WEST virginia legislature

2018 regular session

Introduced

House Bill 4574

By Delegate Maynard

[Introduced February 13, 2018; Referred
to the Committee on Energy then Finance.]

A BILL to amend and reenact §11-13A-3a and $11-13A-5a of the Code of West Virginia, 1931, as amended, to amend and reenact §37-7-2 of said code; and to amend said code by adding thereto a new article, designated §37-16-1, §37-16-2, §37-16-3, §37-16-4, §37‑16‑5, and §37-16-6, all relating to development of interests in natural gas and oil; providing an additional measure of tax for the severance of natural gas and providing for distribution of the revenues from the additional measure to be used to contribute to teacher salaries in all counties; establishing a special fund for receipt of money from the additional measure of severance tax; providing an exception to waste and trespass for certain oil or natural gas developments; providing declarations of public policy and legislative findings; defining terms; providing for development of oil and natural gas estates by persons owning three fourths of the royalty interests; providing that nonconsenting cotenants may elect a production royalty interest or a working interest share of production; providing that interests owned by unknown or unlocatable owners be reserved, reported, and deposited in a special fund; creating the Unknown and Unlocatable Interest Owners Fund, to be administered by the State Treasurer in conjunction with the West Virginia Uniform Unclaimed Property Act; empowering the Oil and Gas Conversation Commission to enforce certain provisions hereof and to make determinations of reasonable terms and conditions; granting rulemaking authority to the Oil and Gas Conversation Commission; providing liability protection for damages resulting from the lawful use or development of oil or natural gas mineral property; establishing basic provisions for determinations of royalties and declaring that royalties shall not be reduced by production expenses incurred by an operator; specifying damages for injury to surface property; and limiting liabilities for nonconsenting cotenants.

Be it enacted by the Legislature of West Virginia:

CHAPTER 11. TAXATION.

ARTICLE 13A. SEVERANCE AND BUSINESS PRIVILEGE TAX ACT.

§11-13A-3a. Imposition of tax on privilege of severing natural gas or oil; Tax Commissioner to develop a uniform reporting form.

(a) Imposition of tax. -- For the privilege of engaging or continuing within this state in the business of severing natural gas or oil for sale, profit or commercial use, there is hereby levied and shall be collected from every person exercising such privilege an annual privilege tax: Provided, That effective for all taxable periods beginning on or after January 1, 2000, there is an exemption from the imposition of the tax provided in this article on the following: (1) Free natural gas provided to any surface owner; (2) natural gas produced from any well which produced an average of less than five thousand cubic feet of natural gas per day during the calendar year immediately preceding a given taxable period; (3) oil produced from any oil well which produced an average of less than one-half barrel of oil per day during the calendar year immediately preceding a given taxable period; and (4) for a maximum period of ten years, all natural gas or oil produced from any well which has not produced marketable quantities of natural gas or oil for five consecutive years immediately preceding the year in which a well is placed back into production and thereafter produces marketable quantities of natural gas or oil.

(b) Rate and measure of tax. -- The base tax imposed in subsection (a) of this section shall be five percent of the gross value of the natural gas or oil produced, as shown by the gross proceeds derived from the sale thereof by the producer, except as otherwise provided in this article, and the tax imposed on the severance of natural gas produced after June 30, 2018, shall also include an additional amount, to be known as the natural gas severance surtax, of 4.7 cents per thousand cubic feet of natural gas produced.

(c) Tax in addition to other taxes. -- The tax imposed by this section shall apply to all persons severing gas or oil in this state, and shall be in addition to all other taxes imposed by law.

(d)(1) The Legislature finds that in addition to the production reports and financial records which must be filed by oil and gas producers with the State Tax Commissioner in order to comply with this section, oil and gas producers are required to file other production reports with other agencies, including, but not limited to, the office of oil and gas, the Public Service Commission and county assessors. The reports required to be filed are largely duplicative, the compiling of the information in different formats is unnecessarily time consuming and costly, and the filing of one report or the sharing of information by agencies of government would reduce the cost of compliance for oil and gas producers.

(2) On or before July 1, 2003, the Tax Commissioner shall design a common form that may be used for each of the reports regarding production that are required to be filed by oil and gas producers, which form shall readily permit a filing without financial information when such information is unnecessary. The commissioner shall also design such forms so as to permit filings in different formats, including, but not limited to, electronic formats.

(3) Effective July 1, 2006, this subsection shall have no force or effect.

