PA Court Case Finds in Favor of Landowners, Against Drillers in Lease Extension Case

A legal case that affects Pennsylvania landowners with signed leases to allow Marcellus drilling on their land has just been decided in landowners’ favor in a PA court. But it’s complicated to explain (we’ll do our best).

Several years ago some PA landowners signed leases with drilling companies where the terms of lease, specifically how royalties would be calculated, came into question. The drilling companies intended to use the “net back” method of calculating royalties, which deducts the costs of getting gas from the wellhead to market from the value of the gas before calculating royalties. The landowners disagreed with that method, saying it violated Pennsylvania law guaranteeing a minimum of one-eighth of the value of the wellhead gas price as a royalty payment. The landowners said their royalty payments would be below the one-eighth figure if the extra expenses to get the gas from the wellhead to market were part of the calculation. The case went to court, and ultimately, the landowners lost. That was in 2009.

But it’s not the end of the story. The original lease term with the landowners in question was for five years. The litigation in court took a good two years. During that two-year period, the drilling companies would not drill on the land in dispute from concern that the case would go against them. So after the case was decided and the drilling companies prevailed, they asked for a two-year extension on the original leases in consideration of the two years it took to decide the case. That is, they wanted to force a lease extension from the original five years to now seven years. A judge in Harrisburg just handed down his decision, and it was a very loud “no” to the drilling companies.

In essence, the judge told the drilling companies they should have drilled anyway, even while litigation was happening, and if they didn’t, it was their problem.

Lesson for all landowners: You must have a lawyer review your contracts before signing—and one that knows the ins and outs of royalty calculations.

Read the full story for more details:

Pittsburgh Post-Gazette (Mar 14, 2011) – Judge deals setback to drilling companies in shale case