Arkansas Supreme Court Affirms Oil and Gas Commission’s Authority to Set Reasonable Royalty Rate

G. Alan Perkins and Kimberly D. Logue of PPGMR Law successfully represented SWN Production (Arkansas) in the affirmance of an amended AOGC integration order.  The Order set aside a mineral owners’ attempt to set an inflated royalty rate through self-dealing leases, elect to go non-consent, and force the operator to pay the inflated royalty.  AOGC agreed that the royalty rate was unreasonable, and reduced the rate the operator was required to pay during recoupment to a reasonable royalty rate based on market conditions.  The appeal concerned a dispute between operator SWN Production and a group of integrated mineral owners who opted not to participate in the cost of completing a well.  The mineral owners attempted to force a 25% royalty rate by executing self-dealing leases with their own oil and gas companies and arguing that SWN Production should be bound by that royalty rate during the recoupment period.  At SWN Production’s request, the AOGC amended its integration order for the unit and ordered that the mineral owners could receive no more than a 1/7th royalty based on the current market.  The mineral owners and their related companies appealed the Order arguing that the AOGC lacked statutory authority to make such an adjustment.  The case was originally dismissed on sovereign immunity grounds.  The Supreme Court reversed in 2018.  On remand, the trial court affirmed the AOGC’s order setting a reasonable royalty rate.  Following a second appeal, the Supreme Court has now affirmed on the merits, holding that the AOGC has statutory authority under Ark. Code Ann. §§ 15-71-110(a)(1) and 15-72-304(a) to enter integration orders and also to ensure a reasonable royalty rate.  The Court observed that state agencies possess such powers as are conferred by statute or are necessarily implied from a statute.  Justices Hart, Kemp, and Baker dissented.