A small Northeast Pennsylvania township in one of the epicenters of the Marcellus Shale passed a resolution late Tuesday to limit natural gas production because angry landowners contend that some operators are deducting “exorbitantly” high post-production costs from royalty checks.
The Wilmot Township supervisors passed the largely symbolic ordinance, claiming it’s an effort to motivate state lawmakers that have for years been debating legislation to better guarantee minimum royalties.
“All we want to do is have the leases follow-through like their written, have the royalties paid at 12.5% like it says in the lease — no deductions — a lot of us have simple leases,” Frank Massersmith, chairman of the township supervisors, told a television reporter.
The resolution demands “production be discontinued from wells where the landowners are having their royalty checks diminished to nothing or nearly nothing, or in some cases having their accounts accrue a negative balance due to companies deducting exorbitantly high post-production costs.” The supervisors said both Chesapeake Energy Corp. and Chief Oil & Gas LLC have reduced royalty payments to cover post-production costs, such as compression, dehydration and transmission. Royalty payments are typically spelled out in contracts before operations are underway.
Wilmot in Bradford County has about 1,200 residents. There have been 3,736 shale permits issued in the county, which was the fourth highest producing county in the state last year at 353.8 Bcf. Chesapeake was the top producer with 675.9 Bcf, while Chief was the fifth largest, reporting 271.5 Bcf, according to the Pennsylvania Department of Environmental Protection.
Last year, the state Attorney General’s office filed a wide-ranging lawsuit against Chesapeake, seeking restitution for thousands of landowners, as well as civil penalties and legal costs over allegations of post-production deductions from royalty checks (see Shale Daily, Dec. 9, 2015). Other operators have faced similar lawsuits from landowners across the state.
Lawmakers have tried but failed since 2014 to pass legislation that would clarify the state’s Guaranteed Minimum Royalty Act of 1979, which sets forth the minimum payment to landowners with oil and gas leases (see Shale Daily, June 26, 2015). The statute does not address marketing costs and how they should be factored into royalty payments. The latest legislation, HB 1391, was again referred to the Rules Committee in June.
Wilmot’s resolution cites the Guaranteed Minimum Royalty Act and refers to a 2010 state Supreme Court opinion that said the General Assembly should determine how royalties be valued and paid (see Shale Daily, March 29, 2010).
Chesapeake and Chief have not commented about the uproar in Wilmot. But industry representatives said Wednesday there are economic and contractual obligations that both parties are subject to, noting that landowners have unfortunately shared the burden of the commodities downturn. They also noted that while lawmakers continue work on royalties legislation, they should be equally focused on things like costly regulations, establishing end-use markets and streamlining the permitting process to get more pipelines in the ground that would help lower post-production costs.
“A lease is a contract between a mineral owner and an energy producer. Any disputes that may arise between these two parties over the terms of the contract have and will always be most effectively resolved by the courts,” the Marcellus Shale Coalition said in a statement. “Our members share in the frustration with mineral owners that depressed commodity prices along the northern tier have had a negative impact on revenue, investment, jobs and royalty payments.”
To show their support for the Wilmot ordinance and legislative efforts to clarify minimum royalties, the Bradford County Commissioners planned a rally next week at a local high school to promote HB 1391 and pressure lawmakers.
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