It’s one thing when you have a poor record of compliance with regulations protecting land owners. It’s quite another when you are being sued by hundreds (perhaps thousands) of people who feel they are being cheated out of energy royalties that you owe them. Sadly, Energy Corporation of America (ECA), the company that wants to “bring the Bakken” to the Beartooths, has hit the perfecta. They qualify on both counts.

Click to view Pennsylvania DEP report

We’ve written extensively about ECA’s poor environmental record in Pennsylvania and West Virginia. If you haven’t seen it, I urge you to look at the report from the Pennsylvania Department of Environment Protection (click on the graphic at right) detailing their record as a serial polluter in that state.

Pollock et al. v. Energy Corporation of America
Today we’re reporting on something entirely different. It’s a class action lawsuit originally filed in federal court in 2010 and currently working its way through the court system. The suit is Pollock et al. v. Energy Corporation of America.

I recently spoke to representatives of the two law firms representing the plaintiffs in the case.

Discussions with the plaintiff attorneys
Attorney Robert Sanders describes this type of class action suit this way:

Attorney Robert Sanders represents the plaintiffs in Pollock at al v Energy Corporation of America

Oil and gas leases typically require the producer to pay the landowner a monthly royalty equal to an agreed upon share of the proceeds of the gas produced from the leasehold each month….

Gas producers do not generally sell the gas at the well. They typically transport the gas through a system of gathering lines to the interstate pipeline system and sell the gas at delivery points into the interstate system. In some cases, gas producers hold title to the gas during its interstate transport and sell it to more distant buyers.

Depending on state law and the lease language, gas producers are sometimes permitted to deduct certain “post production” costs from the royalty. These are costs incurred between the well and the point of sale, such as gathering, compression, processing, dehydration, marketing and interstate transportation.

Royalty checks stubs often report only the amount of gas produced and sold from each well (in units of a thousand cubic feet or “mcf”) and the dollar amount of the monthly royalty. In such cases, the royalty owner must do the division to determine the price paid by the buyer per mcf. This division will not always yield the price per mcf, however, because sometimes the dollar amount of the monthly royalty is net post production costs. Often it cannot be determined from the check stub whether post production costs were deducted and, if so, what costs were deducted and how much was deducted for each cost.

Since gas producers have total control over the calculation and reporting of royalties, royalty owners often have no choice but to trust that the calculation is correct. No government agency oversees the process. Unlike the environmental aspects of gas production, royalties arise from private contracts. The enforcement of those contracts is left to the parties.

Not surprisingly, disputes over royalty payments often lead to litigation. Often royalty underpayment cases are brought as class actions. This is because the time and expense of litigating a single claim can be cost prohibitive and because the gas producer’s method of calculating the royalties is either uniformly correct or uniformly incorrect as to all its royalty owners.

David McGowan

Caroselli, Beachler, McTiernan & Conboy
David McGowan, an attorney at the law firm of Caroselli, Beachler, McTiernan & Conboy,  the other firm handling the case, went into some detail about the nature of the suit.

Mr. McGowan explained that much of Pennsylvania law regarding post production costs is governed by a State Supreme Court decision in the case Kilmer v Elexco, a sweeping decision that favored the oil and gas industry by allowing the deduction of post production costs from the well to the point of sale. The 2010 decision therefore eliminated some of the initial claims in Pollock, but the case continues. The remaining claims are based on the fact that ECA sold the gas to a marketing affiliate, but continued to deduct costs all the way to the point at which the affiliate sold the gas.

There is currently a movement afoot in Pennsylvania to enact law to change Kilmer. Several states, including Wyoming, do not allow the deduction of post production costs from royalties.

The suit is currently scheduled to go to trial in March, 2015. We’ll keep you updated.

ECA’s comment on the lawsuit
When questioned by the Billings Gazette about the lawsuit, ECA spokesperson Jennifer Vieweg commented, “The courts are an important component of our governmental structure and when two parties cannot agree, it is not unusual to seek relief through the court system.”

Vieweg was the ECA representative who also said the company was “in full accordance with the law” right before the Montana Department of Natural Resources shut them down for taking water without a right in Belfry last June. She also recently told the Carbon County Commissioners that ECA’s poor compliance record in Pennsylvania was the result of “a lot of misunderstanding with regard to the regulations.”

Whether you’re talking about the integrity of accounting practices, the appropriate use of precious water or adherence to regulations that protect land owners, there seems to be a pattern here. Good corporate citizens take responsibility for their actions.

What does it mean for the Beartooth Front?
For ECA, and likely for any oil operator that wants to drill along the Beartooth Front, the law is just a roadblock to their primary goal: maximizing profit from each well.  They do not have a long-term stake in the community, and are not necessarily going to offer land owners a fair deal. They are not necessarily going to honor whatever contracts they sign.

ECA has shown it has no interest in following the good neighbor standards of the American Petroleum Institute.

For you as a landowner:

• Figure out whether you own the mineral rights to your land
• Find an attorney who can help you negotiate with the landman representing ECA or another oil company. This may not be your family attorney — it should be someone who has experience in surface use agreements.
• DON’T sign anything the first time it is presented to you and without legal representation.

For us as a community:

• It doesn’t matter whether you regard yourself as an environmentalist or a pro-growth advocate. Our primary goal as a community should be to make sure that drilling is done on terms that protect our land, our water, and our way of life. It is entirely reasonable to enact regulation that does that. This is the basis for the Silvertip Zone in Carbon County and another zone that is being formed in Stillwater County.