West Virginia Enacts Significant Bills in 2022 Session

On March 12, 2022, the West Virginia legislature adjourned its regular legislative session for this year. Of the many bills AAPL governmental affairs tracks and reports for members, the following three pieces of legislation were signed into law by Gov. Jim Justice (R) last week and are significant for AAPL members operating in West Virginia.

SB 694 – Horizontal Wells Unitization

SB 650 – Cotenants in Oil and Gas Development

HB 4336 – Ad Valorem Taxation of Natural Resources Property

Following, please find a detailed summary of each bill.

West Virginia SB 694 (Horizontal Wells Unitization) – Sponsored by Senator Eric Tarr (R), SB 694 was signed into law on March 30 by Gov. Jim Justice (R). The bill provides for the unitization of oil and gas interests for the purpose of horizontal well drilling and “authorizes the West Virginia Oil and Gas Conservation Commission to issue horizontal well unit orders in certain circumstances. Upon the issuance of a unit order, the unitization of tracts for both shallow and deep horizontal wells is authorized by law and addresses the issues oil and gas operators face when mineral owners cannot be located, refuse to lease, or do not consent to amend existing leases to permit horizontal drilling.” Read more. The bill’s passage has been attempted in some form over the past eight years, finally succeeding this session.

SB 694 brought together various stakeholders “to finally address the issue of shallow horizontal well unitization in West Virginia,” says Kurt Dettinger, energy practice attorney at Steptoe & Johnson PLLC. SB 694 “creates a regulatory framework that will authorize unitization of horizontal well units proposed for both deep and shallow formations. Enactment of this legislation is another policy development that will ensure that West Virginia remains a leader in oil and gas production in the Appalachian Basin.” Of the bill, the Parkersburg News and Sentinel wrote, “After eight years of false starts, a bill dealing with unitization — sometimes called forced pooling or lease integration” has finally passed.

Specifically, SB 694 “allows unitization of interests if a producer demonstrates that executive interest royalty owners in the target formation owning 75 percent or more of the net acreage in the prospective unit have consented to pool or unitize their acreage and, with respect to the operator interest, that it controls 55 percent or more of the net acreage in the prospective unit.” The bill “also caps horizontal well units at 640 acres per unit, but a unit cannot contain more than 128 net acres controlled by non-consenting royalty owners. The bill gives non-consenting royalty owners with valid leases but lack utilization provisions options for how they wish to be paid: either 25 percent of the weighted average bonuses or 80 percent of the average royalty rate percentage. Non-consenting owners without valid leases can either sell their minerals, participate in the well subject to a 200 percent payout penalty, or elect to receive royalty payments three different ways. They could choose to receive 100 percent of the weighted average bonus received by owners inside the unit within the previous 24 months, the highest royalty rate received by the owners in the unit within 24 months, or mineral owners could be paid through a weighted average sales price or the local monthly index price.” SB 694 also contains these key provisions: Applies to all horizontal wells regardless of depth; no surface used permitted for non-consenting owners; and expands the West Virginia Oil and Gas Conservation Commission membership from five to seven members; among other provisions.

West Virginia House Energy and Manufacturing Committee Chairman Bill Anderson (R) and Vice Chairman John Kelly (R) “explained that SB 694 was a good bill and the result of a compromise between the Gas and Oil Association of West Virginia, the West Virginia Royalty Owners Association, and the West Virginia Farm Bureau. The West Virginia Surface Owners Rights Organization also doesn’t oppose the bill.” As noted by Delegate Kelly, “For the first time in eight years since I’ve been here, we have a bill those organizations agree on totally and they want. It’s a good bill.” Delegate Mark Zatezalo (R) said, “They negotiated a deal, and the deal is very good. In my estimation, this bill is a chance to keep people tied to the land in the game. No one is looking to buy all their rights unless they want to sell them of course. This is a good bill to get people paid for the resources under their feet and to keep their resources from being trapped and never produced.” The Act is effective June 7, 2022.  Read more.

