Meadville Tribune

June 30, 2013

State lawmakers take on shale drilling royalty payments

By John Finnerty
Meadville Tribune

HARRISBURG — Rural landowners who say they’re getting short-changed in royalty payments from gas companies in the Marcellus Shale region have gotten the attention of lawmakers in Harrisburg.

The amounts involved may be surprising.

The Allegheny Institute for Public Policy estimated that Pennsylvania landowners received $731 million in royalty payments last year.

While advocates repeatedly note that many landowners only get royalty payments of about $500 a month, larger property owners may be entitled to payments of thousands and thousands of dollars.

Sen. Gene Yaw, chairman of the Senate environmental resources and energy committee, convened a public hearing to explore the concerns. The session was attended by rural lawmakers in both the Senate and House who have been besieged with complaints from landowners.

Yaw, R-Lycoming County, said problems with confusing or ambiguous royalty stubs and excessive post-production cost deductions have significantly impacted many leaseholders throughout his district.

“In some cases, these costs have caused royalty payments to be as low as 1.47 percent, well below the 12.5 percent guaranteed minimum,” Yaw said.

“We need the industry. We don’t want to slow the train,” said Jackie Root of the Pennsylvania chapter of the National Royalty Owners Association. “But business partners make mistakes. Business partners sometimes don’t do the right thing.”

Her organization is lobbying for changes in regulations to arm property owners with leverage to ensure they are being treated fairly.

When a company drills on your land, the deal essentially works like this:

The company pays to drill the well and in exchange, the company and landowner split proceeds from gas produced by the well. Basically, the landowner is supposed to get the money from every eighth gallon of gas produced by the well.

A 2010 court decision established that gas companies are allowed to deduct for post-production expenses, including the cost of processing the gas or transporting it to market. Gas companies have interpreted the rules regarding royalty deductions differently, though. Those who testified before the Senate committee identified Chesapeake Energy as being the most aggressive about subtracting from property owners’ checks, according to advocates for landowners.

Chesapeake was invited to the Senate hearing but declined to participate, a legislative aide said. A Chesapeake spokesman also declined to comment for this story.

Sen. Elder Vogel, R-Lawrence County, said the complaints he’s heard have suggested problems are limited to the one company and asked why there was no industry standard regarding how deductions would be made.

The county commissioners in Bradford, Susquehanna and Sullivan counties have all passed resolutions asking the state to make it illegal for gas companies to take deductions that leave landowners with royalties less than the one-eighth share.

The Pennsylvania Farm Bureau has compiled samples showing cases where the deductions wiped out much or all of the royalty payments.

The amounts are not chump change either: In one case found by the Farm Bureau, the well had produced $41,861 worth of gas, but Chesapeake Appalachia deducted $28,249 before making a royalty payment of $13,611.

In another case, the Farm Bureau’s Mike Evanish noted that the gas company post-production deductions consumed 88 percent of the royalty payment. The well had produced $14,481 worth of gas. The company deducted $12,790, leaving the landowner with a royalty payment of $1,690.

“The problem is that most royalty owners cannot afford to file a lawsuit on an oil company that has lawyers on their staff,” said David Sikes, president of the National Association of Royalty Owners in testimony before the Senate committee.

Yaw authored a measure that would create rules regarding exactly what kind of information gas companies are supposed to provide landowners with royalty payments. The bill passed the Senate earlier this year and received final approval in the House Friday evening.

Other than providing a framework for companies to disclose what they are doing, the bill doesn’t attempt to prevent the drillers from making royalty deductions. Lawmakers have indicated that additional legislation targeting the complaints is planned.



Finnerty works in the Harrisburg Bureau for Community Newspapers Holding Inc. He can be reached by email at jfinnerty@cnhi.com or on Twitter @cnhipa.