., 219 W. Va. 266, 633 S.E.2d 22 (2006)

(“Tawney”), and Wellman v. Energy Resources, Inc., 210 W. Va. 200, 557 S.E.2d 254

(2001) (“Wellman”), remain good law in West Virginia. I also agree that the remaining

three questions posed by the district court – essentially asking what language or details are

required by Tawney and Wellman to be included in a lease – are usually case-by-case

questions. Leases are contracts, written repositories of the parties’ intentions. When oil- 1

and-gas leases are not properly drafted or are later interpreted by a party in a slipshod

manner, the questions posed by the district court become issues to be resolved by a court

or factfinder.

I write separately to emphasize the central, general rule underlying Tawney

and Wellman that was only tangentially touched upon by the majority opinion. The rule

underlying Tawney and Wellman is simple: contracts are formed by a meeting of the minds.

You cannot have a meeting of the minds if a contract uses terms that are vague, ambiguous,

“An oil and gas lease (or other mineral lease) is both a conveyance and a 1

contract.” Syl. pt. 1, in part, McCullough Oil, Inc. v. Rezek, 176 W. Va. 638, 346 S.E.2d 788 (1986).

1 and neither understood nor accepted by both parties. This rule is immutable and is, with

few exceptions, the basis for every legally enforceable agreement.

To understand the general rule at the heart of Wellman and Tawney in the

context of an oil and gas lease, the reader must understand other, more specific, long-

standing interwoven guidelines tied to the interpretation of oil and gas leases. These

guidelines are, by default, implied into every oil and gas lease. For over a century, the first

guideline has been that lessee/oil-and-gas companies cannot lease oil and gas rights and

then sit on those rights, to the detriment of the owner/lessor of the rights. Thus, the 2

fundamental goal implied into every single oil and gas lease is that the lessee has a duty to

extract the minerals and get them to market for sale. 3 Included in that goal is an

2 See St. Luke’s United Methodist Church v. CNG Dev. Co., 222 W. Va. 185, 191-92, 663 S.E.2d 639, 645-46 (2008) (“This Court has recognized the unfairness of allowing a lessee to effectively tie up land when others stood ready to develop the same.”); Syl. pt. 1, in part, McCullough Oil, Inc. v. Rezek, 176 W. Va. 638, 346 S.E.2d 788 (1986) (An oil and gas lease “is designed to accomplish the main purpose of the owner of the land and of the lessee (or its assignee) as operator of the oil and gas interests: securing production of oil or gas or both in paying quantities, quickly and for as long as production in paying quantities is obtainable.”); United Fuel Gas Co. v. Smith, 93 W. Va. 646, 117 S.E. 900, 904 (1923) (“[T]here is always implied in every oil and gas lease a covenant to drill the number of wells reasonably necessary to develop the property and prevent drainage by operation on adjoining lands.”); Lowther Oil Co. v. Miller-Sibley Oil Co., 53 W. Va. 501, 44 S.E. 433, 435 (1903) (“[A] lease calls for the right, not to oil in place, but to extract it.”); Parish Fork Oil Co. v. Bridgewater Gas Co., 51 W.Va. 583, 42 S.E. 655 (1902) (recognizing as universal the principle of law “which discourages tying up and rendering unproductive the vast fields of mineral wealth, construes every contract and lease as to both lessor and lessee so as to best promote production, development and progress, and frowns upon every attempt to evade it as being in contravention of both good morals and public policy.”).

See generally, Keith B. Hall, Implied Covenants and the Drafting of Oil 3

and Gas Leases, 7 LSU J. Energy L. & Resources 401, 418 (2019) (“The implied covenant 2 understanding that the lessee bears all of the risks and costs of drilling, producing, and

getting the oil and gas to market. Hence, the lessee bears the risk of drilling a dry well.

The lessee also bears the risk that the physical properties of any oil or natural gas

discovered may be of a lesser quality or pressure than is desired.

Another corollary, default guideline implied into every oil and gas lease is

just as clear: the lessor/owner of oil and gas rights is entitled to royalties, that is, a share of

the profit gained from the oil and gas the lessee delivers to market. In West Virginia, those

royalties are, by default, (1) based on the gross proceeds received by the lessee at the first

point of sale to an unaffiliated third-party purchaser in an arm’s length transaction, and (2)

free from any deductions for the expenses incurred by the lessee getting the oil and gas to

market.

