BY JAMES LOEWENSTEIN (Staff Writer)
Published: July 1, 2013

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In response to numerous complaints made by local citizens, a group of Northern Tier lawmakers in the Pennsylvania House of Representatives is working on new legislation that would clarify state law regarding the minimum royalty payment for landowners.

The legislation, which would apply to existing as well as new leases, would prevent deductions from post-production costs from reducing royalty payments below 12 1/2 percent, said state Rep. Matt Baker (R-Bradford/Tioga), one of four state representatives who are working on the draft of the legislation.

Baker and the three other drafters of the bill, Tina Pickett (R-Bradford/Sullivan/Susquehanna), Sandra Major (R-Susquehanna/Wayne/Wyoming), and Garth Everett (R-Lycoming), say the proposed legislation is intended to directly respond to concerns by landowners who have drilling leases and whose royalty payments have decreased due to post-production costs, according to a press release issued over the weekend by the four state representatives.

"When landowners signed leases stating that they would receive one-eighth of the value of the gas from their properties, they were not told that their share could be drastically reduced by a gas company's accounting magic," Everett said. "All the legislation we plan to introduce will do is help to make sure that landowners in Pennsylvania get treated fairly and receive what they were promised when they signed their leases."

Long before the Marcellus Shale was discovered as a major natural gas deposit, a 1979 state law guaranteed a minimum royalty payment of one-eighth for oil, natural gas, or gas of any other designation, the press release said. This guaranteed minimum royalty payment was enacted to ensure fairness and protect landowners from deceptive leases, the release said.

"Our goal with this legislation is in seeking fairness and in making sure that landowners receive the minimum royalty, as guaranteed by state law, and that companies do not transfer post-production costs from that payment," Pickett said.

Recently, some companies have attempted to reduce royalties below the statutory minimum by transferring post-production costs to royalty owners, the release said. These post-production costs, which are incurred between the wellhead and a final market point of sale, typically include dehydration and transportation, the release said. When these expenses are deducted, final payments often result in royalty shares of less than one-eighth (12.5 percent), the release said.

"This is an issue that impacts many residents in the Northern Tier who have entered into agreements with gas companies on the premises that they would be receiving a set royalty payment," said Baker. "As state legislators, we are working to ensure fair treatment and protection of our landowners."

"The bottom line is that the amount of the royalty payments promised landowners should not be lessened in order to offset costs the natural gas companies incur on their end," said Major.

The pending legislation would clarify that the deduction of post-production costs from unconventional wells may not result in royalty payments less than the guaranteed minimum, the release said.

The proposed legislation "won't be an easy slam dunk" to get passed, because the four lawmakers want the legislation to apply to existing leases as well as leases that would be drawn up in the future, Pickett said in an interview.

"Because of constitutional protections, changing the terms of current contracts (leases) is difficult," Baker explained. "However, this proposal (proposed legislation) is intended to apply to all leases (including existing ones)."

"We'll try to get as many legal eyes as we can" to review the draft of the bill before it is introduced in the Legislature, Pickett said.

Gas leases vary in their language, Pickett said, adding that she hopes the proposed legislation would apply to "all leases, if not the majority" of them.

Currently, the four state representatives are looking for other state legislators to co-sponsor the proposed legislation, Pickett said.

The legislation might be ready to be introduced in the Legislature as a House bill in a month, she said.

Pickett noted that the four state representatives from the Northern Tier's Marcellus Shale region are all working on the legislation. "We're making it a Northern Tier joint effort," she said.

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