No Deductions for Processing and Fractionation Under Ohio “Market Enhancement” Royalty Clauses

Introduction

In The Grissoms, LLC v. Antero Resources Corp. (6th Cir. Apr. 2, 2025), Chief Judge Sutton—writing for a unanimous panel—affirms a class judgment in favor of Ohio landowners and clarifies how “Market Enhancement Clauses” operate under Ohio law in oil-and-gas royalties. The court holds that where a lease states that royalties are paid on “gross proceeds” and forbids deductions for costs incurred “to transform the product into marketable form” while allowing deductions only for costs that “enhance the value of the marketable” product, the producer may not deduct the costs of:

“Processing” (the separation and purification of methane from other gases), and
“Fractionation” (the separation of the non-methane gas mixture into discrete saleable products such as ethane, propane, butane, and natural gasoline).

The case arises from a series of 2012 leases between Antero Resources Corporation and 370 Ohio landowners, with Antero paying royalties on three categories: “OIL,” “GAS” (purified methane), and “PPROD” (plant products—individual NGLs). The landowners challenged Antero’s deduction of processing and fractionation costs from their gas-related royalties. The district court granted summary judgment for the class, and the Sixth Circuit now affirms, leaving intact a stipulated $10 million damages award.

Beyond resolving this dispute, the opinion provides a contract-driven roadmap for determining when a hydrocarbon stream becomes “marketable,” and, therefore, when costs shift from the producer to the royalty owners under the lease. It aligns the Sixth Circuit with the Fourth Circuit’s reading of an identical clause involving the same defendant.

Summary of the Opinion

Applying Ohio law’s contract-centered approach, the court interprets the leases’ Market Enhancement Clause to:

Prohibit deductions for costs incurred to transform raw production into “marketable” discrete products (methane; and separately ethane, propane, butane, and natural gasoline), and
Allow deductions only for costs that enhance the value of a product after it has become marketable (for example, certain transportation of the finished product to the ultimate buyer).

The court concludes that:

Processing (stage two) is essential to transform the raw gas mixture into marketable methane because transmission pipelines will not accept gas containing excessive non-methane components and there is no market for the raw mixed stream.
Fractionation (stage three) is essential to transform the “Y-Grade” NGL mixture into marketable individual products (ethane, propane, butane, natural gasoline) because the unseparated mixture is not a saleable commodity to traditional end users.
Accordingly, Antero may not deduct processing or fractionation costs from the landowners’ royalties.

The court also:

Distinguishes leases that adopt explicit “at the wellhead” valuation and deduction language (as in Zehentbauer) from the leases here, which have no such language and instead center on marketability of discrete “products.”
Notes that all parties agree landowners share in transportation costs of finished products to downstream buyers, which is consistent with allowing deductions only after marketability is achieved.

Bottom line: under these Ohio leases, processing and fractionation are transformation costs borne by the producer; only post-marketability value-enhancing costs may be proportionally deducted.

Detailed Analysis

I. The Textual Anchors: “Gross Proceeds,” “Products,” and the Market Enhancement Clause

The leases pay a 21% royalty on the “gross proceeds” of “oil, gas and other hydrocarbons” produced and sold by the lessee or its affiliates. The pivotal “Market Enhancement Clause” reads:

“[A]ll royalties or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be proportionally deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements. However, in no event shall Lessor receive a price per unit that is less than the price per unit received by Lessee.”

The clause makes two critical distinctions:

It bars deductions for a broad list of activities when they are incurred “to transform the product into marketable form.”
It allows deductions for costs that “enhanc[e] the value of the marketable” product, i.e., after marketability exists.

The court emphasizes that the lease contemplates multiple “products,” not a single undifferentiated stream. Antero’s own royalty statements confirm this multi-product regime by paying separate “OIL,” “GAS,” and “PPROD” royalties.

II. The Operational Stages and Why They Matter

Stage 1: At the wellhead, the raw mixture (water, sand, oil, and multiple gases) is separated into crude oil, a mixed gas stream, and water. Crude oil is immediately marketable and sold via truck; royalties on “OIL” are paid.
Stage 2 (Processing): The mixed gas stream is gathered, dehydrated, compressed, and processed at a plant to separate and purify methane (pipeline-quality “natural gas”). Royalties on “GAS” reflect sales into pipeline markets.
Stage 3 (Fractionation): The remaining mixture (“Y-Grade” NGLs) is fractionated into ethane, propane, butane, and natural gasoline; these discrete products are then sold. Royalties on “PPROD” reflect those sales.

