Three bills introduced to the PA House Environmental Resources and Energy Committee to Update the Oil and Gas Lease Act

On September 16, 2013, three bills were introduced to the House of Representatives for the Pennsylvania General Assembly that would amend the act of July 20, 1979 (P.L. 183, No. 60), known as the Oil and Gas Lease Act, added July 9, 2013 (P.L. 473, No. 66). They were each forwarded to the House Environmental Resources and Energy Committee.

House Bill 1650 proposes amended language under the Oil and Gas Lease Act that deals with information that well operators are required to supply to landowners. HB 1650 includes definitions for “affiliated parties” under the Act, and also included more detailed requirements for reporting the calculation of royalties and deductions under the Act. The Bill was introduced by Representative White.

House Bill 1684 proposes amended language under the Oil and Gas Lease Act that would prohibit the deduction of severance or other production taxes when calculating royalties. Additionally, it proposed a Construction sub-section that would prevent the Act from being interpreted to preclude enforcement of leases that guaranteed lessor’s a greater than one eighth royalty under the first marketable product doctrine. The Bill was introduceds by Representative Everett.

Lastly, House Bill 1700 proposes amended language under the Oil and Gas Least Act that states the function of “multiple contiguous leases” in the language added as a result of Act 66 of 2013. The bill provides:

 “In cases where an operator has the right to develop multiple contiguous leases separately and proceeds to develop the leases jointly when not expressly permitted by the leases, the leases may be declared null and void at the lessor’s discretion and may be renegotiated at the lessor’s discretion.”

The language would also clarify that forced pooling or unitization, as defined, was not implemented by the Act. The Bill was introduced by Representative White.

Written by: Garrett Lent, Research Assistant

Agricultural Law Resource and Reference Center

September 2013

PA General Assembly amends statutes governing oil and gas leases

On June 30, the Pennsylvania General Assembly amended statutes that governed oil and gas leases in the Commonwealth. SB 259 recodifies 58 P.S. §33, the so-called “Guaranteed minimum royalty act,” adds requirements for royalty check stub information and provides for well operators to jointly operate leases on multiple contiguous properties. The Pennsylvania Senate passed SB 259 on February 5, 2013, and the House passed the bill with amendments on June 28, 2013. On June 30, the Senate concurred with the amendments and SB 259 was sent to the governor.

The requirement that an owner receive a one-eighth royalty, 58 P.S. §33, on oil and gas extracted under a lease (the “GMRA”) remains unchanged under SB 259. The provision for the escalation of royalties remains unchanged from the current rules of 58 P.S. §34.

The bill requires additional information to be listed on royalty check stubs that owners receive from well operators. In particular, Section 3.2 of SB 259 would require royalty check stubs to include:

• identification information for the lease, property, unit or well(s) for which the royalty is being paid;
• the month and year of production;
• the total volume of oil and gas produced;
• the price per unit of volume (barrel, Mcf or gallon);
• taxes and deductions permitted in the lease, except for windfall profit taxes;
• net value of the total sales less above taxes/deductions;
• interest owner’s interest (decimal or fraction) for production described by the identifying information;
• interest owner’s share of total value prior to taxes/deductions;
• interest owner’s share of sales less interest owner’s share of taxes/deductions;
• And the contact information of the well operator.

If, however, the well operator already has another basis for regularly providing this payment information to landowners, then it need not provide it in the royalty check stubs.

Additionally, where a single operator has the right to develop multiple contiguous properties separately, the operator may develop the leases jointly under Section 2.1, unless the leases expressly prohibit doing so. Previously, well operators were not able to jointly operate leases in Pennsylvania unless joint operation was expressly permitted in the leases, normally through a pooling clause. Section 2.1 now implies the well operator’s right to jointly operate multiple contiguous leases unless expressly prohibited by the language of a lease.

Further, Section 2.1 allows the well operator to calculate the royalty shares of each lease “in such proportion as the operator reasonably determines to be attributable to each lease.”

