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…
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EQT Sues WV for Passing Minimum Royalty Law re Flat Rate Leases

Earlier this year the West Virginia legislature passed Senate Bill (SB) 360, which Gov. Jim Justice subsequently signed into law (see WV Gov Justice Signs Bill to Guarantee 12.5% Minimum Royalty). SB 360 overturns a ruling by the WV Supreme Court in Leggett v. EQT Production, a case in which the Supremes (in a very unusual move) reversed their own previous decision and allowed EQT to deduct post-production expenses in an old flat rate lease. In essence, SB 360 guarantees rights owners/landowners a 12.5% minimum royalty, regardless of post-production deductions–but only in flat rate leases. A flat rate lease is a lease in which a company pays a regular (in EQT’s case, annual) payment, regardless of how much oil/gas is produced. Traditionally drillers don’t deduct post-production expenses because the payments they make aren’t all that much anyway. But then EQT began to claim deductions, prompting a lawsuit that went all the way to the Supreme Court. The legislature aimed to “fix” what they considered an error in the court’s ruling. EQT claims the new law is unconstitutional and last week filed a lawsuit (copy below) asking a judge to block implementation of the law, set to take effect on May 31…
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Southwestern Appeals “Trespass” Case to Entire PA Superior Court

Southwestern Energy has just taken the next very important step in a process that frankly has us holding our breath. Two weeks ago MDN brought you the news that the Pennsylvania Superior Court handed down a decision that has the power to greatly restrict, perhaps even stop, Marcellus drilling in PA (see PA Superior Court Overturns “Rule of Capture” for Marcellus Well and PA “Rule of Capture” Case has Power to Limit Marcellus Drilling). The issue, in brief, is that the Superior Court decision disallows using an age-old principle called the “rule of capture” when it comes to shale drilling and fracking. It opens the door to a myriad of frivolous lawsuits claiming that a fracture, a crack created during fracking, is draining gas from a neighbor’s property without justly compensating the neighbor for the gas. Southwestern successfully argued in a lower court that the odd crack here and there that may slip under a neighbor’s property is permissible. The landowner appealed the case to Superior Court and three judges heard the case. One of the Superior judges authored a decision overturning the lower court, with a second judge “joining” (agreeing with) the decision. The third judge was AWOL (“not participating”). Frankly, the stakes could not be higher for the future of Marcellus drilling in PA. Southwestern has just filed a request with the Superior Court asking that all 20 judges who sit on that court hear and consider the case, which makes sense given the gravity of the case and PA’s economic future…
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Did StateImpact Forum on PA Gas Royalty Issue Resolve Anything?

Perhaps our headline for this article is a tad misleading. Maybe the better question is, Was a meeting held yesterday in Towanda, PA on the topic of gas royalties *meant* to resolve anything? The answer of which is, “Probably not.” PBS StateImpact Pennsylvania organized and hosted a forum yesterday on the topic of PA landowners getting screwed over by energy companies with respect to royalty payments. Both sides were well represented at the forum. We think it’s a cool concept, to get both sides talking about a very important issue. However, StateImpact, funded and controlled by Big Green backers including the William Penn Foundation and Heinz Endowments, is not an impartial, unbiased news organization that wants to honestly explore this important issue. StateImpact is NOT an impartial broker. Their purpose is to play both sides against each other and enjoy the chaos that ensues. Whip up more animosity between both sides. Make no mistake: StateImpact abhors shale drilling and prefers it not happen at all in PA. With that as the proper context to understand the event, some good points did emerge from the discussion, despite StateImpact’s bad intentions…
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Latest OH Wayne Natl Forest Auction a Bust – Leases Go for $3/Acre

The fifth auction by the federal Bureau of Land Management (BLM) of federally-owned acreage in Wayne National Forest (WNF) to allow shale drilling was, in a word, a bust. The first four auctions offered up a total of 2,396 acres in total, and sold for over $8 million (average of $3,354 signing bonus per acre). The fifth auction of two smaller parcels–39.6 acres in Monroe County, and 305.8 acres in Noble County–sold for a piddly $2 and $3 signing bonuses per acre, respectively. What in the world happened? MDN reader and friend Charles Winslow, owner of The Wells Inn in Sistersville, WV, writes the INNformer publication. Charles recently published an excellent article about the recent auction and its lackluster results in the INNformer. He offered MDN the opportunity to reprint it (below). Charles finds there are a number of factors for the low auction price–but primarily the blame can be laid at the foot of regulatory uncertainty…
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WV Royalty Transparency Law Sheds New Light Beginning June

