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Pennsylvania Legislation Infuriates Leaseholders Group

July 8, 2013
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A national organization that supports oil and gas leaseholders is furious that Pennsylvania legislators passed a bill that its members contend will weaken landowners' ability to negotiate lease terms, and are urging people to contact Gov. Tom Corbett to get a veto.

According to the Pennsylvania chapter of the National Association of Royalty Owners (NARO), the group was repeatedly told over the last two weeks that SB 259, which passed on Sunday, did not contain a provision allowing forced pooling.

SB 259 and HB 1414 both contain Section 2.1, which addresses apportionment. The bills stipulate that "where an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease." The section continues, "in determining the royalty where multiple contiguous leases are developed, in the absence of an agreement by all affected royalty owners, the production shall be allocated to each lease in such proportion as the operator reasonably determines to be attributable to each lease."

Dale Tice, an attorney with the firm Marshall, Parker & Associates LLC, said NARO was surprised the language contained in Section 2.1 was added to the bills. He said many landowners hold old oil and gas leases that allowed pooling of formations below the Onondaga Horizon, but not the Marcellus Shale. Others hold oil leases now held by shallow gas production with vertical wells, but which don't include a pooling provision and pay the state's minimum royalty of 12.5%.

"My concern is that Section 2.1 may be construed to allow these old leases that don't have a pooling provision -- but don't expressly prohibit it -- to be included in [a] production unit that will be developed with horizontal drilling, without the lessor's agreement to amend the lease to allow Marcellus pooling," Tice stated on NARO's website. If that happens, the Pennsylvania General Assembly "will have effectively eliminated the impacted landowners' ability to negotiate landowner-friendly terms or a higher royalty into a lease amendment."

Trevor Walczak, vice president of NARO's Pennsylvania chapter, also railed against Section 2.1. "If the legislature wants to expand our antiquated and predatory pooling laws, we should do it in the light of day with the people who will be most affected, not behind closed doors with the people who will benefit the most by it," he said. "This is the fox watching the hen house. It's bad business and bad politics."

SB 259 passed the state Senate unanimously on Feb. 5, 50-0. It was then sent to the state House of Representatives, and referred to the House Environmental Resources and Energy Committee. The committee amended the bill and passed it, 24-1, on June 25. The amended bill then passed the House on June 28 (167-33), and the Senate on June 30 (48-2), before being sent to Gov. Tom Corbett for his signature.

HB 1414 unanimously passed the House on June 11, 200-0, but it was not introduced in the Senate.

Steve Forde, spokesman for the Marcellus Shale Coalition (MSC), told NGI that SB 259 was designed to give royalty owners more information, and to add transparency to the royalty payment process by categorizing various deductions. "Additionally, this piece of legislation provides for ongoing development of existing leases in the most efficient and environmentally sensitive manner while guaranteeing fair compensation to the landowner. The MSC supports this bill, as it will provide royalty owners with additional information, while also addressing challenges with existing leases that already allow for natural gas development."

SB 259's primary sponsor, State Sen. Gene Yaw (R-Lycoming) told NGI that Section 2.1 was added during House deliberations.

"This language has no relation to forced pooling, as some have suggested," he said. "It simply allows for combining properties already leased by the same company into a larger tract. In other words, one company must own 100% of the leases involved. This will dramatically reduce the amount of surface disturbance while still allowing the royalty owner an opportunity to more efficiently develop their mineral interests."

Although Corbett has been a vocal opponent of forced pooling (see NGI, May 2, 2011), the Republican governor's energy adviser Patrick Henderson told NGI that the administration agrees with Yaw's interpretation of the bill. "Nothing in SB 259 requires someone to lease their land; changes the terms of a lease; or reduces the royalties paid to landowners," Henderson said. "SB 259 is not forced pooling and has no relation to forced pooling."

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