Royal pain Production costs cut into payments to gas leaseholders
Some natural gas lease-holders don’t feel like royalty.
Under a Pennsylvania law enacted 37 years ago, property owners with said leases are to receive a minimum 12.5 percent royalty for gas extracted from their properties. Some leases, however, don’t prevent companies from deducting expenses from leaseholders and mineral owners for processing, condensing and transporting gas – cutting into the 12.5 percent, sometimes deeply, at this time of diminished production.
“Some landowners are getting checks with zeros,” said state Rep. Brandon Neuman, R-North Strabane.
Neuman’s constituency is composed of eight municipalities in Washington County, which, along with Greene County, may have a keener interest than usual in what transpires in Harrisburg in coming weeks. House Bill 1391, the Minimum Royalty Bill, will be before state representatives when they reconvene Monday along with the Senate. The would-be legislation, in essence, would establish a firm 12.5 percent minimum royalty for leaseholders.
Minimum royalty bills, in some form, have been considered – but not passed – in the House over the past four years, including the past two two-year legislative sessions. Twenty amendments have been added to the one now being considered.
Opponents contend that the bill is unconstitutional, that it flies in the face of certain contracts. Some oil and gas companies have said they would sue if the bill becomes law.
The Marcellus Shale Coalition, a trade group representing roughly 300 oil and gas producers and their supply chain partners, weighed in on the matter. Spokeswoman Erica Clayton Wright said in a statement:
“We understand and share the frustration being voiced by some mineral owners that depressed commodity prices along the northern tier have had a negative impact on revenue, investment, jobs and royalty payments. Mineral owners are our partners in resource development and share in the success and challenges that the market brings.
“That said, a legislative response to this issue will not bring the relief that some are promising, as a lease is a binding contract and any disputes that may arise will always be most effectively resolved by the courts.
“With the current market realities putting incredible pressure on energy producers and royalty owners, it’s absolutely critical that lawmakers turn their attention to encouraging natural gas infrastructure development and use, especially among our manufacturers and power generators.”
Rep. Garth Everett, R-Lycoming, is the prime sponsor of HB1391. Unconventional drilling is prevalent in his region, north-central Pennsylvania, especially Susquehanna, Bradford and Lycoming counties, where there is a healthy share of disgruntled landowners.
The oil and gas industry, of course, was much different in 1979, when the Guaranteed Minimum Royalty Act was enacted. Unconventional (horizontal) drilling, hydraulic fracturing (fracking) and Marcellus Shale were little known then – if at all.
Nearly 30 years later, that law became the focus of a state Supreme Court case, Kilmer vs. Elexco Land Services Inc. A group of landowners filed a complaint against the gas company after it deducted post-production costs from the royalties. Pennsylvania’s top court ruled against the plaintiffs in 2010.
“The court chose not to make a law,” Everett said. “Since that decision, more companies have been using the practice of deducting post-production costs to go below the 12.5 percent minimum (on royalties). It’s legal to do that until we change the law.”
Neuman and fellow representative Pam Snyder, D-Jefferson – who serve in the heart of Marcellus Shale – support the current House measure.
“Landowners in our area are feeling they’re not being treated fairly. The option before us is to help the landowners,” said Neuman, a member of the House Environmental Resources & Energy Committee.
“Whenever you’re dealing with someone’s livelihood and they believe they are being treated unfairly, there’s a sense of anger.”
Neuman added that royalty reductions weren’t really an issue “until the price of gas really took a hit. When the price of gas goes up, I don’t think this is an issue.”
A sense of anger, apparently, resonates south of Washington County, as well.
“I have heard complaints from landowners in Greene County, that a lot of people want to see this voted into law,” Snyder said. “I would vote yes on the current bill as it came out of committee. We have to wait and see (what happens with the amendments).
“I feel the 12.5 percent minimum should be firm, because that’s how the law reads.”
Neuman said he has attended a number of meetings – organized “from both sides” – on this issue, including a town hall session in North Franklin Township last month. It was organized by the Pennsylvania chapter of the National Association of Royalty Owners and drew about 75 people, chapter President Jackie Root said.
Root, who is based in northeastern Pennsylvania, recently returned from NARO’s national convention and said royalty minimums are “an issue in all states.” She is particularly concerned about the one in hers.
“A lot of people are being severely affected by the deductions, which are well below 12.5 percent,” she said. “The law has a clear definition, and it does not mean owners get zero or less. I know one person who got a check for negative $3,500.
“We want what’s fair. Marcellus Shale is the cheapest gas play to drill in the United States, yet companies not only take 87.5 percent, they take from royalties. If an oil and gas company can’t make a profit on 87.5 percent, maybe they should not be developing.”
Root said she is “pretty confident we’ll have the votes to pass (the bill) – if it gets to the floor.” Her primary concerns about passage are industry lobbyists and the number of amendments that, ultimately, may prevent HB 1391 from reaching the House floor.
Everett likewise is optimistic, but with a large measure of caution.
“If the bill gets to the floor, it passes,” he said. “But when there are well-funded and powerful forces opposing it … they are formidable opponents, to say the least. They have lot more lawyers and lobbyists.”