§11-13A-5a. Dedication of ten percent of oil and gas severance tax for benefit of counties and municipalities; distribution of major portion of such dedicated tax to oil and gas producing counties; distribution of minor portion of such dedicated tax to all counties and municipalities; reports; rules; special funds in the office of State Treasurer; methods and formulae for distribution of such dedicated tax; expenditure of funds by counties and municipalities for public purposes; and requiring special county and municipal budgets and reports thereon.

(a) Effective July 1, 1996, five percent of the tax attributable to the severance of oil and gas imposed by §11-13A-3a of this code is hereby dedicated for the use and benefit of counties and municipalities within this state and shall be distributed to the counties and municipalities as provided in this section Effective July 1, 1997, and thereafter, 10 percent of the base tax attributable to the severance of oil and gas imposed by §11-13A-3a of this code is hereby dedicated for the use and benefit of counties and municipalities within this state and shall be distributed to the counties and municipalities as provided in this section. Effective July 1, 2018, the full amount of the natural gas severance surtax imposed by §11-13A-3a of this code shall be deposited in a special fund hereby created in the State Treasury and hereby named as the “Natural Gas Severance Teacher Pay Raise Fund.”

(b) Seventy-five percent of this dedicated the base severance tax shall be distributed by the State Treasurer in the manner specified in this section to the various counties of this state in which the oil and gas upon which this additional tax is imposed was located at the time it was removed from the ground. Those counties are referred to in this section as the “oil and gas producing counties”. The remaining 25 percent of the net proceeds of this additional the base severance tax on oil and gas shall be distributed among all the counties and municipalities of this state in the manner specified in this section.

(c) The Tax Commissioner is hereby granted plenary power and authority to promulgate reasonable rules requiring the furnishing by oil and gas producers of such additional information as may be necessary to compute the allocation required under the provisions of subsection (f) of this section. The Tax Commissioner is also hereby granted plenary power and authority to promulgate such other reasonable rules as may be necessary to implement the provisions of this section.

(d) In order to provide a procedure for the distribution of 75 percent of the dedicated tax on oil and gas to the oil and gas producing counties, the special fund known as the Oil and Gas County Revenue Fund established in State Treasurer's office by chapter 242, Acts of the Legislature, 1995 regular session, as amended and reenacted in the subsequent act of the Legislature, is hereby continued. In order to provide a procedure for the distribution of the remaining 25 percent of the dedicated tax on oil and gas to all counties and municipalities of the state, without regard to oil and gas having been produced in those counties or municipalities, the special fund known as the all counties and municipalities revenue fund established in State Treasurer's office by chapter 242, Acts of the Legislature, 1995 regular session, as amended and reenacted in the subsequent act of the Legislature, is hereby redesignated as the “All Counties and Municipalities Oil and Gas Revenue Fund” and is hereby continued.

Seventy-five percent of the dedicated base severance tax on oil and gas shall be deposited in the Oil and Gas County Revenue Fund and 25 percent of the dedicated base severance tax on oil and gas shall be deposited in the All Counties and Municipalities Oil and Gas Revenue Fund, from time to time, as the proceeds are received by the Tax Commissioner. The moneys in the funds shall be distributed to the respective counties and municipalities entitled to the moneys in the manner set forth in subsection (e) of this section.

(e) The moneys in Oil and Gas County Revenue Fund and the moneys in the All Counties and Municipalities Oil and Gas Revenue Fund shall be allocated among and distributed annually to the counties and municipalities entitled to the moneys by the State Treasurer in the manner specified in this section. On or before each distribution date, the State Treasurer shall determine the total amount of moneys in each fund which will be available for distribution to the respective counties and municipalities entitled to the moneys on that distribution date. The amount to which an oil and gas producing county is entitled from the Oil and Gas County Revenue Fund shall be determined in accordance with subsection (f) of this section, and the amount to which every county and municipality shall be entitled from the All Counties and Municipalities Oil and Gas Revenue Fund shall be determined in accordance with subsection (g) of this section. After determining, as set forth in subsections (f) and (g) of this section, the amount each county and municipality is entitled to receive from the respective fund or funds, a warrant of the State Auditor for the sum due to the county or municipality shall issue and a check drawn thereon making payment of the sum shall thereafter be distributed to the county or municipality.

