Pennsylvania legislation guarantees minimum royalty rights amid controversy

SALEM, Ohio — Pa. Gov. Tom Corbett signed the “Guaranteed Minimum Royalty Act,” into law July 9, but it’s already under fire.
The legislation was intended to improve transparency of the deductions companies take out of royalty payments. But some believe it gives drillers the power to combine, or pool, leases for horizontal oil and gas drilling.

At least that’s the way the North American Royalty Owners- Pennsylvania views Senate Bill 259.

Controversy

The royalty owners group feels items were added to the bill without the proper consideration, and, in the end, the law takes away the rights of the landowner by forcing them to be added to a pool of landowners and giving the leaseholder the right to force landowners into drilling.

Shale gas drilling

The organization has argued the law could adversely impact some people who signed contracts years ago and didn’t anticipate modern shale gas drilling. They say it leaves landowners at a disadvantage — hindering their ability to renegotiate old leaseis.

“This bill removes the ability for a mineral owner who already has shallow oil or gas production on their property, to negotiate a clause with an interested producer, for their Marcellus property,” said Trevor Walczak, NARO-PA vice president in a written statement.

“The old leases do not contain language which allows these leases to be pooled, so the absence of this clause gives a mineral owner the ability to negotiate for a pooling clause to be inserted into their existing lease,” his statement continued.

“It is potentially a valuable opportunity to these mineral owners, but it appears that the operator who pushed this effort found their money would be better spent to negotiate in Harrisburg with lawmakers rather than at kitchen tables with mineral owners.”

Joint development

The language of the law causing the controversy is Section 2.1, an addition to the existing statute:

“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. 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 attributal to each lease.”

Walczak added that the bill opens up an entire new set of problems for the royalty owners affected.

“Will they be paid the state minimum 12.5% royalty with post-production costs allowed to be deducted? Before this bill, mineral owners would have been able to negotiate a higher royalty of 15 or 20% with no cost deductions. Are they even notified when they have been force pooled?” Walczak said in the statement.

No adverse affects

Gov. Corbett does not believe the bill will adversely impact the rights of landowners, but will, instead, protect them.

“By signing this legislation, it is my intention, and I believe that of the General Assembly, to enhance the efficient development of oil and natural gas while safeguarding the rights and protections of landowners and leaseholders,” Corbett said in a written statement. “It is not my intention to alter or affect the common-law Rule of Apportionment, or to alter or affect the agreed-to terms of any existing lease.

“The bill only applies to existing leases. It allows companies to combine land parcels for horizontal drilling, unless it’s explicitly prohibited in the lease.”

Minimum royalties

One new definition in the bill changes how royalties are paid to landowners if the lease calls for less than one-eighth to be paid to them, which was supposed to be the highlight of the bill because it guarantees minimum royalty payments to landowners in existing leases.

Section 2

Escalation required for alteration to original state.

“An oil, natural gas or other designation gas well or oil, natural gas or other designation gas lease which does not include a one-eighth metered royalty shall be subject to an escalation equal to one-eighth metered royalty when its original state is altered by new drilling, deeper drilling, redrilling, artificial well stimulation, hydraulic fracturing or any other procedure to increase production. A lease shall not be affected when the well is altered through routine maintenance or cleaning.”

Corbett’s statement claimed this legislation provides enhanced transparency to owners of oil and gas interests by requiring, at a minimum, that certain information which pertains to the payment for oil or gas production be disclosed on a royalty check stub or other means provided to the interest owner on a regular basis.