Back in January MDN told you about West Virginia House Bill (HB) 4270, a bill that provides more transparency for landowners on their royalty statements (see WV Co-Tenancy, Royalty Transparency Bills Make Progress). The good news is that the bill passed and was signed into law by Gov. Jim Justice on March 27th. For far too long royalty statements have been loosey-goosey. Landowners (technically royalty owners) get no specifics on how much gas (or other hydrocarbons) were produced, what deductions were made, and why those deductions were made. HB 4270, which goes into effect on June 8, will fix all that. Here’s more details on what is being called the “Check Stub Bill”…
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A (Very) Rough Method for Calculating Royalties on Cabot Wells

Cabot Oil & Gas, one of our favorite Marcellus drillers, has just published a new PowerPoint slide deck presentation as part of an investor’s conference they attended earlier this week (the Scotia Howard Weil Energy Conference). Normally a new slide deck isn’t all that big a deal. However, thanks to MDN friend Chris Acker who pointed it out to us, there is some new information in the deck worthy of note. Back in December MDN brought you the news that Cabot had signed a deal to sell off their Texas Eagle Ford Shale assets in order to concentrate solely on the Marcellus (see Cabot O&G Sells Texas Eagle Ford Assets for $765M, Focus on Marc.). The slide deck notes that the Eagle Ford divestiture closed on Feb. 28th (slide #3). Also in the slide deck is a mention that Cabot plans to experiment with drilling “upper Marcellus” wells in the second half of 2018 (slide #11). Most (all?) of the wells they’ve drilled to date are “lower Marcellus.” A successful program of drilling upper Marcellus certainly bodes well for existing landowners with existing lower Marcellus wells–perhaps Cabot will revisit those pads to drill new wells? Slide #11 has some great information on it. We’ve used it to create a (very) rough royalty estimation calculator for Cabot landowners…
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EQT Pulls a Chesapeake, New Deductions from PA Leases

Last Friday MDN editor Jim Willis had the pleasure of speaking at the National Association of Royalty Owners (NARO) Pennsylvania Chapter annual convention in State College, PA. Jim was humbled to present alongside a cast of terrific speakers, including Scott Perry, Deputy Secretary of the Office of Oil and Gas Management at the PA Dept. of Environmental Protection, Tom Murphy, Director of Penn State’s Marcellus Center of Outreach and Research (MCOR), and Scott Kurkoski, a top lawyer and head of the energy practice for Levene, Gouldin & Thompson (thanks for the ride home Scott!). One of the first attendees at the event to stop by the MDN table for a chat asked if we had heard about a letter recently sent by EQT to PA landowners. We had not. He gave us a copy (below). In the letter, EQT claims they have been “subsidizing a portion of the cost to gather the gas” produced by their PA wells, and they intend to begin claiming new deductions from royalty checks beginning this year. The way they position it in the letter is that landowners will begin “sharing” in these post-production costs. Who doesn’t like to share, right? We can tell you, not a single attendee at the event was impressed with EQT’s “sharing” letter. It smacks of the road Chesapeake Energy has gone down in robbing landowners of their royalties…
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EQT Spends $1.6M to Lease More Land Under Monongahela River

The Pennsylvania Dept. of Conservation and Natural Resources (DCNR) has just amended an existing lease with EQT that allows EQT to extract natural gas (and other hydrocarbons) from underneath the Monongahela River in Allegheny, Greene, Fayette, Washington and Westmoreland counties. EQT is paying $4,000 per acre for 392 acres ($1.568 million total) in a signing bonus, along with a big 20% royalty on anything produced. However, the announcement raises an important question we’ve asked for more than four years: Is the land under rivers and streams actually owned by the state? PA says yes. We suspect landowners who own land along those rivers and streams would say otherwise. The state grabbing money for land under bodies of water has been going on for years (see PA DCNR Program Leases Under Rivers/Creeks for Marcellus Drilling and PA DCNR Publishes Lease Agreements for Deals Under Rivers/Creeks). Below is the latest lease deal by DCNR to lease more land under the Monongahela River…
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WV Gov Justice Signs Bill to Guarantee 12.5% Minimum Royalty

