Pennsylvania House Committee Tables Bill Establishing Royalty Minimums

On March 11, 2014, Pennsylvania House Bill 1684, which would have established fixed minimum royalty payments for landowners with unconventional gas leases, was tabled in the Pennsylvania House of Representatives.

The House Environmental Resources and Energy Committee was apparently unable to move the bill to a vote due to inconsistency in the wording of the bill. 

Specifically, the bill stated that gas companies could not lower royalties below a certain threshold by deducting “production costs,” rather than “post-production costs.” 

Garth Everett, R-Lycoming, the bill’s sponsor, made a verbal motion to change the language before the bill was tabled.

H.B. 1684 provides that a lease cannot allow any deductions for:
severance or other production taxes or costs associated with producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, marketing or other marketing enhancements to be deducted from any royalty payable to a lessor if such deductions result in a royalty of less than one-eighth calculated under the first marketable product doctrine.
H.B. 1684 is an amendment to Pennsylvania’s Guaranteed Minimum Royalty Act (“GMRA”), which currently requires leaseholders to receive at least 12.5 percent of the value of gas extracted from their land.

The current GMRA does not specify the point at which such royalty is to be calculated, however, so the value of extracted gas may be calculated at the wellhead, at the time the gas has been sold to a third party, or at some point during the process to render the gas marketable. See Kilmer v. Elexco Land Services, Inc., et al., 990 A.2d 1147 (Pa. 2010) (holding that GMRA 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”).

The bill was originally introduced on September 16, 2013, as part of a package of three bills addressing the deduction of post-production costs and pooling of mineral leases. 

Three additional bills, aimed at giving leaseholders greater transparency into how royalty payments are calculated, were subsequently introduced on September 30, 2013. 

None of the bills has yet to move out of committee.

See prior blog postings

This article was prepared by Lauren Brogdon ( or 713 651 5375) from Norton Rose Fulbright’s Energy Practice Group.