New PA Strategy on Post-Prod. Deductions – Bill Defines “Royalty”

Have you ever heard the trite but true phrase, “words mean things”? Never has that been more true than in Pennsylvania and the simple word called “royalty.” Somewhere along the way the word “royalty” got watered down and changed. A new bill being introduced by PA State Rep. Eric Davanzo (Republican from Westmoreland County) will clear up the confusion and bastardization of the term royalty, making it easy for everyone to know what can and cannot be deducted from royalties with respect to oil and gas leases.

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 (the Oil and Gas Act) guarantees landowners a 12.5% royalty regardless of expenses involved in extracting the gas. 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, into negative territory where theoretically landowners owe the drillers!

PA landowners have, for almost a decade now, lobbied for legislation to clarify and protect a 12.5% minimum royalty.

Black’s Law Dictionary defines “royalty” as “a share of the product or profit paid to the owner of the property.” What rankles landowners is when drillers pay $0.00 or less for the product being removed. We don’t blame the landowners. It’s not right, we don’t care what cries of poverty are made by these big corporations. If drillers make a profit, so too should the landowner. Period.

The Guaranteed Minimum Royalty clause in the 1979 Oil and Gas Act “lost its clarity” with deregulation of the industry in the mid 1980’s. In a 2010 Supreme Court case, Kilmer v. Elexco, the Supremes issued a note in their opinion stating the PA Legislature is the proper body to resolve the ongoing situation of the 12.5% minimum royalty, and what can and cannot be deducted.

Since that 2010 court decision, at least three attempts have been made to firm up the 12.5% minimum standard with bills introduced in the PA House. All of them went nowhere.

Landowners and drillers should be on the same side and not fighting over issues like royalties. We have a new effort to clear up the ongoing confusion and division between landowners and drillers. Let’s, once and for all, clearly define the word royalty in PA law–just as the Supremes suggested back in 2010. That’s what Rep. Davanzo is attempting to do.

Davanzo floated the following co-sponsorship memo last week, seeking more names to attach to a new bill he plans to introduce:

House of Representatives
Session of 2021 – 2022 Regular Session

MEMORANDUM

Posted: April 13, 2021 10:24 AM
From: Representative Eric Davanzo
To: All House members
Subject: Pennsylvania Supreme Court Referral – 2010 Kilmer v. Elexco Decision

In the near future, I plan to introduce legislation that responds to the Pennsylvania Supreme Court referral in the 2010 Kilmer v. Elexco decision. The Court said: “We note 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 in the deregulated gas industry…”.

What is royalty? Traditionally natural gas was both measured and sold at the wellhead. With changes in industry practices and the implementation of local gathering systems, there has been confusion as to: 1) where natural gas volume is measured for production subject to royalty, and 2) where the sale price of gas is set for calculation of royalty. My bill will define the place of measurement of volume (the mouth of the well) and the sale price (the point of sale to an unaffiliated 3rd party buyer).

It is essential to note that this bill will not change terms of any contract. It is critical to Pennsylvania landowners and industry representatives that the definition of terms used in contracts is precise and just; this legislation will provide assurance that the two parties can work together in furtherance of this important industry.

Please join me in sponsoring this important legislation.*

Will Davanzo’s new bill succeed where previous attempts have failed? Let’s hope so.

*Pennsylvania House of Representatives (Apr 13, 2021) – House Co-Sponsorship Memoranda