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Pennsylvania Auditing Marcellus Operators For Potentially Shorting Royalties

The Pennsylvania Department of Conservation and Natural Resources (DCNR) has discovered that some Marcellus Shale operators could be wrongly deducting post-production fees from royalties paid to the state under land they have leased in public forests, according to a department representative.

With the sharp spike in Marcellus Shale activity on state-owned land in recent years, the DCNR has stepped-up its auditing process by hiring another accountant in its Bureau of Forestry and bringing on two outside consultants to conduct volumetric and price audits.

Along the way, DCNR realized that a number of companies could be deducting post-production costs related to transport and processing, which the state's leases prohibit. Department spokeswoman Christina Novak said DCNR has not yet confirmed any wrongdoing, but she added that it's looking closely into the matter. In any event, DCNR is the latest to raise such concerns about post-production costs, as dozens of landowners are challenging certain operators in state courts and the Pennsylvania Attorney General's office is said to be investigating the issue.

"Nothing prompted us to do this, per se. Over the last 50 years of our program, we've clearly seen an exponential increase in activity relative to the Marcellus Shale," Novak said. "We've adapted and improved our auditing efforts as a result. It's a part of our business practice and the process has indicated that there might be some issues related to post-production costs involving several different companies."

Novak said she couldn't name the companies being investigated at this time.

Last month, Chesapeake Energy Corp. agreed to increase a settlement it had previously reached with a group of landowners to resolve claims that it improperly deducted post-production fees from royalty checks. Under the new settlement, the company agreed to pay $11 million rather than the $7.5 million it agreed to in 2013 (see Shale Daily, Jan. 2; Sept. 4, 2013. Responding to a request from Gov. Tom Corbett and state lawmakers, the attorney general's office is also said to be in the midst of a wide-ranging investigation of the practice involving multiple companies (see Shale Daily, Aug. 29, 2014).

The state has 385,400 acres under lease for oil and gas development. Novak said there are currently 117 active leases generating revenue for the state. Since its first Marcellus Shale lease in 2008, DCNR has approved 227 well pads and 977 shale gas wells in state forests.

Novak said if DCNR does conclude that some companies are deducting post-production costs, it will attempt to resolve the issue with each operator through negotiations, which she said DCNR has been able to do a "majority of the time" in similar disputes.

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