Range Resources Faces $7M Class Action Over Royalty Underpayments

A group of Pennsylvania landowners have filed a class action lawsuit against Range Resources, one of the largest natural gas producers in the state. The plaintiffs, who leased their land to Range for drilling, allege that the company breached its contractual obligations by taking excessive deductions for post-production costs when calculating royalty payments for natural gas and natural gas liquids (NGLs).

At the heart of the dispute are the specific lease provisions that cap post-production cost deductions at $0.80, $0.75, or $0.72 per MMBTU (Million British Thermal Units). The landowners claim that Range consistently exceeded these caps, resulting in systematic underpayment of royalties across all affected leases.

Range acknowledged that it miscalculated royalty payments by applying excessive post-production cost deductions until October 2021. The company has since begun issuing reimbursement payments to affected lessors, covering the past four years in accordance with Pennsylvania's statute of limitations for breach of contract claims.

However, the plaintiffs argue that these reimbursements are insufficient, as Range's breaches were not isolated incidents but rather a consistent pattern of underpayment across all leases with similar cost cap provisions. By seeking class certification, the landowners aim to recover the full extent of underpayments for the entire class of affected lessors.

 

Potential Damages

The financial implications of this lawsuit for Range Resources could be substantial. Based on reasonable assumptions about the number of affected leases (204), average monthly production per lease (1,000 MMBTU), the period of underpayment (48 months), and the average excess deduction per MMBTU ($0.50), the estimated potential damage award could reach a staggering $7.05 million.

This estimate includes $4,896,000 in back royalties owed, $1,174,560 in prejudgment interest (assuming a 6% annual interest rate), and $979,200 in litigation costs and fees (estimated at 20% of the back royalty total). It is important to note that the actual damages could vary significantly depending on the specific details of each lease, the exact amounts deducted, and any additional costs or punitive damages awarded by the court.

Moreover, the reputational damage to Range Resources cannot be overlooked. The company's admission of miscalculations and the subsequent class action lawsuit may erode trust among lessors and raise concerns about Range's business practices. This could potentially impact Range's ability to secure future leases or negotiate favorable terms with landowners.

 

Legal Implications for Lease Terms and Collective Action

The Range Resources class action lawsuit underscores the critical importance of strict compliance with lease terms, particularly those relating to royalty calculations and post-production cost deductions. It highlights the potential for significant financial exposure when discrepancies occur, especially when lessors unite in class action lawsuits to hold operators accountable for breaching lease agreements.

This case also demonstrates the power of collective action in enforcing the rights of landowners. By banding together, the plaintiffs have leveraged their collective bargaining power to challenge Range's practices and seek redress for the alleged underpayments. If successful, this lawsuit could set a precedent for the oil and gas industry, emphasizing the need for transparent and accurate royalty payment practices.

Furthermore, the case may prompt other landowners to scrutinize their royalty statements more closely and question any deductions that appear to exceed contractual limits. This heightened scrutiny could lead to additional legal challenges for upstream companies that have not adhered strictly to lease terms.

 

Implications for Landmen and E&Ps

The Range Resources lawsuit serves as a stark reminder for landmen and upstream oil and gas companies about the paramount importance of transparency and compliance in royalty payment practices. It highlights the need for meticulous adherence to lease terms, particularly those related to post-production cost deductions.

Landmen play a crucial role in ensuring that lease provisions regarding cost deductions and royalty payments are clearly defined, understood, and agreed upon by all parties. They must work closely with legal teams to draft lease agreements that are unambiguous and leave no room for misinterpretation. Additionally, landmen should prioritize open communication with lessors, promptly addressing any concerns or questions related to royalty calculations.

For upstream firms, this case underscores the necessity of implementing robust systems to accurately track and allocate post-production costs. Companies must invest in technology and processes that ensure royalty calculations are transparent, auditable, and compliant with lease terms. Regular audits of royalty payment practices are essential to identify and rectify any discrepancies promptly, before they escalate into legal disputes.

Moreover, upstream companies should foster a culture of transparency and accountability, encouraging employees to report any irregularities or concerns related to royalty payments. Providing training and resources to ensure that all staff involved in royalty calculations understand the importance of compliance and the potential consequences of breaches can help mitigate the risk of costly mistakes.

 

Recommendations: 

To avoid the pitfalls encountered by Range Resources and minimize the risk of costly litigation, landmen and oil and gas companies should adopt a proactive approach to managing royalty payment practices:

1. Conduct thorough reviews of existing leases: Regularly review all active leases to ensure compliance with royalty payment provisions. Identify any discrepancies or ambiguities and address them promptly with the lessors.
2. Implement transparent and auditable systems: Invest in technology and processes that enable accurate tracking and allocation of post-production costs. Ensure that royalty calculations are transparent, auditable, and easily accessible to lessors.
3. Maintain open communication with lessors: Regularly communicate with lessors regarding royalty payments, providing clear explanations of any deductions or adjustments. Promptly address any concerns or questions raised by lessors, and work collaboratively to resolve any discrepancies.
4. Include clear dispute resolution mechanisms: Incorporate clear dispute resolution mechanisms in lease agreements to facilitate timely and efficient resolution of any issues that may arise. Consider including provisions for mediation or arbitration to avoid costly and lengthy court battles.
5. Stay informed about industry best practices: Keep abreast of industry best practices and legal developments related to royalty payments. Attend industry conferences, participate in workshops, and engage with professional organizations to stay informed and adapt to changing standards and regulations.

By proactively managing royalty payment practices, fostering open communication with lessors, and staying attuned to industry best practices, upstream companies can mitigate the risk of breaching lease agreements and protect themselves from potential class action lawsuits.

 

A Wake-Up Call on Sloppy Land Management

The Range Resources class action lawsuit is a wake-up call for the oil and gas industry, underscoring the critical importance of meticulous compliance with lease terms and transparent royalty payment practices. As the case unfolds, it will be closely watched by landmen, upstream companies, and leaseholders alike, as its outcome could have far-reaching implications for the industry.

This case should serve as a catalyst for introspection and action within the industry. Upstream companies must take a hard look at their royalty payment practices, identify any potential vulnerabilities, and take proactive steps to ensure compliance with lease terms. Landmen, too, must be vigilant in drafting clear and unambiguous lease agreements, fostering open communication with lessors, and advocating for transparent and accurate royalty calculations.

Ultimately, the Range Resources lawsuit underscores the importance of building and maintaining trust between upstream companies and landowners. By prioritizing transparency, compliance, and proactive problem-solving, the industry can foster a more collaborative and mutually beneficial relationship with lessors, minimizing the risk of costly legal battles and ensuring the long-term sustainability of oil and gas development.