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2. “If an oil and gas lease provides that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale, the lessee shall be entitled to credit for those costs to the extent that they were actually incurred and they were reasonable. Before being entitled to such credit, however, the lessee must prove, by evidence of the type normally developed in legal proceedings requiring an accounting, that he, the lessee, actually incurred such costs and that they were reasonable.” Syllabus Point 5, Wellman v. Energy Resources, Inc., 210 W.Va. 200, 557 S.E.2d 254 (2001).
3. “A valid written instrument which expresses the intent of the parties in plain and unambiguous language is not subject to judicial construction or interpretation but will be applied and enforced according to such intent.” Syllabus Point 1, Cotiga Development Co. v. United Fuel Gas Co., 147 W.Va. 484, 128 S.E.2d 626 (1962).
4. The term “ambiguity” is defined as language reasonably susceptible of
two different meanings or language of such doubtful meaning that reasonable minds might
be uncertain or disagree as to its meaning.
5. “The question as to whether a contract is ambiguous is a question of law to be determined by the court.” Syllabus Point 1, in part, Berkeley County Pub. Serv. Dist. v. Vitro Corp. of Am., 152 W.Va. 252, 162 S.E.2d 189 (1968).
6. “[W]hen new points of law are announced . . . those points will be articulated through syllabus points as required by our state constitution.” Syllabus Point 2, in part, Walker v. Doe, 210 W.Va. 490, 558 S.E.2d 290 (2001).
7. “The general rule as to oil and gas leases is that such contracts will generally be liberally construed in favor of the lessor, and strictly as against the lessee.” Syllabus Point 1, Martin v. Consolidated Coal & Oil Corp., 101 W.Va. 721, 133 S.E. 626 (1926).
8. “Uncertainties in an intricate and involved contract should be resolved against the party who prepared it.” Syllabus Point 1, Charlton v. Chevrolet Motor Co., 115 W.Va. 25, 174 S.E. 570 (1934).
9. “'It is the province of the court, and not of the jury, to interpret a written contract.' Franklin v. Lilly Lumber Co., 66 W.Va. 164, 66 S.E. 225 [1909].” Syllabus Point 1, Stephens v. Bartlett, 118 W.Va. 421, 191 S.E.2d 550 (1937).
10. Language in an oil and gas lease that is intended to allocate between the lessor and lessee the costs of marketing the product and transporting it to the point of sale must expressly provide that the lessor shall bear some part of the costs incurred between the wellhead and the point of sale, identify with particularity the specific deductions the lessee intends to take from the lessor's royalty (usually 1/8), and indicate the method of calculating the amount to be deducted from the royalty for such post-production costs.
11. Language in an oil and gas lease that provides that the lessor's 1/8
royalty (as in this case) is to be calculated “at the well,” “at the wellhead,” or similar
language, or that the royalty is “an amount equal to 1/8 of the price, net all costs beyond the
wellhead,” or “less all taxes, assessments, and adjustments” is ambiguous and, accordingly,
is not effective to permit the lessee to deduct from the lessor's 1/8 royalty any portion of the
costs incurred between the wellhead and the point of sale.
Maynard, Justice:
In this case, we address two certified questions from the Circuit Court of Roane
County which we reformulate (See footnote 1) into the following single question:
In light of the fact that West Virginia recognizes that a lessee to an oil
and gas lease must bear all costs incurred in marketing and transporting the
product to the point of sale unless the oil and gas lease provides otherwise, is
lease language that provides that the lessor's 1/8 royalty is to be calculated “at
the well,” “at the wellhead” or similar language, or that the royalty is “an
amount equal to 1/8 of the price, net of all costs beyond the wellhead,” or “less
all taxes, assessments, and adjustments” sufficient to indicate that the lessee
may deduct post-production expenses from the lessor's 1/8 royalty, presuming
that such expenses are reasonable and actually incurred. (See footnote 2) For the reasons that follow, we do not believe that the lease language set forth in the certified
question permits CNR to deduct post-production expenses from the lessors' royalty
payments. (See footnote 3)
By order of October 14, 2005, the circuit court denied CNR's motion for
summary judgment and certified two questions to this Court which we have reformulated as
indicated above.
