Keith B. Hall
LSU Law Center

In Romeo v. Antero Resources Corp., 917 S.E.2d 26 (W. Va. 2025), the plaintiffs brought a class action in state court, arguing that Antero Resources had underpaid the royalites owed under oil and gas leases covering land in Harrison County, West Virginia. The case was later removed to the United States District Court for the Northern District of West Virginia. The federal district court eventually certified two questions concerning the calculation of the royalty owed on the sale of natural gas liquids (NGLs) to the West Virginia Supreme Court of Appeals. The Supreme Court accepted the certified questions, and in November 2024 the Court issued a judgment answering the questions by expanding the marketable title rule, making it a point-of-sale rule. See Romeo v. Antero Resources, Corp., 2024 WL 4784706 (W. Va. 2024). This was reported in a prior EMLF monthly newsletter. 
The Supreme Court granted a rehearing and set the matter for re-argument, giving some hope to the lessee defendants, but on rehearing the Court reached the same result. The Court issued a new opinion that superseded the November 2024 opinion, but language of the new opinion tracked the language of the prior opinion very closely, with much of it following the superseded opinion word-for-word.

Background
Royalty disputes often have arisen when an oil and gas lease provides for the lessee to pay a royalty based on the value of natural gas at the well, but the natural gas is sold away from the well—often after the lessee has processed the gas to remove impurities and transported the gas to a distant market. These post-production activities add value to the gas, but the lessee also incurs costs to perform these activities.  More importantly, because the sale of gas does not occur at the well, and because the gas does not have the same properties (such as composition) at the time of sale as the gas had at the well, the sales price does not necessarily represent the value of the gas at the well. Lessees often seek to use the “workback” or “netback” method to calculate an estimated value of the gas at the well by starting with the sales price of the gas (after processing and transport) and then subtracting the “post-production” costs of processing and transporting the gas. And there is an undeniable economic logic to this calculation as a method (though not necessarily a perfect method) of estimating the value of the gas at the well when the sale does not occur at the well.

Of course, royalty owners would prefer to be paid a royalty based on the sales price, rather than a royalty based on the sales prices minus post-production costs. Indeed, they often argue that the royalty must be based on the sales price, rather than the sales price minus the post-production costs. They do not typically argue that the sales price is a better a better estimate of the value of the gas at the well than the sales price minus post-production costs.  Instead, they typically argue either that the lessee has an implied duty to pay for post-production costs relating to marketing or that a lease’s royalty clause is ambiguous if it bases the royalty on the value at the well when the gas is not sold at the well.

The traditional or majority rule is that, if a lease provides for royalties to be based on market value at the well, but the gas is not sold at the well, it is permissible for lessees to use the workback method to estimate the market value at the well. However, some states have adopted a “marketable product rule,” including Colorado, Kansas, Oklahoma, and West Virginia. Under this rule, a lessee must absorb all the costs necessary to make the gas marketable. Thus, in calculating the royalty, the lessee cannot subtract (from the sales price) the post-production costs necessary to make gas marketable, unless the lease expressly authorizes the deduction of those costs. See Wellman v. Energy Resources, Inc., 557 S.E.2d 254 (W. Va. 2001); Estate of Tawney v. Columbia Natural Resources, L.L.C., 633 S.E.2d 22 (W. Va. 2006).

However, even in the marketable product rule states, the lessee generally can deduct any post-production costs that go beyond what is necessary to make a product marketable, provided that those costs add value. Thus, if removing a given amount of impurities would allow marketing of the gas (and cost the lessee a given amount of money), but the lessee incurs an incrementally higher expense to remove a greater amount of the impurities, the lessee could deduct the incremental expense of the additional processing from the sales price, provided that removing the additional impurities made the gas more valuable.

