American Oil and Gas Reporter - October 2015 - 135

she recounts. "Now, the subject is innovation and flexibility. There is a strong
capital market for emerging technology that
improves productivity and lowers costs."
The shift, Landry characterizes, can
be seen in the nimble, incisive manner in
which companies are responding to the
downturn. "That is why it is so important
for COGA to work with regulators on
pragmatic solutions that are not cost prohibitive,' she emphasizes.
Board Restructuring
Reflecting on his second one-year term
as COGA chairman, Harrison, a former
drilling operations vice president at WPX
Energy who also served as COGA chair
in 2004, describes his now-completed
second term as a year of transition in
which the industry's efforts at community
outreach rose to the forefront.
"We have rules in place now that outline the operator's responsibilities to
neighbors and the community," Harrison
says. "Lately, it is the local jurisdictions
that create the points of contention. The
industry has a long history of working

with landowners and local governments.
Now it seems local governments are
trying to add a layer of regulation on top
of the state's."
As COGA played a key role last year
in the compromise that pulled local control
initiatives off the ballot in exchange for
the formation of the Governor's Task
Force, Harrison relates, the association
recognized a need to streamline its governing board. "It was time to make a
change," Harrison assesses. "We decided
the association needed to respond quickly
and decisively while still representing
all segments of the industry. The new
board structure allows us to do that."
Under the new organizational structure,
voting authority moves to a 14-member
executive board while a 40-member advisory board considers issues and recommends policies. Consisting of a cross
section of COGA members, the advisory
board includes the executive board, four
COGA chapter presidents, and past chairmen as ex-officio members.
A COGA policy statement indicates
that criteria for appointment to the board

of advisers are:
* A demonstrated commitment to
Colorado, the industry and the organization, and engagement with a broad range
of Colorado stakeholders;
* Status as a company's highest operations officer in the Rockies, with an
emphasis on strong leadership and character; and
* For the body to represent COGA
membership as determined by company
type, company size, and area of operation.
The association must be prepared to
respond to a rapidly changing landscape,
Harrison reflects. "If we are to provide
value to our members, we have to be
willing to listen when we should and
take a stand when we have to."
Although the association cannot control
market forces, Harrison observes, it can
work to provide members with a degree
of certainty and a voice in important
issues. A reorganized board of directors
will help COGA remain a responsive,
involved and informed representative of
their interests across the state, he concludes.
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Kentucky Decides Two Royalty Cases

FRANKFORT, KY.-The Kentucky
Supreme Court has ruled that while producers may deduct some post-production
costs from royalty calculations, severance
taxes are not deductible, state energy
leaders confirm.
According to Pittsburgh-based law
firm Reed Smith, in mid-August, the
court published two opinions dealing
with natural gas royalties:
* In Baker v. Magnum Hunter, the
court confirmed that Kentucky is an "at
the well" jurisdiction, so a lessor's royalty
is based on the value of gas at the wellhead.
* In Appalachian Land Company v.
EQT Production Company, the court held
that absent language to the contrary, severance taxes cannot be deducted from
royalties as post-production costs.
In Appalachian Land Company, Reed
Smith explains that the court's majority
concluded that "the (severance) tax was
intended to burden the business of extracting minerals, and not the land containing the minerals."
Writing for the majority, one published
report points out, Justice Bill Cunningham
says, "The producer severing natural gas
from the earth is solely responsible for
the payment of the severance tax. Of
course, this rule can be altered through
agreement. As such, lessees such as EQT
must mathematically work back from the

price at the point of sale to arrive at the
wellhead price. This is the relevant 'market
price' for calculating royalties."
According to Reed Smith, in Baker,
the plaintiffs argued that royalty deductions
for gathering, compression and gas treatment costs were improper. They also said
lessors were required to calculate their
royalty based on the sale of gas made
"marketable," and argued that while transportation costs were proper deductions,
gas was not marketable until it had been
accumulated, compressed, and treated.
However, Reed Smith says the
Supreme Court disagreed, ruling that "under established Kentucky law, an oil and
gas royalty is the lessor's cost-free share
of production, with 'production' understood as the raw gas captured at the
well."
Reed Smith adds that the court found
that a reasonable well-side price could
be determined by an actual well-side
sale, by comparable sales in the vicinity,
or by applying the net-back method to
deduct downstream costs.
Affected Parties
Kentucky Oil & Gas Association Executive Director Andrew V. McNeill says
the Appalachian Land Company decision
is very concerning to KOGA, and the association is looking at its options on how
to proceed. He also clarifies that the decision

affects only natural gas, and not oil, where
"the oil statutes have more clarity."
"We are anticipating many possible
future lawsuits against KOGA members
for back royalty payments because of
the Supreme Court's decision," McNeill
states. "The court will have to decide the
look-back period, which would have to
be answered in a separate royalty-owner-versus-operator court case. Until then,
we could have royalty owners suing for
payments as far back as 2000."
Appalachian Land Company was heard
in the U.S. Court of Appeals for the 6th
Circuit, but was sent to the Kentucky
Supreme Court for clarification of state
law. McNeill remarks the case is now
back in the 6th Circuit for additional adjudication. As of late September, he said
he had not heard the court's timeline for
the case. He says he doubts the 6th Circuit
will overturn the Kentucky Supreme
Court's decision.
In the meantime, McNeill says KOGA
will monitor any upcoming royalty cases,
and look to see whether the issue can be
clarified in the state legislature. "KOGA
is taking this decision very seriously because it affects more than half our members," he emphasizes. "All producer members have been affected to some level,
but it will be hardest on smaller operators,
and most especially those in eastern Kentucky."
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OCTOBER 2015 135

American Oil and Gas Reporter - October 2015

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