This Court finds it unnecessary to adopt wholesale the reasoning of either of the courts above in answering the question before us. Instead, we simply look to our own settled law. We begin our analysis with the recognition that traditionally in this State the landowner has received a royalty based on the sale price of the gas received by the lessee. In Robert Donley, The Law of Coal, Oil and Gas in West Virginia and Virginia § 104 (1951), it is stated:
From the very beginning of the oil and gas industry it has been the
practice to compensate the landowner by selling the oil by running it to a
common carrier and paying to him [the landowner] one-eighth of the sale price
received. This practice has, in recent years, been extended to situations where
gas is found[.]
“The one-eighth received is commonly referred to as the landowner's royalty.” Wellman v.
Energy Resources, Inc., 210 W.Va. 200, 209, 557 S.E.2d 254, 263 (2001). In Wellman, we
expressly recognized the general duty of a lessee to market the oil or gas produced. We
explained:
In Davis v. Hardman, 148 W.Va. 82, 133 S.E.2d 77 (1963), this Court stated
that a distinguishing characteristic of [the landowner's royalty] is that it is not
chargeable with any of the costs of discovery and production. The Court
believes that such a view has been widely adopted in the United States.
In spite of this, there has been an attempt on the part of oil and gas
producers in recent years to charge the landowner with a pro rata share of
various expenses connected with the operation of an oil and gas lease such as
the expense of transporting oil and gas to a point of sale, and the expense of
treating or altering the oil and gas so as to put it in a marketable condition. To
escape the rule that the lessee must pay the costs of discovery and production,
these expenses have been referred to as “post-production expenses.” . . .
The rationale for holding that a lessee may not charge a lessor for “post-
production” expenses appears to be most often predicated on the idea that the
lessee not only has a right under an oil and gas lease to produce oil or gas, but
he also has a duty, either express, or under an implied covenant, to market the
oil or gas produced. The rationale proceeds to hold the duty to market
embraces the responsibility to get the oil or gas in marketable condition and
actually transport it to market.
Wellman, 210 W.Va. at 209-210, 557 S.E.2d at 263-264. This Court held in Syllabus Points
4 and 5 of Wellman,
4. If an oil and gas lease provides for a royalty based on proceeds received
by the lessee, unless the lease provides otherwise, the lessee must bear all costs
incurred in exploring for, producing, marketing, and transporting the product
to the point of sale.
5. If an oil and gas lease provides that the lessor shall bear some part of
the costs incurred between the wellhead and the point of sale, the lessee shall
be entitled to credit for those costs to the extent that they were actually
incurred and they were reasonable. Before being entitled to such credit,
however, the lessee must prove, by evidence of the type normally developed
in legal proceedings requiring an accounting, that he, the lessee, actually
incurred such costs and that they were reasonable.
Accordingly, the present dispute boils down to whether the “at the wellhead”-type language
at issue is sufficient to alter our generally recognized rule that the lessee must bear all costs
of marketing and transporting the product to the point of sale. We conclude that it is not.
As noted by CNR, “[a] valid written instrument which expresses the intent of
the parties in plain and unambiguous language is not subject to judicial construction or
interpretation but will be applied and enforced according to such intent.” Syllabus Point 1, Cotiga Development Co. v. United Fuel Gas Co., 147 W.Va. 484, 128 S.E.2d 626 (1962).
However, when a contract is ambiguous, it is subject to construction. This Court has said
that “[t]he term 'ambiguity' is defined as language 'reasonably susceptible of two different
meanings' or language 'of such doubtful meaning that reasonable minds might be uncertain
or disagree as to its meaning.'” Payne v. Weston, 195 W.Va. 502, 507, 466 S.E.2d 161, 166
(1995), quoting Syllabus Point 1, in part, Shamblin v. Nationwide Mut. Ins. Co., 175 W.Va.
337, 332 S.E.2d 639 (1985). We have also explained that “[a] contract is ambiguous when
it is reasonably susceptible to more than one meaning in light of the surrounding
circumstances and after applying the established rules of construction.” Williams v.