(f) The amount to which an oil and gas producing county is entitled from the Oil and Gas County Revenue Fund shall be determined by:

(1) In the case of moneys derived from tax on the severance of gas:

(A) Dividing the total amount of moneys in the fund derived from tax on the severance of gas then available for distribution by the total volume of cubic feet of gas extracted in this state during the preceding year; and

(B) Multiplying the quotient thus obtained by the number of cubic feet of gas taken from the ground in the county during the preceding year; and

(2) In the case of moneys derived from tax on the severance of oil:

(A) Dividing the total amount of moneys in the fund derived from tax on the severance of oil then available for distribution by the total number of barrels of oil extracted in this state during the preceding year; and

(B) Multiplying the quotient thus obtained by the number of barrels of oil taken from the ground in the county during the preceding year.

(g) The amount to which each county and municipality is entitled from the All Counties and Municipalities Oil and Gas Revenue Fund shall be determined in accordance with the provisions of this subsection. For purposes of this subsection “population” means the population as determined by the most recent decennial census taken under the authority of the United States:

(1) The Treasurer shall first apportion the total amount of moneys available in the All Counties and Municipalities Oil and Gas Revenue Fund by multiplying the total amount in the fund by the percentage which the population of each county bears to the total population of the state. The amount thus apportioned for each county is the county's “base share”.

(2) Each county's base share shall then be subdivided into two portions. One portion is determined by multiplying the base share by that percentage which the total population of all unincorporated areas within the county bears to the total population of the county, and the other portion is determined by multiplying the base share by that percentage which the total population of all municipalities within the county bears to the total population of the county. The former portion shall be paid to the county and the latter portion shall be the “municipalities' portion” of the county's base share. The percentage of the latter portion to which each municipality in the county is entitled shall be determined by multiplying the total of the latter portion by the percentage which the population of each municipality within the county bears to the total population of all municipalities within the county.

(h) Moneys distributed to any county or municipality under the provisions of this section, from either or both special funds, shall be deposited in the county or municipal general fund and may be expended by the county commission or governing body of the municipality for such purposes as the county commission or governing body shall determine to be in the best interest of its respective county or municipality: Provided, That in counties with population in excess of 200,000, at least 75 percent of the funds received from the oil and gas county revenue fund shall be apportioned to and expended within the oil and gas producing area or areas of the county, the oil and gas producing areas of each county to be determined generally by the State Tax Commissioner: Provided, however, That the moneys distributed to any county or municipality under the provisions of this section shall not be budgeted for personal services in an amount to exceed one fourth of the total amount of the moneys.

(i) On or before March 28, 1997, and each March 28, each county commission or governing body of a municipality receiving any such moneys shall submit to the Tax Commissioner on forms provided by the Tax Commissioner a special budget, detailing how the moneys are to be spent during the subsequent fiscal year. The budget shall be followed in expending the moneys unless a subsequent budget is approved by the State Tax Commissioner. All unexpended balances remaining in the county or municipality general fund at the close of a fiscal year shall remain in the general fund and may be expended by the county or municipality without restriction.

(j) On or before December 15, 1996, and each December 15 thereafter, the Tax Commissioner shall deliver to the Clerk of the Senate and the Clerk of the House of Delegates a consolidated report of the budgets, created by subsection (i) of this section, for all county commissions and municipalities as of July 15, of the current year.

(k) The State Tax Commissioner shall retain for the benefit of the state from the dedicated base tax attributable to the severance of oil and gas the amount of $35,000 annually as a fee for the administration of the additional tax by the Tax Commissioner.

(l) The Treasurer shall make regular distributions from the Natural Gas Severance Teacher Pay Raise Fund to every county in this state in proportion to the percentage which the population of each county bears to the total population of the state. Money distributed to a county according to this subsection shall be deposited in the county general fund, but shall be accounted separately from other revenue or distributions into the general fund. The money distributed from the Natural Gas Severance Teacher Pay Raise Fund shall be used solely for compensation of public education teachers.

CHAPTER 37. REAL PROPERTY.

ARTICLE 7. WASTE.

§37-7-2. Waste by cotenant.

If a tenant in common, joint tenant, or parcener commit waste, he or she shall be liable to his or her cotenants, jointly or severally, for damages: Provided, That if the tenants in common, joint tenants, or parceners representing a majority of the ownership consent to lawful use of the property, such use shall be permissible, shall not constitute waste, and the cotenants, their agents, and assigns shall not be liable for damages if an accounting is provided and a pro rata share of the revenues and costs resulting from such use is distributed to or reserved for each tenant in common, joint tenant, or parcener who has not consented to the lawful use.