West Virginia SB 650 (Cotenants in Oil and Gas Development) – Sponsored by Senator Eric Nelson (R), SB 650 was signed into law on March 30 by Gov. Jim Justice (R). The West Virginia legislature summarized the bill as “eliminating [the] number of royalty owners required for utilization by [an] operator for lawful use and development by cotenants.” Specifically, SB 650 removes a state requirement that at least seven royalty owners must own an oil and gas interest in order for an operator to develop it. The bill updates a 2018 law, the Cotenancy Modernization and Majority Protection Act, “which permitted oil and gas development within a mineral tract owned by seven or more royalty owners if the operator gets the consent of owners of at least three-fourths of the interest in the tract.” The bill does not change any other provisions of the 2018 law. Read more. Notably, the West Virginia Royalty Owners Association (WVROA) also supported the bill. “The seven-cotenant threshold reduced the effectiveness of the law,” said Tom Huber, WVROA President. “The effect of passage of SB 650 is to make the Cotenancy Act applicable to all mineral tracts in the state so long as the oil and gas producer satisfies all provisions of the statute.” Read more.

“The revision made to the Cotenancy Act by SB 650 reflects that the Cotenancy Act has properly advanced the policy goals of preventing waste, promoting development of oil and gas minerals, and fairly compensating non-consenting cotenants and unknown or unlocatable interest owners since its enactment in 2018,” says Dettinger. “By removing the arbitrary requirement that a tract of oil and gas mineral property be owned by seven or more cotenants before the Cotenancy Act applies, passage of SB 650 appropriately expands the applicability of the Cotenancy Act to all tracts of mineral property in the state so long as the producer satisfies the remaining elements of the current law, which remain unchanged.” The Act is effective June 3, 2022.

West Virginia HB 4336 (Ad Valorem Taxation of Natural Resources Property) – Sponsored by Delegate Dianna Graves (R), HB 4336 was signed into law on March 30 by Gov. Jim Justice (R). The West Virginia legislature summarized the bill as “providing for the valuation of natural resources property” and “Specifically, HB 4336 requires the West Virginia State Tax Commissioner to develop a valuation approach for properties producing oil, natural gas, natural gas liquids, or any combination thereof, at its fair market value determined through the process of applying a yield capitalization model to net proceeds. HB 4336 specifies that net proceeds would be determined based on the actual gross receipts on a sales volume basis determined from the actual price received by the taxpayers as reported on the taxpayer’s return, less royalty interest receipts, and less actual annual operating costs. Further, HB 4336 specifies that the yield capitalization model will be composed of a working interest model and a royalty interest model and that the summation of the working interest model and royalty interest model shall represent the fair market value of the property. The bill also provides a safe harbor provision for marginal well costs, limitations on calculations by the Tax Commissioner, annualized gross receipts and operating expenses before calculation of the models, limitations on minimum well valuations, an effective date for all assessments made on or after July 1, 2022, and a sunset date of July 1, 2025. HB 4336 also requires the Tax Commissioner to propose legislative rules, including emergency rules, to implement the new law.” Read more.

“The bill is a compromise effort to soften the blow to counties for moving to actual receipts, actual expenses,” said bill sponsor Delegate Graves. West Virginia House Finance Committee Chairman Vernon Criss (R) said HB 4336 would put the state in compliance with a 2019 West Virginia Supreme Court of Appeals decision that determined the way the state assessed natural gas-producing property was unfair. Read more. “HB 4336 represents a major step forward in introducing stability and predictability into the ad valorem property taxation of producing oil and gas properties in West Virginia,” says Dettinger. “As we all know, certainty in state tax policy is critical to companies evaluating major investment decisions in the state.” The Act is effective June 9, 2022.

You may access all bills and a complete legislative history for each here: https://www.wvlegislature.gov/Bill_Status/bill_status.cfm.