Precision Coil, Inc., 194 W.Va. 52, 65 n. 23, 459 S.E.2d 329, 342 n. 23 (1995). Finally,
“[t]he question as to whether a contract is ambiguous is a question of law to be determined
by the court.” Syllabus Point 1, in part, Berkeley County Pub. Serv. Dist. v. Vitro Corp. of
Am., 152 W.Va. 252, 162 S.E.2d 189 (1968).
We believe that the “wellhead”-type language at issue is ambiguous. First, the
language lacks definiteness. In other words, it is imprecise. While the language arguably
indicates that the royalty is to be calculated at the well or the gas is to be valued at the well,
the language does not indicate how or by what method the royalty is to be calculated or the
gas is to be valued. For example, notably absent are any specific provisions pertaining to the
marketing, transportation, or processing of the gas. In addition, in light of our traditional rule
that lessors are to receive a royalty of the sale price of gas, the general language at issue
simply is inadequate to indicate an intent by the parties to agree to a contrary rule _ that the
lessors are not to receive 1/8 of the sale price but rather 1/8 of the sale price less a
proportionate share of deductions for transporting and processing the gas. Also of
significance is the fact that although some of the leases below were executed several decades
ago, apparently CNR did not begin deducting post-production costs from the lessors' royalty
payments until about 1993. Under these circumstances, we are unable to conclude that the
lease language at issue was originally intended by the parties, at the time of execution, to
allocate post-production costs between the lessor and the lessee.
CNR asserts, however, that when read with accompanying language such as
“gross proceeds,” “market price,” and “net of all costs,” the wellhead-type language clearly
calls for allocation of post-production expenses. We disagree. First, we note that the word
“gross” implies, contrary to CNR's interpretation, that there will be no deductions taken.
Hence, the phrase “gross proceeds at the wellhead” could be construed to mean the gross
price for the gas received by the lessee. On the other hand, the words “gross proceeds” when
coupled with the phrase “at the wellhead” could be read to create an inherent conflict due to
the fact that the lessees generally do not receive proceeds for the gas at the wellhead. Such
an internal conflict results in an ambiguity. Likewise, the phrase “market price at the
wellhead” is unclear since it contemplates the actual sale of gas at the physical location of
the wellhead, although the gas generally is not sold at the wellhead. In addition, we believe
that the phrase “net of all costs beyond the wellhead” could be interpreted to mean free of
all costs or clear of all costs beyond the wellhead which is directly contrary to the
interpretation urged by CNR. Finally, CNR also claims that the phrase “less all taxes,
assessments, and adjustments” clearly indicates that post-production expenses can be
deducted from the lessors' royalties. Again, we disagree. Absent additional language that
clarifies what the parties intended by the words “assessments” and “adjustments,” we believe
these words to be ambiguous on the issue of the allocation of post-production expenses.
CNR also cites for support this Court's statement in Wellman that,
the language of the leases in the present case indicating that the “proceeds”
shall be from the “sale of gas as such at the mouth of the well where gas . . .
is found” might be language indicating that the parties intended that the
Wellmans, as lessors, would bear part of the costs of transporting the gas from
the wellhead to the point of sale[.]
210 W.Va. at 211, 557 S.E.2d at 265. According to CNR, this language was included in the
opinion for the purpose of giving meaning to our holding in Syllabus Point 5 of Wellman where we stated that the allocation of post-production expenses will be permitted where
expressly provided for in a lease. We find CNR's reliance on the above language to be
misplaced. This Court has held that “when new points of law are announced . . . those points
will be articulated through syllabus points as required by our state constitution.” Syllabus
Point 2, in part, Walker v. Doe, 210 W.Va. 490, 558 S.E.2d 290 (2001). The comments
relied upon by CNR are dicta insofar as they are not necessary to our decision in Wellman.
The fact is that we simply did not decide in Wellman whether “at the wellhead”-type
language is or is not ambiguous. Therefore, we find no merit to CNR's reliance on our
language in Wellman.
