The Expanded “Point-of-Sale” Doctrine: Downstream Markets and Enhanced Hydrocarbons in West Virginia Royalty Calculations

1. Introduction

Jacklin Romeo, Susan S. Rine and Debra Snyder Miller (collectively “the Lessors”) sued Antero Resources Corporation (“Antero”) in federal district court, alleging that Antero unlawfully deducted post-production costs—compression, dehydration, gathering, processing, fractionation and long-haul transportation—from their royalty checks. The district court certified questions to the Supreme Court of Appeals of West Virginia asking when, under West Virginia law, a lessee may charge such costs to a lessor under a proceeds-based lease.

In its June 11 2025 opinion (not reproduced here), a three-justice majority reaffirmed the twin precedents of Wellman v. Energy Resources Inc. (2001) and Estate of Tawney v. Columbia Natural Resources (2006), but significantly expanded their reach. Specifically, the Court held that:

“Point of sale” for royalty calculation can be any downstream location chosen by the lessee—even hundreds of miles from the wellhead (e.g., the U.S. Gulf Coast).
The rule applies not only to raw gas but also to enhanced by-products, such as natural gas liquids (NGLs) extracted during processing.

Justice Walker’s dissent (quoted above) condemns the expansion, urges overruling Wellman/Tawney, and accuses the majority of judicial activism.

2. Summary of the Judgment

Although the full majority opinion is not included in the excerpt, the following core holdings can be distilled from Justice Walker’s discussion:

The Wellman/Tawney “point-of-sale” requirement remains good law.
“Point of sale” encompasses any downstream market where the lessee ultimately closes a transaction, regardless of distance or intermediate enhancement steps.
All costs incurred between the wellhead and that ultimate point—including transportation, treating, processing and fractionation—must be borne by the lessee unless the lease expressly, with particularity, shifts those costs to the lessor.
Stare decisis, commercial reliability and reliance interests justify preserving and extending the doctrine.

Consequently, Antero may not deduct the disputed post-production expenses, and the Lessors’ cause of action for breach of contract survives.

3. Analysis

3.1 Precedents Cited

Wellman v. Energy Resources, Inc. (2001) – Adopted an implied covenant requiring the lessee to bear costs incurred up to the “point of sale.”
Estate of Tawney v. Columbia Natural Resources (2006) – Declared that lease language must expressly identify deductible items and calculation methods; otherwise, post-production costs stay with the lessee.
Leggett v. EQT Production Co. (2017) – Critiqued Wellman/Tawney but limited to flat-rate royalty statute (§22-6-8); later mooted legislatively.
SWN Production Co. v. Kellam (2022) – Reaffirmed Tawney; declined to parse a specific lease; sparked the current dissent.
Historic contra-proferentem case: Martin v. Consolidated Coal & Oil Corp. (1926) – Often quoted for “construe against the lessee.”

The majority synthesised these cases to say: If the lease does not clearly authorize deductions, the lessee pays.

3.2 Legal Reasoning of the Majority (inferred)

Implied Covenant to Market
The lessee’s duty is not fulfilled until the product is in a marketable condition and actually delivered to the market. Any costs necessary to reach that state lie within the covenant.
Textual Hook – “Proceeds Received” Clauses
Most contemporary leases tie royalty to “proceeds received” or “amount realized.” Because proceeds are realised only when the ultimate downstream sale occurs, the market location sets the royalty base.
Stare Decisis & Reliance
Thousands of leases have been drafted or amended since 2006 with Tawney in mind. Stability outweighs arguments for doctrinal reversal.
Scope Expansion Justified by Industry Practice
In modern shale plays, gathering systems and fractionation plants are integral to marketing. Thus, the covenant covers the full midstream chain.

3.3 Walker, J., Dissenting

Justice Walker calls Wellman and Tawney “wrongly decided” and “outliers,” arguing they:

Misapplied an outdated 1951 treatise on oil-and-gas marketing.
Turned “gap-filling” implied covenants into mandatory contract terms.
Improperly used the “against the lessee” rule as a sword rather than a tiebreaker.
Produce windfalls for lessors, distort risk allocation and deter investment.

She urges wholesale overruling and a return to conventional contract construction—honouring unambiguous “at the well” clauses that allow deductions.

3.4 Likely Impact

Economic Pressure on Producers. Lessees operating in West Virginia must price into their economics all midstream costs and NGL upgrades when drafting leases that lack surgical allocation language.
Drafting Arms Race. Expect intricate “cost-sharing” royalty clauses enumerating every conceivable fee, reminiscent of pipeline tariffs.
Litigation Ripple. Existing royalty disputes involving liquid-rich shales (Marcellus/Utica) will re-evaluate fractionation and long-haul transport deductions.
Competitive Disadvantage. West Virginia becomes the only jurisdiction to push the point-of-sale so far downstream, potentially shifting new drilling capital to Ohio or Pennsylvania.
Legislative Intervention. The legislature—previously active with §22-6-8—may codify a different cost-allocation model to re-balance interests.

4. Complex Concepts Simplified

“At the well” lease – Royalty is measured at the wellhead; traditionally allowed deduction of downstream costs.
Post-production costs – Expenses incurred after extraction: gathering, compression, dehydration, treating, processing, fractionation, transportation, marketing.
Implied covenant to market – Judicially-created duty requiring a lessee to make the product marketable and secure a sale.
First-Marketable-Product Rule – Minority rule that lessee bears costs until the product is in marketable condition; Wellman/Tawney go further by adding delivery to point of sale.
Natural Gas Liquids (NGLs) – Higher-value hydrocarbons (ethane, propane, butane, etc.) stripped from raw gas; require processing/fractionation.
Contra Proferentem (“against the drafter”) / “Against the Lessee” Rule – Tie-breaker favouring the non-drafter/lessor when lease language is ambiguous.

5. Conclusion

The 2025 decision cements West Virginia’s position at the very edge of post-production cost jurisprudence. By extending “point of sale” to distant hubs and to value-added by-products, the Court substantially increases the cost burden on lessees, deepening the state’s divergence from the national majority’s “at the well” approach.

If stability is the majority’s objective, the dissent warns that the ruling may achieve the opposite—fueling contract re-drafts, forum shopping, and renewed legislative lobbying. Whether “permanent good to the public” lies in doctrinal continuity or in the corrective reversal Justice Walker advocates remains the province of future courts—or legislators—to decide. What is certain is that the expanded point-of-sale doctrine now governs all West Virginia proceeds-based leases unless they unmistakably allocate post-production costs to the lessor.