One of the state’s largest producers of natural gas has filed a lawsuit against Austin Caperton, secretary of the West Virginia Department of Environmental Protection, challenging the state’s flat-rate statute and a bill that passed this year to amend it.
The lawsuit, filed Thursday in U.S. District Court in Clarksburg, asks that U.S. District Judge Irene M. Keeley grant EQT Production Company declaratory relief. The lawsuit was filed in Clarksburg because EQT holds many flat-rate leases in that region.
EQT, a Pittsburgh-based drilling company, argues that the state’s flat-rate statute “infringes on EQT’s vested drilling rights under its flat-rate leases” and that the statute is unconstitutional because it violates the Contract Clause and the Due Process Clause.
The state first enacted the flat-rate statute in 1982 to fix “wholly inadequate compensation” and required drillers to pay lessors a one-eighth royalty on the sale price of natural gas, instead of a usually low, flat rate. Drillers would be required to pay that one-eighth any time they wanted to put a well on the site of an old flat-rate lease.
Senate Bill 360, passed by the Legislature this year and signed by Gov. Jim Justice, requires gas companies to pay the royalty on the sale price without deducting any post-production expenses, like transporting or processing the gas.
The legislation overturned the so-called “Leggett Decision,” referring to Leggett v. EQT Production. In that case, the state Supreme Court decided production companies couldn’t deduct post-production expenses from landowners’ royalties. The state Supreme Court reheard the case in 2017, when Justice Beth Walker replaced Justice Brent Benjamin, and ultimately ruled 4-1 in favor of EQT.
SB 360, which takes effect May 31, 2018, violates the Due Process Clause of the Fourteenth Amendment by forbidding EQT from getting new permits unless the company pays royalties from the proceeds received from production without post-production costs, the lawsuit argues.
“With S.B. 360, the State has awarded windfall benefits to a vocal faction of lessors, at EQT’s expense,” the lawsuit states.
EQT estimates it operates about 5,000 wells in the state, 1,700 of which have flat-rate leases with mineral owners.
EQT argues the company will have to incur post-production expenses and that the statute interferes with its pre-existing, private contracts.
“Moreover, the Flat-Rate Statute severely disrupts the contractual expectations of EQT, which has invested significantly in improving the extraction of natural gas, premised on its ability to enjoy the returns of such investments,” the lawsuit states.
Natalie Cox, spokeswoman for EQT, declined to comment on the pending litigation. Jake Glance, spokesman for the DEP, did not respond to a request for comment.
“Far from benefiting West Virginians generally or solving a broad and general social or economic problem, the Flat-Rate Statute creates a windfall for a special interest: a small but vocal faction of private lessors,” the lawsuit states.