Royalty Valuation Expert Opines on Oil and Gas Lease Dispute

This case involves an oil and natural gas company which acquired leases in mineral interests. The company retained for itself an overriding royalty interest in those leases, but assigned the rights in those leases to a second company. This second company subsequently began imposing deductions on the royalties owed to the original company. An expert with an understanding of gas production expenses incurred by operators was sought to opine on how the industry understands certain terms in leases and assignments.

Question(s) For Expert Witness

1. What is your experience with oil and gas leases/assignments?

2. Please describe your experience interpreting deductions and royalties for oil and gas production.

Expert Witness Response E-126929

I regularly review the determination and valuation of production royalties, as well as royalty calculation methodology implemented (i.e. gross proceeds, market value, amount realized), especially as they apply to a particular state's laws. Over the past four years, I have worked directly with oil and gas companies in Pennsylvania, West Virginia, and Ohio to correct underpayments of production royalties. I have recovered hundreds of thousands of dollars for my clients. It is vital to examine the precise lease and/or assignment language to determine the point-of-sale, such as royalty valuation point, hydrocarbon revenue calculation, and whether post-production costs (post-production deductions) may be deducted from gross royalties payable to owners. Sales of produced hydrocarbons to upstream company affiliates greatly compound payment problems. Many issues arise out of whether such costs are allowable pursuant to oil and gas leases/assignments of leases and state law. Although the oil- and gas-producing states have varying applications of law, each owner-operator situation can be unique.