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PA Attorney General Moving On Royalty Complaints Against Chesapeake

A top Republican state senator confirmed Thursday that the Pennsylvania Attorney General's office is reviewing landowner complaints about unfair post-production costs that Chesapeake Energy Corp. has allegedly been deducting from royalty checks.

The move comes after lawmakers and Republican Gov. Tom Corbett expressed outrage last month and called for an investigation into the matter (see Shale Daily, Feb. 18). On Feb. 13, Republican state Sen, Gene Yaw, who also serves as chairman of the Senate Environmental Resources and Energy Committee, sent a letter to Attorney General Kathleen Kane's office detailing his concern about Chesapeake's royalty payments.

"We have also received numerous complaints from citizens located in the Marcellus Shale region, including your district, regarding royalty payments," Kane's office said in a response letter to Yaw. "Your letter and the complaints have been forwarded to the antitrust section of the office for a response."

The antitrust section acts as a consumer watchdog and brings legal action against overcharges and underpayment. Yaw claims that "with no background in the oil and gas industry, local Pennsylvanians became consumers relying on the representations of landmen working for the gas companies."

Last year, Chesapeake began deducting higher fees from Pennsylvania royalty checks. The post-production costs cover marketing and transportation fees, and the company claims it is allowed to make such deductions under the state's Guaranteed Minimum Royalty Act of 1979.

Although Chesapeake settled a $7.5 million claim with Pennsylvania landowners for underpayment in September 2013 (see Shale Daily, Sept. 4, 2013), the latest spat has prompted lawmakers to focus on language included in the royalty act and other legislation to protect landowners in the state.

On Wednesday, the Senate Energy Committee passed a package of bills known as the Oil and Gas Lease Protection Package. The package would allow landowners to inspect the records of natural gas companies to verify proper payment; prohibit oil and gas companies from terminating a lease agreement in retaliation for royalty inquiries, and it would require those companies to file a surrender document that relinquishes the mineral rights of a lease if it is terminated. The package would also require that companies pay royalties within 60 days or face a fine.

Although Corbett, who has defended and supported the oil and gas industry since taking office in 2010, has faced criticism for calling the investigation during an election year in which his polling numbers are low, several Republicans in both the state House and Senate have rallied for greater landowner protections since.

In the state House of Representatives, the Environmental Resources and Energy Committee tabled a bill on Tuesday that would clarify language in the royalties act ensuring that landowners receive a minimum 12.5% royalty payment.

"During the committee meeting, the bill was vetted at length, and of particular discussion, was an amendment that would provide further clarification to the 1979 state law and to respond to the changing industry," said state Rep. Tina Pickett, who sponsored the legislation with two other Republican representatives. "A couple of technical details in the language are currently being worked [out] and as a result, the committee tabled the bill."

Further discussion and a committee vote is expected on Monday. The House bill also would not allow oil and gas companies to deduct post-production costs from royalty payments.

About 25% of Chesapeake's 10.93 Tcf of proved reserves are located in the Appalachian Basin; the company has thus far declined to comment about royalty payments there. The attorney general's office would also not confirm the status of an investigation into the matter.

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