Bill aims to curb royalty check deductions

• Marie Cusick
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  Marie Cusick was the Harrisburg reporter for StateImpact Pennsylvania.

State Rep. Garth Everett (R-Lycoming) has introduced a bill aimed at dealing with widespread allegations some gas companies are cheating landowners out of royalties.
House Bill 1684 would amend the 1979 Guaranteed Minimum Royalty Act in an effort to limit companies from deducting post-production costs from royalty checks.
Post-production costs are the expenses involved in processing and transporting gas from the well to the market.
Although the 1979 law requires oil and gas companies to give a minimum royalty of 1/8th (or 12.5 percent), many landowners have been complaining recently they are receiving far less.
They have accused some companies– particularly Chesapeake Energy— of withholding significant amounts of money and charging them for the post-production costs.
Chesapeake recently agreed to a $7.5 million settlement in a class action lawsuit over the issue.
In 2010, the state Supreme Court ruled that it is legal for companies to take the deductions, but noted the 1979 law did not define the word “royalty”– which complicated the matter of how the money was to be calculated.
In the unanimous opinion, the justices wrote,”The General Assembly is the branch of government best suited to weigh the public policies underlying the determination of the proper point of royalty valuation.”
The crux of the confusion and debate lies in where the exact point of sale is for natural gas. Basically, landowners get 12.5 percent of what?
The point of sale for gas can be a surprisingly difficult question to answer.
Sometimes the price can be at the wellhead– which means companies can deduct the expenses involved in processing and moving the gas.
Everett’s bill would instead require the sale point to be when the gas enters a marketable form at an interstate pipeline.
“So all of those costs have already been paid by the gas producer,” he says, “Not the landowner.”
He says he wants to ensure landowners get what they were promised.
“Back in 2005 and 2006 when the big leasing boom was going on, there were landmen all over the Northern Tier, saying, ‘You don’t need to worry about all this stuff in the lease, because Pennsylvania has a guaranteed minimum royalty.'”
“All this stuff in the lease” sometimes turned out to be clauses allowing companies to take the deductions.
Other landowners negotiated for language explicitly prohibiting the deductions, but many complain it’s still happening anyway.
The Chesapeake class action settlement would require landowners to pay nearly three-quarters of the expenses, instead of 100 percent.
“A lot of other companies are looking at that [settlement] and saying, ‘Maybe that is what’s reasonable.'” says Everett, “And some companies are starting to nibble a little more at the post-production costs.”
The state’s gas industry trade group, the Marcellus Shale Coalition, calls Everett’s bill a vast legislative overreach.
“Adding additional costs to the way industry and our partners operate only serves to undermine development in Pennsylvania and make the Commonwealth’s landscape less competitive,” said MSC spokesman Steve Forde in an email to StateImpact, “In the end, this would be a loss for businesses, landowners, and families alike.”
Everett argues that when the royalty money stays with gas companies instead of landowners, it’s a loss to the entire state.
“These proceeds should be coming to our landowners. It’s spent in Pennsylvania. It’s taxed in Pennsylvania.”
HB 1684 would apply to leases signed since 1979. Although it would not return money already deducted, it would apply to royalty calculations for those leases going forward.
If a landowner has negotiated a higher royalty rate — like 15 percent, for example– the bill does not prohibit a company from taking deductions, but the rate can’t fall below 12.5 percent.

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