Lastly, SB 259 Section 3.4 states that division orders, which list the proportion of a landowner’s interest in a group of pooled properties, cannot amend or supplement the terms and conditions of an oil and gas lease. Where the lease and order may conflict, the oil and gas lease is controlling.

For more information on SB 259, please visit the Pennsylvania General Assembly site.

Written by: Garrett Lent, Research Assistant
Agricultural Law Resource and Reference Center
July 2013

Senate Environmental Committee holds hearing on royalty issues

On June 27, 2013, Pennsylvania Senate Environmental Resources and Energy Committee held a hearing about royalty transparency and the calculation of post-production costs in Pennsylvania oil and gas leases. Further, the question of what costs incurred by operators are categorized as post-production was discussed at the hearing.

The committee hearing centered on testimony from county commissioners from Bradford County, the Pennsylvania Farm Bureau and National Association of Royalty Owners, as well as industry and legal representatives involved in the Marcellus play. The discussion focused on the accessibility of information on cost-deductions to landowners and how the state should regulate the calculation of cost deductions by producers.

While current legislation requires an 1/8^th royalty on all gas extracted be paid to landowners by gas companies leasing the land (Guaranteed Minimum Royalty Act), and the State Supreme Court has held that post-production costs can be factored into the calculation of the royalty (Kilmer v. Elexco), gas companies are not currently required to show how the periodic royalty paid to a landowner is calculated. Proposed legislation would update the required information on pay stubs to landowners (SB 259 and HB 1414).

For more information on the discussion, visit Sen. Yaw’s website for the committee hearing recording, transcripts, and a news release detailing the discussion.

Written by: Garrett Lent, Research Assistant

Agricultural Law Resource and Reference Center

June 2013

PA House Passes Bill to Update the Required Check Stub Information for Well Royalties

On June 11, 2013, the Pennsylvania House of Representatives passed HB 1414, which would change the information well operators are required to include on check stubs for royalty payments to landowners. Section 3.1 of HB 1414 would require specific well production, pricing, tax, and sale information to be attached to royalty payments to landowners, unless another basis for regularly providing this information is already in place. In his co-sponsorship memorandum, Rep. Everett stated the bill responded to landowner frustrations surrounding a lack of clarity in royalty payment calculations. The Senate has not yet voted on the bill.

For more information on the changes, as well as the bill text, visit the Pennsylvania General Assembly’s website.

Written by: Garrett Lent, Research Assistant

Penn State Law, Agricultural Law Center

June 2013

Federal Judge Approves $22 Million Class Action Settlement in Frederick v. Range Resources

A class action lawsuit initiated against Range Resources (Range) by lessors was settled for $22 million today. The suit challenged, among other complaints, the propriety of the amounts deducted by Range and sought a court ordered accounting. The parties proposed an order to the Court that would provide $17.9 million for the plaintiffs and $4.6 million for the attorneys. After a lengthy analysis, the Honorable Judge Sean McLaughlin concluded that the award was sufficient and the fees reasonable. To read the decision, please view the Memoradum and Opinion.

Written by Steven P. Trialonas, Research Fellow

March 17, 2011

Court Declines to Equitably Extend Leases in Lauchle v. The Keeton Group, LLC

In a lawsuit to determine the validity of leases under Pennsylvania's Guaranteed Minimum Royalty Act (GMRA), the U.S. District Court for the Middle District of Pennsylvania initially ruled the leases valid in October. On March 8, 2011, the Court addressed the Chief Defendant's motion to extend the leases by the amount of time during which the Plaintiffs contested the leases in Court, as development was halted for these two years. The Court ruled that merely bringing a declaratory judgment was not sufficient to constitute repudiation and entitle the Defendant to have the leases extended, declining to create precedent that would discourage lessors from bringing actions to determine the validity of their leases. To read the Court's decision, please view the Memorandum.

Written by Steven P. Trialonas, Research Fellow

March 8, 2011