Royalty class action litigation continues to move forward in federal courts in Pennsylvania. Currently pending cases have challenged different kinds of royalty clauses, different kinds of marketing relationships, and different aspects of the royalty calculation on a variety of legal theories, including breach of express contract, breach of implied covenants, and good faith and fair dealing claims, among others. Recently, the U.S. District Court for the Middle District of Pennsylvania issued two opinions relating to motions to dismiss filed by a lessee and its affiliated-buyer of natural gas in Canfield v. Statoil USA Onshore Properties, Civil Action No. 3:16-0085, (M.D.Pa. March 22, 2017), where lessors filed a putative class action challenging the calculation of royalties, as well as the relationship between the lessee and its affiliated buyer, on a number of different bases. The district court’s ruling on the motions to dismiss and its subsequent ruling on the lessor’s motion for reconsideration made very clear that the specific language in the oil and gas lease is a dispositive factor in resolving these disputes.
Specifically, the royalty provision in lessor Canfield’s oil and gas lease provided that, among other things, royalties are to be paid on a percentage of the “amount realized from the sale of gas at the well.” The lease expressly stated that this meant that post-production costs could be deducted from the royalty payment. However, an addendum to the lease modified the royalty provision, limiting the deduction of post-production costs unless those costs make the oil or natural gas produced “ready for sale or use.” Canfield alleged that the lessee, Statoil breached the terms of the royalty provision and addendum by paying royalties based on an index price instead of an actual market price for natural gas and engaging in an affiliate sale to different Statoil entity, which allegedly did not constitute an arm’s-length transaction. Canfield also alleged several other claims, including breach of the covenant of good faith and fair dealing, civil conspiracy and an accounting.
