Pennsylvania legislator to introduce bill to stop post-production deductions

Michele Brooks, a member of the Pennsylvania House of Representatives, plans to introduce legislation to prevent oil and gas companies from deducting post-production costs from royalties paid to landowners. Currently the state’s Guaranteed Minimum Royalty Act (58 PA. STAT. ANN. § 33 (West 2010) mandates that landowners receive at least 12.5% of the gas produced from a well; however, in reality, the landowners receive payments based on the value of the gas. How the royalty payment is calculated has led to many questions regarding whether post-production costs should be deducted from the royalty checks, with many landowners being upset by the amount of the deductions.

The issue of post-production deductions in Pennsylvania is complicated by the decision in Kilmer v. Elexco Land Services, Inc., et al, 990 A.2d 1147 (Pa. 2010) in which the Court held that the Guaranteed Minimum Royalty Act permits “the calculation of royalties at the wellhead, as provided by the net-back method in the Lease,” which states that “lessor shall receive as its royalty one-eighth (1/8th) of the sales proceeds actually received from the sale of such production, less this same percentage share of all Post Production Costs.” Rep. Brooks’ proposed legislation would end these leases and amend the state’s Oil and Gas Lease Law to specify a “market first” approach to royalties by requiring that the one-eighth royalty to be calculated on the gross value of the gas at the wellhead, without any deductions for post-production costs or severance taxes.

Recently there was a settlement between Chesapeake Energy and more than 1,000 leaseholders, under which the leaseholders would pay the entire cost of transporting the gas from the wellhead to the point of sale and pay 72.5% of all additional post-production costs, including the costs for gathering, dehydrating and compressing the gas, all of which would be deducted from the royalty payments. See prior blog posting “$7.5 Million Settlement Reached in Pennsylvania Class Action Regarding Deductions of Post-Production Costs from Royalty Payments” dated September 9, 2013.