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Oil and Gas Update

Northern District of Ohio Addresses Royalty Issue in Lutz Opinion

October 29, 2017

Issues regarding the deduction of post-production costs from royalty payments to landowners were recently addressed by a Memorandum Opinion and Order filed in Lutz v. Chesapeake Appalachia, LLC, Case No. 4:09-cv-2256-SL, United States District Court, Northern District of Ohio, Eastern Division.

Lutz has a long procedural history and involved somewhat novel questions under Ohio law. The Northern District had previously certified the following question to the Supreme Court of Ohio: “Does Ohio follow the ‘at the well’ rule (which permits the deduction of post-production costs) or does it follow some version of the ‘marketable product’ rule (which limits the deduction of post-production costs under certain circumstances)?” The Supreme Court of Ohio held that oil and gas leases are contracts subject to traditional rules of contract interpretation and denied certification because the rights and remedies of the parties are controlled by the specific language of the lease agreement.

After the Supreme Court of Ohio declined to decide the certified question, Chesapeake moved for summary judgment on leases containing the following language in the Northern District of Ohio: 

  1. The royalties to be paid by Lessee are: . . . (b) on gas, . . . produced from said land and sold or used off the premises . . . the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale. . . .

In a recent Memorandum Opinion and Order, the Court held that “at the well” rule should be applied to such leases, based on clear language that royalties are to be paid based on “market value at the well.” See Doc # 142.

This article was published by Andrew Schock, Jackson Kelly PLLC. For more information on the author, see here.


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