June 28, 2013 02:45 PM
Representative Garth Everett and Rep. Matthew Baker, Rep. Sandra Major, Rep. Tina Pickett
All House members
Guaranteed Minimum Royalty Act (Act 60 of 1979)
As you may know, our Guaranteed Minimum Royalty Act (Act 60 of 1979) provides royalty owners with a guaranteed minimum one-eighth royalty for oil, natural gas or gas of any other designation in order to protect landowners from unfair or deceptive leases for the recovery of these natural resources. The development of unconventional shale gas wells in the Commonwealth has been accompanied by an effort by some companies to reduce royalties below the statutory minimum by transferring post-production costs to royalty owners. These are costs that are incurred between the wellhead and a final market point of sale and typically include dehydration and transportation. When these expenses are deducted, final payments often result in royalty shares of less than one-eighth.
In 2010, the Pennsylvania Supreme Court considered this issue in Kilmer v. Elexco Land Services, Inc. and determined that the “General Assembly is the branch of government best suited to weigh the public policies underlying the determination of the proper point of royalty valuation.” When PA landowners signed leases stating that they would receive one-eighth of the value of the gas produced, they assumed that an eighth is an eighth – not something significantly less than that because of deductions. Accordingly, we believe it is within the legitimate police power of the Commonwealth to address and clarify this issue for our royalty owners, gas developers and the Courts.
Therefore, in the near future, Representatives Baker, Major, Pickett and I will introduce legislation to clarify that the deduction of post-production costs from unconventional wells may not result in royalty payments less than the guaranteed minimum.