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Arkansas Case On Post-Production Costs

A U.S. District Court in Arkansas decided a case in 2016 that a client sent me, Whisenhunt Investments, LLC v. Exxon Mobil Corp., 2016 WL 7494266, No. 4:13cv00656 JM, Eastern District of Arkansas, Western Division, raising an interesting issue on post-production costs.

Arkansas has forced pooling. The forced pooling statute provides that

One-eighth (1/8) of all gas sold … from any such unit shall be considered royalty gas, and the net proceeds received from the sale thereof shall be distributed to the owners of the marketable title in and to the leasehold royalty and royalty …. Payment of one-eighth (1/8) of the revenue realized from the sale of gas as provided in this section shall fully discharge all obligations of the operator and other working interest owners with respect to the payment of one-eighth (1/8) leasehold royalty or royalty … Nothing contained in this section shall affect the obligations of working interest owners with respect to the payment of royalties, overriding royalties, production payments, or similar interests in excess of the one-eighth (1/8) royalty required to be distributed under this section.

The Whisenhunts’ lease provides for a royalty of “40% of the gross proceeds” received by the Lessee for gas. But Exxon paid royalties based on net proceeds (after deduction of post-production costs) on the first 1/8th royalty owed to the Whisenhunts, and based on gross proceeds (without deduction of post-production costs) on the remainder of the Whisenhunts’ royalty. The Whisenhunts sued. The District Court entered summary judgment for Exxon:

Act 272 takes 1/8 of the net proceeds and distributes it to all lessors in the Unit, including lessors who do not have the bargaining power to contract for payment above 1/8. This statutory scheme can be likened to a business that pays its sales force a base salary plus commission. All salespeople get the same base salary, including those salespeople who are not performing at a level equal to the base salary. Likewise, the Operator, on behalf of all lessees, pays each lessor in a Unit a base “salary.” Every lessor is paid a base amount. Any “commission” paid above the statutory 1/8 depends on the negotiating power and the value of each individual lessor’s property. Further, the Court agrees with the Defendants that the parties to the Leases were aware of Act 272 as evidence by the provision in the Leases acknowledging the applicability of “all Federal and State Laws, Executive Order, rules and Regulations …”

On October 8, 2019, the staff of the Arkansas Oil and Gas Commission asked its Commissioners to issue an opinion on whether Whisenunt is good law.

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