The court concludes that “marketability” attaches when each discrete hydrocarbon stream is saleable in its own market:

Crude oil: marketable at stage 1 (wellhead separation).
Methane: marketable only after stage 2 processing (to meet pipeline specs and market expectations).
NGLs (ethane, propane, butane, natural gasoline): marketable only after stage 3 fractionation.

III. Transformation vs. Enhancement: The Court’s Semantics and Market Reality

The court relies on dictionary definitions to give “transform” and “marketable” their ordinary meanings. “Transform” means to change the nature or form of a thing; “marketable” means fit for sale in commercial markets. It then reasons:

Processing and fractionation are classic examples of transformation: they change the raw mixed stream into discrete saleable products that meet market and pipeline specifications.
Enhancement, by contrast, presupposes an already marketable product and aims only to improve its value (e.g., some transportation or marketing after marketability exists).

Market realities corroborate this textual reading:

There is a robust market (and even a futures market) for methane, but not for an undefined methane–ethane–propane–butane–natural gasoline mixture.
Transmission pipelines do not accept gas with excessive non-methane content; purification is therefore a precondition to marketing methane.
End users do not buy undifferentiated Y‑Grade; fractionation is necessary to create saleable NGLs.

IV. Addressing Antero’s Arguments

The “product” is the raw mixed stream at the wellhead. The leases’ repeated reference to plural “products,” Antero’s own royalty categories (OIL, GAS, PPROD), and the absence of any “at the wellhead” language defeat this argument. The contracts contemplate separate saleable hydrocarbons, not a single undifferentiated product.
Anything capable of being sold is “marketable.” The court rejects this as incompatible with the lease structure, which would otherwise morph into an “at the wellhead” arrangement without saying so. Marketability requires fitness for sale in an actual commercial market—something the raw mixed stream lacks.
Reading “such costs” narrowly leaves little left to deduct. That is both textually and structurally correct here: the leases grant landowners “gross proceeds” subject to a narrow exception for value-enhancing costs after marketability. Expanding deductions to the wellhead separation point would, in substance, adopt “at the wellhead” valuation that the parties never agreed to.
Our Zehentbauer decision compels a different result. Not so. In Zehentbauer Fam. Land, LP v. TotalEnergies E&P USA, Inc., the lease expressly adopted an “at the wellhead” valuation and the producer actually sold at that point. The court here distinguishes Zehentbauer on precisely that basis; the contracts here lack that language and instead embed a marketability threshold.

V. Precedents and Authorities Cited

Lutz v. Chesapeake Appalachia, L.L.C., 71 N.E.3d 1010 (Ohio 2016): The Ohio Supreme Court declined to adopt a categorical default rule for royalty deductions and instructed courts to interpret the “terms of the written instrument.” The Sixth Circuit faithfully applies that directive here.
Corder v. Antero Resources Corp., 57 F.4th 384 (4th Cir. 2023): Involving the same company and the same Market Enhancement Clause, the Fourth Circuit held that processing and fractionation costs are non-deductible because the products become marketable only after those steps. The Sixth Circuit explicitly agrees.
Zehentbauer Fam. Land, LP v. TotalEnergies E&P USA, Inc., No. 20-3469, 2022 WL 294081 (6th Cir. Feb. 1, 2022): Distinguished because the lease there used “at the wellhead” language, deeming the raw product marketable at that point. The leases here contain no such clause and instead hinge on a marketability threshold.
J. Fleet Oil & Gas Corp., L.L.C. v. Chesapeake La., L.P., 2018 WL 1463529 (W.D. La. Mar. 22, 2018): Cited as an example of jurisdictions using default “at the wellhead” concepts for allocating post-production costs. The Sixth Circuit notes Ohio has no such presumption after Lutz.
Pummill v. Hancock Expl. LLC, 419 P.3d 1268 (Okla. Civ. App. 2018) and Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001): Representative “marketable product” rule decisions, explaining that a product becomes marketable when it is acceptable to buyers in a competitive marketplace. The Sixth Circuit uses these formulations to illuminate the ordinary meaning of “marketable.”
Graham v. Drydock Coal Co., 667 N.E.2d 949 (Ohio 1996): Ohio’s contra proferentem principle: ambiguities are construed against the drafter. While the court deems the clause unambiguous, it notes this background rule aligns with the result should ambiguity be claimed.
Dictionaries: The panel relies on Black’s Law Dictionary (marketable), the American Heritage Dictionary (marketable), and Webster’s II New College Dictionary (transform; enhance) to give ordinary meaning to key terms.

