The Ohio Supreme Court will determine if oil and gas companies can deduct from landowner royalties some expenses for putting the products in a pipeline.

The Ohio Supreme Court will determine if oil and gas companies can deduct from landowner royalties some expenses for putting the products in a pipeline.

Before the nation’s recent boom in oil and natural gas production, the federal government overhauled the way the products get from the wells to pipelines. The change has created a dispute between drillers and Ohio landowners who signed leases in the 1960s and 1970, decades before the rules changed, over how to pay the expenses of operating in the modern marketplace. The Ohio Supreme Court will hear oral arguments this week to determine if drillers can deduct some of the costs for preparing and transporting natural gas for sale from the royalty payment to the landowners.

In Regis F. Lutz et al. v. Chesapeake Appalachia, L.L.C.,  landowners with oil and gas leases from the 1960s and 1970s filed a class action lawsuit against Chesapeake Appalachia in the U.S. District Court for the Northern District of Ohio. Until the early 1990s, natural gas was nearly all sold by producers to buyers at the wellhead site. Those leases, including ones in effect today, based the royalty payment to the landowner on the price sold “at the well.” However, because not all gas was sold at the well, other provisions of the landowners’ leases indicated in cases where it was sold someplace else, the landowner’s royalty would be based on “the market value at the well” of the gas.

In the early 1990s the Federal Energy Regulatory Commission deregulated the natural gas industry, which led to the majority of natural gas being taken by the drillers from the well to an offsite location to sell. To get the gas to market, the gas companies began to incur “post-production” cost for various processes like compressing and dehydrating the gas as well as the costs for trucking it to a sales point. Both the landowners and Chesapeake agree that the company is responsible for all “production” costs used to get the gas out of the ground and to the wellhead. The dispute centers on if the leases allow Chesapeake to deduct post-production costs before calculating royalties to the landowners, leaving the landowners and company to split the post-production costs. A federal district judge is considering the class-action lawsuit and informed the Ohio Supreme Court that her decision will be impacted by how Ohio determines the rules for deducting post-production costs. The judge noted gas-producing states around the nation are split in determining if the royalty is based on the price “at the well,” which allows for deductions, or whether it follows a “marketable product” rule that limits or prevents the deduction of the post-production costs. The federal court asked in a certified question if Ohio follows the “at the well” rule or some version of the “marketable product” rule, and the Court agreed to hear the matter.

Oral Arguments
In addition to the oil and gas case, the Court will hear three other appeals on Tuesday, Jan. 5 and four cases on Wed. Jan 6. The Court’s sessions begins at 9 a.m. at the Thomas J. Moyer Ohio Judicial Center in Columbus. The arguments will be streamed live online at sc.ohio.gov and broadcast live on The Ohio Channel.

Previews Available
Along with the brief descriptions below, the Office of Public Information today released previews of the cases.

Cases for Tuesday, Jan. 5

• In Epic Aviation v. Testa, a jet fuel seller to a Columbus-based air cargo carrier seeks a $1.7 million sales tax refund on fuel it sold between 2006 and 2007. Epic, the jet fuel seller, asserts that AirNet  qualifies as a public utility, which is exempt from the taxes. The company also maintains that AirNet has similar characteristics to tax-exempt companies – such as regularly scheduled flights advertised publicly on a web site and a comparable system for delivering packages.
• An Austintown police officer’s cruiser was rear-ended by a vehicle traveling at a high speed causing the cruiser to erupt in flames and seriously burning the officer. While the officer has alleged that the cruiser had a design defect that increased the risk of a post-collision fire, the manufacturer argues in Ford Motor Company v. Linert that it has no duty to warn consumers of every possible danger nor did its later improvements to a fire suppression system trigger an obligation to inform customers about a reason for the change.
• A commercial truck driver became trapped between his trailer and a loading dock in Fairfield County. An employee from a nearby business tried unsuccessfully to move the truck, and doctors had to amputate the driver’s leg. The driver claims in Carter v. Reese that the state’s Good Samaritan law gives immunity only to health-care providers who assist in an emergency, but not to the man who tried to help. The driver wants the case to go to trial to determine whether the Good Samaritan is legally responsible for the injuries.

Cases for Wednesday, Jan. 6

• In an appeal of a public utilities case, two organizations challenge the PUCO’s approval of a rate plan submitted by FirstEnergy. They argue that the commission wrongly considered qualitative factors when it should have evaluated only quantitative aspects of the proposal. They also maintain that even the quantifiable measures didn’t support approval of the plan, that the record from a previous application shouldn’t have been included, and that the evidence didn’t prove that the plan met PUCO requirements.
• In separate cases, two Belmont County landowners are fighting a couple’s ownership claim in oil and gas underneath their land as well as more than 100 properties spread throughout the county. In Mark Albanese, Executor of the Estate of James Albanese v. Nile Batman, et al., and Wayne Lipperman, et al. v. Nile Batman, et al., the heirs of Frances Batman used an affidavit filed in 1981, when she died, and the recording of her out-of-state will in 1989 as the basis for preserving the mineral rights. The landowners seek to use the Ohio Dormant Mineral Act to claim all the rights under their land.
• In a disciplinary case, the Board of Professional Conduct recommends that a Dayton attorney be suspended for 18 months, with six months stayed. While representing a client, the lawyer neglected discovery requests, didn’t show up for a hearing, and didn’t file an appeal on time, the board found. The attorney counters that he has suffered from personal and health problems, including a vitamin D deficiency, and asks that his earlier suspensions be considered sufficient discipline.