Some PA Drillers Threaten to Spoil it for All via Royalty Shenanigans

We’ve written a number of posts over the years about the ongoing, sometimes quiet sometimes not, civil war between Pennsylvania landowners and some (not all) drillers who use inflated post-production deductions to pad their own bottom lines, leaving landowners with peanuts–sometimes with no royalties at all (see Deep Dive: PA Royalties Civil War Between Landowners & Drillers). If we can oversimplify and summarize this complex issue, landowners maintain that a 1979 PA law guarantees landowners a 12.5% royalty regardless of expenses involved in extracting the gas, and drillers say no, landowners must abide by the contracts they’ve signed and if those contracts allow post-production costs to be deducted before calculating a royalty, the rate may go lower than 12.5%–sometimes to zero and below. PA landowners have, for the past six plus years, lobbied for legislation to clarify and protect a 12.5% minimum royalty. Today we have a guest post from the landowner point-of-view. Thad Stevens is a Gaines, PA resident and real estate developer. Thad has negotiated more than 50 oil and gas leases. He sits on the Dept. of Environmental Protection Citizen Advisory Council and is a director with the National Association of Royalty Owners PA chapter. We consider Thad a friend. He’s smart and he’s passionate about the the ongoing issue that some companies take inflated post-production deductions leaving PA landowners with little or nothing. Thad writes that some of PA’s gas drillers are displaying real arrogance in their attitudes toward the very people they need the most–landowners…

Gas, Royalties, Arrogance and Equity!!!

by Thad Stevens

The arrogance of the gas producers is discouraging landowners and being tempered by the Courts.

A few months ago, the arrogance was graphically represented at its worst when EQT, a producer in Southwest PA. wrote its gas owner partners to say they hadn’t taken enough of their earned royalties, and would henceforth take more….but, out of the goodness in their hearts, they would not bill their partners for the gas they removed from their ownership (a copy of the letter is available below). Arrogant? Confiscatory? Theft by penmanship?

Black’s Law Dictionary defines ROYALTY as “a share of the product or profit paid to the owner of the property”. How can equity be addressed by the producer (lessee) paying $0.00 or less for the product being removed.

For three legislative sessions (6 years), bills clarifying the issue (which was indefinitely addressed in a 2010 Supreme Court case, with a note directing the Legislature to resolve the matter) have been brought before the House of Representatives. For seven years (since that decision, Kilmer v. Elexco), most gas producing companies have taken liberty with their post-production deductions because of the indefinite nature of the Supreme Court decision.

The arrogance of that practice has set Royalty Owners and their producing partners at odds with each other. That Arrogance has angered many of us; maybe best represented in a Superior Court matter handed down in April, 2018 [Briggs v. Southwestern (SWN)]. SWN had produced gas from leased land adjacent to Briggs without leasing Briggs. Briggs sued for trespass; the Court of Common Pleas in Susquehanna Co. granted a motion for Summary Judgment in Aug 2017 in favor of SWN. Briggs appealed to the Superior Court and the Susquehanna Court order was reversed. The case is remanded to Susquehanna County for full development of the matter.

Does anyone believe Briggs would have sued if SWN had been neighborly and equitable in their treatment of landowners? This author believes not!

In more cases than not, the operating companies’ Landmen have come to our area and sweet-talked us and our neighbors with promises of great wealth developed from our holdings; leases have been penned and only later have the operating companies (after the Landmen are long gone) shown their intent in enticing the Royalty Owner to sign the long lease forms presented. We’ve been led to believe we would get a stated percentage of the proceeds received upon the sale of the gas. The language in the leases leads us to a conclusion that is the deal we struck. The producers parse the words and deduct costs unanticipated by the lessor; SOMETIMES TO THE POINT NO PROCEEDS ARE FORTHCOMING TO THE LESSOR! SOMETIMES TO THE POINT WHERE THE LESSOR GETS A NEGATIVE ROYALTY STATEMENT!!!

That is arrogance!

Where is the solution? It resides with the legislature; the Supreme Court has so ordered!

In addressing matters brought before them, our Representatives and Senators must address a multitude of matters; all because of the arrogance of many of the producers:

1. Physically, at what point is product measured for payment of Royalty?

2. What defines fair pooling; how far must a well bore be from an unleased owner to avoid legal action for trespass?

3. How often must a production report be made to the Royalty owner/partner?

4. What must be included in the periodic report?

5. How much power of prohibition can be delegated to River Basin Commissions, is watershed-wide prohibition a “taking”?

6. Should the production of oil and gas be taxed and be subject to Impact fees?

7. Should the operators/producers be allowed to hold leased acreage when drilling, but not producing?

Is it time for a comprehensive writing of new gas law? Production practices have changed. Definitions are changing, geology remains the same but our retrieval of product is no longer the same and our Courts are recognizing it.

Court decisions and arbitrary decisions on the part of individual companies bring down critical pressure on our law makers to resolve ambiguous matters. With the trespass issue in front of them, the companies’ actions have forced reaction because their arbitrariness has brought the wrath of royalty owners to a point the future of energy production in PA is threatened. A body of law must be developed now to provide reasoned development and equitable treatment of all parties in producing the abundant and valuable resources of which our energy portfolio is made.

We anxiously await action already demanded of the Legislature.

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Copy of the letter sent by EQT in early March:

EQT royalty letter