ARTICLE 16.  MINERAL development by cotenants.

§37-16-1.  Declaration of public policy; legislative findings.

It is declared to be the public policy of this state and in the public interest to:

(1) Foster, encourage and promote exploration for and development, production, and conservation of oil, natural gas, and their constituents;

(2) Prohibit waste of oil, natural gas, and their constituents and unnecessary surface loss of oil, natural gas, and their constituents;

(3) Encourage the maximum recovery of oil, natural gas, and their constituents;

(4) Safeguard, protect, and enforce the correlative rights of operators and mineral owners in that each such operator and mineral owner may obtain his or her just and equitable share of production;

(5) Safeguard, protect, and enforce the integrity of the passive royalty owner’s interest in his or her minerals.

(6) Safeguard, protect, and enforce the rights of surface owners; and

(7) Protect and enforce the clear provisions of contracts lawfully made.

§37-16-2.  Definitions.

As used in this article:

“Consenting Cotenant” means a tenant in common, joint tenant, or parcener having an interest in the mineral property who consents in writing to a lawful use of the mineral property through a bona fide lease made in an arms-length transaction;

“Nonconsenting Cotenant” means an owner who for any reason chooses not to consent to a lawful use of the mineral property agreed to by persons owning, cumulatively, at least an undivided three fourths interest in and to the mineral property;

“Operator” means any owner of at least an undivided three fourths interest of the right to develop, operate and produce oil, natural gas, or their constituents, and to appropriate the oil, natural gas, or their constituents produced therefrom;

“Post-production expense” means an expense or cost subsequent to production including, but not limited to, an expense or cost related to severance taxes, pipelines, surface facilities, telemetry, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or natural gas and their constituents;

“Prorata share” means the allocation of revenues and costs attributable to the lawful use of a mineral property that is calculated based on the proportion that the net acreage of such ownership interest bears to the total net acreage in the mineral property, in a development or production unit that includes, all or part of, that mineral property;

“Royalty owner” means any owner in place of oil or natural gas and their constituents, owners of oil or natural gas leasing rights, and owners vested with any leasehold estate less than 25 percent of the total, to the extent that the owners are not an operator as defined in this section. A royalty owner does not include a person whose interest is limited to: (A) A working interest in a wellbore only; (B) overriding royalties; (C) nonparticipating royalty interests; (D) nonexecutive mineral interests; or (E) net profit interests; and

“Unknown or unlocatable interest owner” means a person vested with a present ownership interest in the oil or natural gas and their constituents in place in a mineral property whose present identity or location cannot be determined from:

(A) A reasonable review of the records of the clerk of the county commission, the sheriff, the assessor, and the clerk of the circuit court in the county or counties in which the interest is located, and includes unknown heirs, successors and assigns known to be alive;

(B) A reasonable inquiry in the vicinity of the owner’s last known place of residence;

(C) A diligent inquiry into known interest owners in the same tract; and

(D) A reasonable review of available Internet resources commonly utilized by the industry.

§37-16-3.  Lawful use and development by cotenants; election of interests; reporting and remitting of interests of unknown or unlocatable cotenants; establishment of terms and provisions for development.

(a) If an operator or owner makes reasonable efforts to negotiate with all royalty owners in an oil or natural gas mineral property and three fourths or more of the royalty owners, including without limitation tenants in common, joint tenants or coparceners, consent to the lawful use or development of the oil or natural gas mineral property, the operator’s or owner’s use or development of the oil or natural gas mineral property is permissible, is not waste, and is not trespass. In that case, the consenting cotenants and their lessees, operators, agents, contractors or assigns are not liable for damages for waste or trespass due to the lawful use or development if they pay nonconsenting royalty owners in accordance with subsections (b) and (c) of this section, reserve the amounts specified in subsection (d) of this section for the benefit of unknown or unlocatable interest owners, and report and remit the reserved interests as provided in subsection (d) of this section. 

(b) A nonconsenting cotenant is entitled to receive, based on his or her election, either:

(1) A production royalty, paid on the gross proceeds received at the first point of sale to an unaffiliated third-party purchaser and free of post-production expenses, equal to the highest royalty percentage paid to his or her consenting cotenants in the same mineral property, and lease bonus and delay rental payments equal to the average amount paid to such consenting cotenants calculated on net mineral acre basis; or

(2) To participate in the development and receive his or her pro-rata share of the revenue and cost equal to his or her share of production attributable to the tract or tracts being developed according to the interest of such nonconsenting cotenant, exclusive of any royalty or overriding royalty reserved in any lease, assignments thereof or agreements relating thereto, after the market value of such nonconsenting cotenant’s share of production, exclusive of such royalty and overriding royalty, equals double the share of such costs payable or charged to the interest of such nonconsenting cotenant.

