Our attorneys handle royalty disputes involving production of a well and payments and distributions of operating revenue and royalty interests.
Our practice includes oil and gas litigation regarding oil and gas drilling and production matters, mechanics' liens, gas purchase contracts, and lease and royalty disputes.
Apportionment Theory vs. Non-Apportionment Theory
The payment of royalties is a problem for landowners who own less than a 100% mineral interest in an oil and gas lease. For example, Landowner A signs an oil and gas lease containing 100 acres. One year later, Landowner A sells 40 acres of his land to Landowner B.
Which landowner will be paid royalties under the lease negotiation?
The answer hinges on which theory of apportionment is enforced. Under the apportionment theory, the royalties are distributed among Landowner A and Landowner B in proportion to the amount of acreage owned by each landowner. Under the non-apportionment theory, royalties are paid only to the person who owns the property on which the well is located.
The majority rule in Ohio has been to use the non-apportionment theory. However, more recent Ohio cases have supported the apportionment of the royalties. To protect mineral interest under a lease, an entireties clause should be included in the lease to ensure that royalties are apportioned among all of the landowners.
Appropriateness of Deductions by the Producer
There are many costs associated with the production of oil and gas. Costs of production are typically paid solely by the producer and include:
- Costs of geophysical surveys
- Drilling Costs
- Costs incurred in testing, completing, or reworking a well
- Secondary recovery costs
Post-Production costs are typically shared by the parties and include:
- Transportation costs
- Costs of treatment such as dehydration
- Costs of compressing gas to deliver it into a purchaser’s pipeline
- Costs incurred to add value to the well-head product (i.e., turning liquid gas into propane)
The non-producer’s share of the post-production costs is deducted from the royalty paid by the producer. Historically, the deduction of post-production costs has not been a major issue. However, in recent years the technology required to develop the Utica Shale formation has caused costs to soar.
To avoid future disputes concerning these deductions, parties have included provisions in the lease detailing the calculation of post-production deductions. However, even if such a provision is included in the lease, the non-producer may still bring a claim that the producer deducted post-production costs not listed or that the costs deducted were improper and/or excessive.