CNR further cites for support Cotiga Development Company v. United Fuel
Gas Company, 147 W.Va. 484, 128 S.E.2d 626 (1962), wherein this Court distinguished the
wellhead or field price of gas from the price received by the lessee when the gas is marketed.
However, while we did distinguish between the wellhead price and the actual selling price
of gas, we did not define wellhead price, determine how it is calculated, or decide the
specific question currently before us. Therefore, we find our discussion in Cotiga unhelpful
in deciding the present issue. Accordingly, in light of the above, we conclude that the “at the
wellhead” type language at issue is ambiguous because it is susceptible to more than one
construction and reasonable people can differ as to its meaning.
Having found the language at issue ambiguous, the lessors urge that the
language should be construed against CNR consistent with “[t]he general rule as to oil and
gas leases . . . that such contracts will generally be liberally construed in favor of the
lessor,
and strictly as against the lessee.” Syllabus Point 1, Martin v. Consolidated Coal & Oil
Corp., 101 W.Va. 721, 133 S.E. 626 (1926). CNR posits, to the contrary, that the lease
language at issue should not be construed against it. According to CNR, many of the lessors
are business entities which are as sophisticated in commercial matters as CNR. Further, says
CNR, many of the lessors consulted with attorneys experienced in oil and gas law and even
amended the leases prior to signing them.
We choose to adhere to our traditional rule and construe the language against
the lessee. Significantly, CNR drafted the “the wellhead”-type language in dispute. Under
our law, “[u]ncertainties in an intricate and involved contract should be resolved against the
party who prepared it.” Syllabus Point 1, Charlton v. Chevrolet Motor Co., 115 W.Va. 25,
174 S.E. 570 (1934). Simply put, if the drafter of the leases below originally intended the
lessors to bear a portion of the transportation and processing costs of oil and gas, he or she
could have written into the leases specific language which clearly informed the lessors
exactly how their royalties were to be calculated and what deductions were to be taken from
the royalty amounts for post-production expenses.
It is also CNR's position that having found the disputed lease language herein
ambiguous, the rules of interpretation require that the intent of the parties now be determined
by the finder of fact. This is incorrect. Under our law, “'[i]t is the province of the court, and
not of the jury, to interpret a written contract.' Franklin v. Lilly Lumber Co., 66 W.Va. 164,
66 S.E. 225 [1909].” Syllabus Point 1, Stephens v. Bartlett, 118 W.Va. 421, 191 S.E. 550
(1937). There are exceptions to this rule but none are applicable here. (See footnote 5) Thus, we reject
CNR's argument. (See footnote 6)
Accordingly, this Court now holds that language in an oil and gas lease that is
intended to allocate between the lessor and lessee the costs of marketing the product and
transporting it to the point of sale must expressly provide that the lessor shall bear some part
of the costs incurred between the wellhead and the point of sale, identify with particularity
the specific deductions the lessee intends to take from the lessor's royalty (usually 1/8), and
indicate the method of calculating the amount to be deducted from the royalty for such post-
production costs. We further hold that language in an oil and gas lease that provides that the
lessor's 1/8 royalty (as in this case) is to be calculated “at the well,” “at the wellhead,” or
similar language, or that the royalty is “an amount equal to 1/8 of the price, net all costs
beyond the wellhead,” or “less all taxes, assessments, and adjustments” is ambiguous and,
accordingly, is not effective to permit the lessee to deduct from the lessor's 1/8 royalty any
portion of the costs incurred between the wellhead and the point of sale.
In light of the fact that West Virginia recognizes that a lessee to an oil
and gas lease must bear all costs incurred in marketing and transporting the
product to the point of sale unless the oil and gas lease provides otherwise, is
lease language that provides that the lessor's 1/8 royalty is to be calculated “at
the well,” “at the wellhead” or similar language, or that the royalty is “an
amount equal to 1/8 of the price, net all costs beyond the “wellhead,” or “less
all taxes, assessments, and adjustments” sufficient to indicate that the lessee
may deduct post-production expenses from the lessor's 1/8 royalty, presuming
that such expenses are reasonable and actually incurred?
Answer: No. Certified question answered.