(c) A nonconsenting cotenant shall have 45 days following the operator’s written delivery of its best and final lease offer in which to make his or her election for either a production royalty or a revenue share as specified in subsection (b) of this section.  If the nonconsenting cotenant fails to deliver a written election to the operator prior to the expiration of such 45 day period, he or she shall be deemed to have made the election set forth in subdivision (1), subsection (b), of this section.

(d) Unknown or unlocatable interest owners are deemed to have made the election provided by subdivision (1), subsection (b) of this section and are only entitled to receive the amount provided by that subdivision.  Within 120 days from the date upon which an amount is reserved for an unknown or unlocatable interest owner pursuant to subsection (a) of this section, the consenting cotenants and their lessees, operators, agents, contractors or assigns shall make a report to the State Treasurer as the Unclaimed Property administrator and each calendar quarter, thereafter, concerning each reserved interest for each unknown or unlocatable interest owner and shall concurrently remit the amount reserved, in accordance with the provisions of article two of this chapter, article eight of chapter thirty-six of this code and as determined by the State Treasurer. The quarterly report and remittances shall be submitted by the first day of the month following each calendar quarter.

(e) Unless otherwise agreed to in writing or defined by this section, any nonconsenting cotenant and any unknown or unlocatable interest owner who elects or is deemed to elect a production royalty under subdivision (1), subsection (b), of this section is subject to and shall benefit from the other terms and provisions defined by the leasehold executed by a consenting cotenant which contains terms and provisions most favorable to the nonconsenting cotenant or the unknown or unlocatable interest owner: Provided, That nonconsenting cotenants and unknown or unlocatable interest owners shall not be subject to or liable under any warranty of title.

(f) Unless otherwise agreed to in writing or defined by this section, a nonconsenting cotenant who elects to participate under subdivision (2), subsection (b), of this section, shall be subject to and shall benefit from other terms and provisions determined to be just and reasonable by the Oil and Gas Conservation Commission in a manner similar to the provisions of §22C-9-1 et seq. of this code governing deep wells. The commission may propose rules for legislative approval in accordance with the provisions of §29A-3-1 et seq. of this code, to implement and make effective the provisions of this section and the powers and authority conferred and the duties imposed upon the commission under the provisions of this section.

§37-16-4.  Damages for injury to surface property.

Where an operator or operators have the right to develop multiple contiguous oil and gas leases, the operator may develop these leases jointly by horizontal drilling unless the development is expressly prohibited by the terms of a lease or agreement. In addition to the surface damages payable pursuant to §22-6B-3 of this code and any surface damages owed under common law, the operator shall pay the surface owner suffering damage to his or her surface tract the greater of $100,000 or the value of $100,000 in July 2018 adjusted by the change in the consumer price index as of the date of the damage for each well pad constructed by the operator that results in damage to the surface owner’s tract.

§37-16-5.  Royalties for jointly-developed minerals.

(a) In determining the royalty where multiple contiguous leases are developed under §37-16-3 of this code, in the absence of specific agreement language to the contrary, the production shall be allocated to each lease in the proportion that the net acreage of each lease bears to the total net acreage of the jointly developed tracts.

(b) In the absence of specific agreement language to the contrary, the royalty for all royalty owners of the acreage jointly developed under §37-16-3 of this code shall not be reduced for post-production expenses incurred by the operator. Nothing in this subsection is intended to impact royalties due for wells drilled prior to the effective date of the original enactment of this chapter.

§37-16-6.  Limitation of liability for nonconsenting cotenant.

A nonconsenting cotenant shall have no liability for bodily injury, property, damage, or environmental claims arising out of site preparation, mineral extraction, maintenance, reclamation, and other operations with respect to minerals produced from the cotenant’s property.

NOTE: The purpose of this bill is to establish and define rights of mineral estate owners, surface owners, royalty owners, and operators for development of oil and gas interests through cotenancy in production, to authorize development of oil and gas through agreements for horizontal well drilling, and to levy an additional amount in tax for the severance of natural gas to be distributed to all counties and used to supplement teacher salaries.

Strike-throughs indicate language that would be stricken from a heading or the present law and underscoring indicates new language that would be added.