This dispute
One of the leases at issue in this case provided for a royalty on gas equal to one-eighth “of the value at the well of the gas.” The other provided for a royalty on gas equal to one-eighth of the “gross proceeds received from the sale of the same at the prevailing price for gas sold at the well.” The parties disputed how to calculate the royalty on natural gas liquids (NGLs) extracted from natural gas during processing of the gas. The lessors argued that they should be entitled to one-eighth the price at which the NGLs were sold.

The lessees argued that, notwithstanding jurisprudence from the West Virginia Supreme Court of Appeals that applies the marketable product rule, this rule should not apply to NGLs, as opposed to natural gas. The lessees also may have hoped that the West Virginia Supreme Court would discard the marketable-product rule altogether, given language in a West Viriginia Supreme Court decision that criticized the Court’s own marketable product rule jurisprudence.

The Supreme Court’s majority rejected the lessee’s arguments by a 3-to-2 vote on original hearing. The majority acknowledged the language in a prior decision that criticized the Court’s own marketable product jurisprudence, but the majority characterized that criticism as “dicta” and an “indulgent frolic.” The majority also rejected the lessee’s argument that marketable product rule is bad public policy, stating that is the legislature’s job, not the Court’s job, to consider public policy. Likewise, the majority rejected the lessee’s argument that the marketable product rule should be limited to natural gas itself, not to NGLs.

The lessees noted that, in all the other marketable product rule states, the marketable-product rule only prohibits the deduction of the expenses necessary to make the product marketable. If a lessee incurs post-production costs above and beyond the amount necessary to make the product marketable—for example, to remove more impurities than necessary to make the gas marketable—the lessee is allowed to deduct the incremental portion of post-production costs from the sales price, provided that performing the extra work adds value to the gas (value in which the lessor would share given that the sales price presumably would reflect the additional value and the incremental costs would be subtracted from this higher sales price). See Garman v. Conoco, 886 P.2d 652 (Colo. 1994); Sternberger v. Marathon Oil Co., 894 P.2d 788, 800 (Kan. 1995); Mittelstaedt v. Santa Fe Minerals, Inc., 954 P.2d 1203, 1207 (Okla. 1998).

The majority stated, however (assuming the lease does not expressly provide for such deductions), that even if the lessee incurs more post-production costs than necessary to make gas marketable, and even if the extra work adds value to the gas, a rule prohibiting the deduction of all post-production costs still is most consistent with West Virginia jurisprudence. The majority acknowledged that this its holding—which the majority dubbed the “point of sale” rule— “may make West Virginia a minority of one.”

The dissenting justices vigorously disagreed with the majority’s original hearing decision.  One of two dissenting opinions criticized the marketable product rule itself, stating that the workback method is more consistent with a plain meaning of “at the well” royalty clauses than is the marketable product rule. Romeo, 2024 WL 4784706 (Walker, J.). 

Another dissenting opinion did not seek to overturn West Virginia’s version of the marketable product rule, as established by Wellman and Tawney. However, this second dissenting opinion disagreed with the majority’s conclusion that its newly pronounced “point of sale” rule naturally follows from the Court’s existing marketable product rule jurisprudence. This dissenting opinion concluded that the point-of-sale rule is an unwarranted extension of the marketable product rule. This dissent asked where the marketable product rule ends.  If, for example, instead of the lessee selling the NGLs, the lessee instead had used the NGLs to manufacture plastics, would the lessee have to pay a royalty on the sales price for the plastics? Romeo, 2024 WL 4784706 (Bunn, J.).

The Supreme Court’s original decision was issued in November 2024. In December 2024, the Court granted a rehearing and set the case for re-argument. On rehearing, the Court reached the same result. It issued a new opinion that superseded the opinion issued on original hearing, but the new opinion reached the same result and used much the same language as the superseded opinion. Justice Walker again dissented, issuing an opinion almost identical to his prior dissenting opinion. Justice Bunn again dissented, issuing an opinion that made similar points as did his prior dissent. On original hearing, Justice Hutchison stated that he agreed with the majority opinion, but he also submitted a concurring opinion, but on rehearing he merely joined the majority opinion and did not file a concurring opinion.