Pennsylvania’s oil and gas industry has grown tremendously in the past five years and continues to grow. Along with that market growth, Pennsylvania’s oil and gas laws, regulations, and guidance documents have changed. Currently, there is an emphasis in the Pennsylvania Legislature on post-production costs and royalties. While the Pennsylvania Supreme Court decision in Kilmer v. Elexco Land Servs., Inc. made clear that post-production costs could be deducted from a landowner’s royalty payment, landowners and landowner’s groups have recently claimed that their royalties are being reduced too dramatically by the deduction of post-production costs. As a result, we’ve seen the following recent and proposed developments from the Pennsylvania Legislature regarding post-production costs:

• On July 9, 2013, Governor Corbett signed Senate Bill 259, which amended the Guaranteed Minimum Royalty Act by adding definitions for things like ‘check stub,’ ‘division order,’ and ‘interest owner,’ as well as clarifying the specific information that an oil and gas operator must include with royalty payments. The Act also included an amendment that allows oil and gas operators to pool contiguous leased properties, provided that each oil and gas lease does not contain an express prohibition against pooling.
• According to their press release, Matt Baker (R-Bradford/Tioga), Tina Pickett (R-Bradford/Sullivan/Susquehanna), Sandra Major (R-Susquehanna/Wayne/Wyoming), and Garth Everett (R-Lycoming), are planning to propose legislation to directly respond to concerns of landowners who have oil and gas leases, and whose royalty payments have decreased because of the deduction of post-production costs.
• On June 27, 2013, Senate Environmental Resources & Energy held a hearing on royalty stub transparency and post-production costs. Representatives from the following groups testified at the hearing: Pennsylvania Farm Bureau; Bradford County Commissioners Office; Griffen, Dawsey, DePaola and Jones, P.C.; National Association of Royalty Owners; and Marcellus Shale Coalition, which provided background on Pennsylvania’s Guaranteed Minimum Royalty Act and the Kilmer v. Elexco Land Servs. opinion.
• Representative Pickett’s website indicates that the legislation might be ready to be introduced in the Legislature as a House bill in a month.
• On June 28, 2013, Representative Everett put out a co-sponsorship memo for the proposed legislation. The memo also states that it is unfair for oil and gas operators to pay royalties of less than one-eighth because of the deduction of post-production costs. The co-sponsorship memo states that Representatives Everett, Baker, Pickett, and Major “will introduce legislation to clarify that the deduction of post-production costs from unconventional wells may not result in royalty payments less than the guaranteed minimum.”
• Also on June 28, 2013, Representative Jesse White put out a co-sponsorship memo (of which he’s the only listed representative) seeking to prohibit the deduction of post-production costs from oil and gas royalty payments. He stated that in Bradford County, they’ve seen deductions ranging from 40 percent-90 percent. He also stated that the oil and gas industry is exploiting Pennsylvanians, especially farmers, of their royalty checks. The memo is available here.

Reed Smith’s Oil & Gas Team is monitoring new developments at the Pennsylvania Legislature, and is following the debate regarding the deduction of post-production costs. If you have any questions, please contact the authors of this alert or any member of the Oil & Gas Team.

Client Alert 2013-203