VI. Practical Implications

A. For Ohio oil-and-gas leases with Market Enhancement Clauses

Processing and fractionation costs are non-deductible where they are necessary to render methane and NGLs saleable in their respective markets.
Transportation and other value-enhancing costs may be deducted only after marketability is achieved—for example, transporting finished methane to downstream buyers or moving fractionated NGLs to market.
Because “marketability” is determined per discrete hydrocarbon stream, producers should identify the precise point at which each stream becomes commercially saleable (e.g., pipeline-quality methane at the plant outlet; individual NGLs after fractionation).
Royalties stated as “gross proceeds” and measured by sales by the lessee or its affiliates reduce opportunities to shift costs via affiliate transactions.

B. Contract Drafting and Litigation Strategy

Operators seeking “at the wellhead” netback valuation must say so expressly. Absent such language, courts will read Market Enhancement Clauses to bar pre‑marketability deductions.
Royalty statements should transparently delineate cost categories and the marketability status of the relevant stream to avoid disputes and potential class exposure.
Expect future disputes at the margins: what counts as a transformation step versus an enhancement step; how to treat blending/stabilization; and the treatment of storage used to capture price arbitrage for already marketable products.

C. Alignment with Other Jurisdictions

The decision deepens inter-circuit consistency: it tracks the Fourth Circuit’s interpretation of the same clause (Corder) and harmonizes with “marketable product” principles recognized in Colorado and Oklahoma. It may influence how district courts within the Sixth Circuit read similar clauses under Ohio law and guide parties in drafting royalty provisions to avoid ambiguity about cost allocation.

VII. Complex Concepts Simplified

Marketable vs. Marketed: “Marketable” means the product is fit for sale in existing commercial markets; “marketed” is the act of selling it. Deductions turn on when the product becomes marketable, not when the producer chooses to sell it.
Transform vs. Enhance: Transforming changes the nature or form of the product to make it saleable (e.g., processing, fractionation). Enhancing increases the value of a product that is already saleable (e.g., shipping an already marketable product to a higher-priced market).
Y‑Grade: A mixed NGL stream (ethane, propane, butane, natural gasoline) that is not itself a saleable commodity to typical end users until fractionated into its components.
At the Wellhead vs. Marketable Product Rules: Under “at the wellhead” clauses, the product is valued and deductions are calculated as of the wellhead, shifting many post-production costs to royalty owners. Under Market Enhancement Clauses like this one, the producer bears the costs necessary to make each product marketable.
Gross Proceeds: Royalty base calculated on the price the lessee (or its affiliate) actually receives on sale, before deduction of pre‑marketability costs barred by the clause.

VIII. Notes on Unaddressed or Narrowly Addressed Points

Stage‑two gathering, dehydration, and compression: Antero sought declaratory relief to deduct these costs. The appellate opinion’s holding focuses on processing and fractionation, but its reasoning—that marketability for methane is not achieved until after stage‑two processing—strongly suggests that pre‑processing steps used to reach marketability are likewise non-deductible under the clause. Practitioners should carefully distinguish between pre‑marketability steps (likely non-deductible) and post‑marketability enhancements (potentially deductible).
Transportation costs: The parties did not dispute deductions for transportation of finished products to buyers. Consistent with the clause, such costs are classic post‑marketability enhancements and may be proportionally deducted when based on actual costs.

Conclusion

The Sixth Circuit’s opinion establishes a clear, contract‑driven rule for Ohio leases with Market Enhancement Clauses: the producer may not deduct processing and fractionation costs that transform raw production into marketable methane and NGLs. Only after each discrete hydrocarbon stream becomes marketable may the producer proportionally deduct value‑enhancing costs, such as transportation to the ultimate buyer, based on actual costs.

The decision:

Affirms the primacy of the lease text under Ohio law (Lutz),
Aligns with the Fourth Circuit’s interpretation of the identical clause (Corder),
Distinguishes “at the wellhead” leases (Zehentbauer), and
Reinforces a product‑specific marketability threshold consistent with market realities and ordinary language.

For industry participants, the case offers both clarity and caution: clarity that transformation costs preceding marketability remain with the producer under Market Enhancement Clauses, and caution that only truly post‑marketability enhancements may be passed along to royalty owners. For lessors and lessees alike, it underscores the importance of precise drafting and meticulous accounting tied to when, and for which product, “marketability” is achieved.