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Pennsylvania Interest Groups Step-up Support For More Royalty Protections

Two prominent Pennsylvania organizations representing landowners and agricultural interests are pushing lawmakers to support a bill under consideration in the state House of Representatives that would protect royalty owners from post-production cost deductions.

The Pennsylvania Farm Bureau and the Pennsylvania chapter of the National Association of Royalty Owners (NARO) have stepped up their calls in recent weeks for their membership to lobby lawmakers across the state as the bill's sponsors work to drum up support ahead of an upcoming floor vote, which hasn't been scheduled. HB 1684, sponsored by Republican Rep. Garth Everett and three others in his party, cleared a major hurdle late last month when it passed the House Environmental Resources and Energy Committee 25-0.

The legislation is being debated as the Pennsylvania Attorney General's office reviews complaints about unfair post-production costs that Chesapeake Energy Corp. has allegedly been deducting from royalty checks in some parts of the state (see Shale Daily, March 14). 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 (see Shale Daily, Feb. 18).

The issue has also been gaining more public attention. The AG's review comes less than one year after Chesapeake settled a $7.5 million claim with Pennsylvania landowners for underpayment (seeShale Daily, Sept. 4, 2013). Several lawmakers have reported receiving complaints from landowners about post-production deductions, which the AG confirmed in a letter to state Sen. Gene Yaw last month. The outcry prompted lawmakers in both chambers to focus on language included in the royalty act and move for other legislation that provides greater protections for landowners in the state.

The royalties act already sets the minimum payment to landowners from oil and gas production at one-eighth, but it doesn't clarify how royalties should be calculated. HB 1684 would stop operators from reducing royalty payments by the costs of production if the deductions result in a payment of less than one-eighth. When the bill cleared the energy committee it was amended to include a definition of post-production costs and to specify how they would apply to both existing and future leases.

"Unfortunately, this issue is one of the growing pains that accompany the positive, transformational phenomenon that the Marcellus Shale has meant for us," said Trevor Walczak, VP of the Pennsylvania NARO. "Yes, our gas law does need to catch up to the technology via the courts, but when we have the opportunity to clarify existing law in the legislature; we need to draft clear, concise gas law that protects royalty owners -- the people who are on the front lines of energy independence."

Walczak said the coming weeks will be "critical in moving this legislation forward," and acknowledged that it has a "long road ahead" before becoming law. Meanwhile, more than 350 farmers from the Pennsylvania Farm Bureau met with lawmakers last month and also asked that they support HB 1684.

According to a press release from the NARO chapter, royalties were paid, in most cases, without post-production deductions until 2012. Although it didn't name specific companies, the organization said that while many Marcellus operators do not make those reductions, others in the state, not just Chesapeake, have been doing it more and more. 

Everett, who represents constituents in three major shale production counties, including Bradford, Sullivan and Susquehanna counties, said he was pleased that his amended bill moved out of committee, but acknowledged that a full debate has only recently started in the General Assembly.

"The challenge now to those of us who are sponsors of the bill is to gather enough support from members so that the majority leader will bring it to a vote," he said in a statement made after the committee passed HB 1684. "As I said in the committee meeting a number of times, in my mind this is simply a matter of fairness to the leaseholders in my district and in other parts of the Commonwealth as well."

Gaining that support could be difficult, though. In a memo sent to members of the House energy committee on March 11 ahead of their vote, Jim Welty, VP of government affairs at the Marcellus Shale Coalition, asked members to oppose the royalty legislation. He said the bill would unconstitutionally impair contracts under state and federal law.

"In essence, this bill attempts to reallocate money and retroactively alter the terms of agreements among private parties," Welty wrote to lawmakers. "Post-production costs, which are essentially the cost of getting the gas to market, are a legitimate business expense which can be allocated among the owners of the gas as defined in the leases negotiated by the parties. There is nothing improper about post-production costs that warrant government intervention in the contract negotiations of private parties."

Welty added that post-production deductions are not a general economic problem confronting royalty owners across the state. Instead, he said lawmakers were unjustly reacting to local concerns and had been wrong to act on a case that is currently the subject of a class action lawsuit and review by the AG's office, referring to the landowners fighting with Chesapeake.

A report released last year by the Allegheny Institute for Public Policy found that rents and royalties reported on Pennsylvania income tax returns from 2006 to 2010 increased 61% statewide and 119% in counties with Marcellus Shale activity (seeShale Daily, July 17, 2013).

Jacqueline Root, president of the Pennsylvania NARO, said the legislation would not just affect a small local group of landowners in the northeast part of the state.

"Individuals are not the only mineral owners in the state. Schools, churches, cemetery associations, businesses, local municipalities and universities are also mineral owners, as well as the Commonwealth itself," she said. "These agencies' royalties will be subject to deductions, just as those of individuals, local governments and other organizations. This could have a huge impact on revenue received by the state for years to come. Therefore, every resident of the state of Pennsylvania has a stake in this issue."

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