Lawyer to PA Drillers: No Royalties? Time to Terminate the Lease

For the past couple of years MDN has covered the issue of low and no royalties for landowners in Pennsylvania and other states because of the low commodity price for natural gas–and because drillers are deducting post-production expenses. The problem, from the landowner’s perspective, is that gas is still getting pumped–and they aren’t getting anything in royalties. Who would sign up for that?! The problem, from the driller’s perspective, is that they’ve spent big bucks to drill the well and even if they have to sell the gas at a loss, at least they’re getting some revenue through the door–hoping to hang on until prices go higher again. It is a conundrum. Last month the Pennsylvania Chapter of the National Association of Royalty Owners (NARO) held their annual meeting and convention in State College, PA. A number of interesting bits of information came out of that meeting. One interesting tidbit: A Houston lawyer told attendees that he is now using the strategy of telling drillers if they keep sending royalty statements with no checks (i.e. statements showing the driller is not making a profit)–they have 30 days to terminate their lease with those landowners. Some leases (not all) state that if a well quits producing profitable quantities of gas, the lease is officially ended. While in some respects the lawyer’s innovative interpretation of o&g contracts may be an empty threat, the strategy does appear to be getting results. Another tidbit: There is a concern that drillers may try to deduct losses today from profits in the future–from a landowner’s royalty check. What can landowners do to guard against it?…

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