While everyone was focused on the passage of a co-tenancy bill in West Virginia (see WV Gov. Justice Does 180 – Says He’ll Sign Co-Tenancy Bill), another bill, with arguably more impact on both rights owners and drillers, quietly made its way through the legislative process and was signed into law by Gov. Jim Justice on Friday. We’re talking about a bill that guarantees that rights owners (i.e. landowners) will get an actual, guaranteed minimum royalty of 12.5%–regardless of post production deductions. WV Senate Bill (SB) 360 is now the law! The bill was proposed to counter what landowners say was a miscarriage of justice at the hands of the WV Supreme Court in the Leggett v. EQT Production, a case in which the Supremes (in a very unusual move) reversed their own decision from a few months before and allowed EQT to deduct post-production expenses (see WV Supreme Court Reverses Itself, Post-Production Deductions OK). While this is fantastic news for landowners/rights owners in WV, you can’t escape the larger implications, which is that there is now no reason (no excuses left) why the PA version of this bill, introduced for the past three consecutive two-year sessions (six years total), can’t also get passed…

Important Note: SB 360 does NOT apply across the board, to all WV leases. It only applies to limited cases, like Leggett v. EQT, which are “flat rate royalty leases.” See a further explanation below.
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WV House Advances Bill to Fix Post-Production Deductions

Earlier this week MDN told you that West Virginia royalty owners are pushing Senate Bill (SB) 360 to fix the issue of post-production deductions drillers take from royalty checks (see WV Royalty Owners Push Bill to Fix Post-Production Deductions). SB 360 would eliminate post-production expenses, such as transportation or severance taxes from royalty owners’ checks. The new news is that the WV House of Delegates is working on its own version of SB 360, called House Bill (HB) 4490. On Wednesday, the House Judiciary Committee voted to report the bill out–that is, they approved the bill to go on to the next step. But the vote, which was a voice vote, was split, indicating the ultimate success of the bill is far from assured. Needless to say drillers are not happy with either SB 360 or HB 4490. According to Anne Blankenship, executive director of the West Virginia Oil and Natural Gas Association, her group (which represents many, perhaps all of WV’s shale drillers) is not actively opposing the bill, but they are letting everyone know they don’t support it–which we call a distinction without a difference. Hundreds of people who work for the drilling industry rallied at the state Capitol in Charleston on Wednesday–there to push for passage of a bill that appears to be on the fast track: HB 4268, the “co-tenancy” bill. Below is an article covering the rally, which mentions HB 4490 on post-production deductions…
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WV Royalty Owners Push Bill to Fix Post-Production Deductions

West Virginia royalty owners (which sometimes means landowners, sometimes not) are pushing Senate Bill (SB) 360 to fix the issue of post-production deductions drillers take from royalty checks. A brief history: In December 2016, MDN reported on the huge WV Supreme Court decision against EQT that disallows EQT from deducting post-production expenses from royalty checks, even with signed contracts in place (see WV Supreme Court Rules EQT Can’t Deduct P-P Costs from Royalties). In February 2017, with a brand new justice on the bench, the WV Supreme Court agreed to rehear the case after an appeal filed by EQT–a rare and unusual step (see EQT Catches Big Break in WV Supreme Court re Royalty Deductions). In May 2017, the WV Supreme Court ruled on the reheard case, overturning its previous decision. The court ruled to allow EQT to deduct “reasonable” post-production expenses (see WV Supreme Court Reverses Itself, Post-Production Deductions OK). Those who won the original case (and lost the reheard case) say newly elected Supreme Court Justice Elizabeth Walker had conflicts of interest and should not have been allowed to vote to rehear the case in the first place (which she did). On that basis, they tried to avoid the rehearing altogether, but that failed. Newly elected Justice Walker, with (according to the losing side) conflicts of interest, voted in favor of EQT. On the basis that Walker should not have been part of the process at all, the case was appealed to the U.S. Supreme Court. However, the Supremes refused to hear the appeal, making post-production deductions the law in WV (see U.S. Supreme Court Rejects Appeal of WV EQT Royalty Case). The only path left to royalty/landowners is to pass a new law. That new law is SB 360…
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PennEast Pipeline Cuts $1.7M Deal with Bethlehem Water Authority