Wellman involved another basic doctrine of contract law: the parties to an oil

and gas lease can agree to disclaim any of the default, implied guidelines I just described,

and contract for a different result. Our opinion plainly stated the default guideline, which

is that that every oil and gas lease is built on a presumption that the lessee will bear both

the responsibility and the cost of getting the minerals to an impartial marketplace. We

to market requires a lessee to diligently seek purchasers at a reasonable price for any oil or gas that is found in paying quantities.”); Nancy Saint-Paul, 2 Summers Oil and Gas § 18:11 (3d ed. 2021) (“In order to carry out the purposes for which an oil and gas lease is made, that is, the . . . production and sale [of oil and gas] so as to yield a profit to the lessee and a return to the lessor in the form of rents and royalties, it is necessary that the oil or gas produced from the land be marketed.”).

3 ruled in Wellman that a lease can alter that presumption and provide that the lessor will

bear a share of the costs of getting the oil and gas to market, but only if those costs were

(1) actually incurred by the lessee, and (2) reasonable. Syl. pts. 4 and 5, Wellman, 210 W.

Va. at 202, 557 S.E.2d at 256.

In Tawney, we reiterated and expounded on Wellman. We determined that,

to vitiate the presumption that the lessee bears the costs of getting the minerals to market,

and to shift some share of the costs onto the lessor, the lease between the parties needs to

identify with particularity the specific deductions for post-production marketing costs that

the lessee intends to take from the lessor’s royalties, and it must indicate the method of

calculating those deductions. See Syl. pt. 10, Tawney, 219 W. Va. at 268, 633 S.E.2d at

24. As the majority opinion makes clear, when a lessee seeks to deduct post-production

expenses from the gross proceeds received in the sale of oil or gas to calculate a lessor’s

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Related

Sternberger v. Marathon Oil Co.
894 P.2d 788 (Supreme Court of Kansas, 1995)
St. Luke's United Methodist Church v. CNG DEVELOPMENT CO.
663 S.E.2d 639 (West Virginia Supreme Court, 2008)
Estate of Tawney Ex Rel. Goff v. Columbia Natural Resources, L.L.C.
633 S.E.2d 22 (West Virginia Supreme Court, 2006)
Messer v. Huntington Anesthesia Group, Inc.
664 S.E.2d 751 (West Virginia Supreme Court, 2008)
Bailey v. Sewell Coal Co.
437 S.E.2d 448 (West Virginia Supreme Court, 1993)
McCullough Oil, Inc. v. Rezek
346 S.E.2d 788 (West Virginia Supreme Court, 1986)
Wellman v. Energy Resources, Inc.
557 S.E.2d 254 (West Virginia Supreme Court, 2001)
Garman v. Conoco, Inc.
886 P.2d 652 (Supreme Court of Colorado, 1994)
Wood v. TXO Production Corp.
854 P.2d 880 (Supreme Court of Oklahoma, 1993)
Hanna Oil and Gas Co. v. Taylor
759 S.W.2d 563 (Supreme Court of Arkansas, 1988)
Patrick D. Leggett v. EQT Production Co.
800 S.E.2d 850 (West Virginia Supreme Court, 2017)
Travis Young v. Equinor USA Onshore Properties
982 F.3d 201 (Fourth Circuit, 2020)
Parish Fork Oil Co. v. Bridgewater Gas Co.
59 L.R.A. 566 (West Virginia Supreme Court, 1902)
Lowther Oil Co. v. Miller-Sibley Oil Co.
44 S.E. 433 (West Virginia Supreme Court, 1903)
United Fuel Gas Co. v. Smith
117 S.E. 900 (West Virginia Supreme Court, 1923)

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SWN Production Company, LLC and Equinor USA Onshore Properties, Inc. v. Charles Kellam, Phyllis Kellam, and all other persons and entities similarly situated, Counsel Stack Legal Research, https://law.counselstack.com/opinion/swn-production-company-llc-and-equinor-usa-onshore-properties-inc-v-wva-2022.