In a sure sign that the $1.1 billion, 120-mile PennEast Pipeline will get built, the Bethlehem Authority, which manages watershed land in the Pocono Mountains that supplies drinking water for the City of Bethlehem, has signed a $1.7 million deal to allow PennEast to traverse four miles of Authority land. Rather than challenge PennEast and potentially lose an eminent domain case, Bethlehem Authority officials said they brokered the deal–not only for the money it will bring in, but also to ensure there are certain protections in place during construction. The State of New Jersey is trying its best to stop the PennEast project (see NJ Continues to Hassle PennEast Pipe with Refusals & Rejections). However, this deal with Bethlehem Authority is yet another sign of the inevitability of the project. NJ is fighting an uphill battle they will lose. Wiser heads in Bethlehem realize that fact and took the right action to get the best deal possible…
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Antis of Green, OH Finally Face Reality – Will Allow NEXUS Pipe

In the end, it came to down to cold, hard cash. Last May, MDN told you about antis running the City of Green, Ohio who were/are hellbent on stopping the NEXUS Pipeline (see Green, OH Paying Lawyers $100K to Fund Stop NEXUS Crusade). Green City Council voted to use $100,000 of taxpayer money to hire a Cleveland law firm to file a lawsuit “aimed at stopping the pipeline from being built or stopping the project altogether.” NEXUS, a $2 billion, 255-mile interstate pipeline that will run from Ohio through Michigan and eventually to the Dawn Hub in Ontario, Canada, was the first major pipeline project to get approved after the Federal Energy Regulatory Commission (FERC) once again had a quorum of three members (see New FERC Quorum Votes Final Approval for NEXUS Pipeline). Green’s high-priced lawyers filed their lawsuit in the 6th U.S. Circuit Court of Appeals, requesting an emergency stay blocking construction, which they got in November (see Fed Court Grants Green, OH Request to Stop NEXUS Pipe Construction). Everyone has their price. For the antis in Green, the price is $7.5 million and 20 acres of land that sit next to an existing city park. While the Green antis hate the idea of the pipeline getting built at all (especially Green’s anti-pipeline mayor), the writing is on the wall. They will lose and they know it–so to save face, the mayor negotiated a deal with NEXUS that City Council will vote on tonight to accept…

2/8/18 Update: Green Council voted 4-3 to accept the NEXUS deal. More below.
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Wheeling WV Eyes $2M Signing Bonus for M-U Drilling Under City Land

Wheeling, West Virginia–known as “the Friendly City”–is about to get an even bigger smile on its face. Wheeling city leaders are about to sign a lease agreement to allow American Petroleum Partners to drill under several “old city landfills” that have been closed for decades. The up-front signing bonus for 336 acres of Wheeling-owned land will be $2 million–which works out to ~$5,952 per acre. Once gas begins flowing, the city will get an 18.5% royalty. The money will be used for “paving, playgrounds, economic development and other city functions.” Does American Petroleum Partners (APP) sound familiar? In December we brought you the news that APP had leased the 66-acre Wheeling Park High School campus for shale drilling–under (not on) the campus–for $6,000 per acre (see Wheeling, WV High School Leased for Shale Drilling, $6K/Acre). We first wrote about the low-key, avoiding-the-limelight APP in March 2016 (see New Marcellus/Utica Driller Quietly Launches w/$800M Investment). APP is headed by Rice Energy alumnus Varun Mishra, who is the founder and CEO. Apollo Global Management invested $411 million in APP with the option to double it up to $800 million. It’s great to see this relatively young company locking up acreage and beginning to drill. Here’s the details on the latest APP lease deal–with the City of Wheeling…
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