Aug 14, 2017 3 min read

Over the past few years, many natural gas leaseholders have expressed confusion over deductions from their royalty checks. Some have even received checks bearing negative amounts from Marcellus shale drillers in certain unusual cases.

A bill in the state House wouldn’t eliminate these deductions – which allow companies to pass post-production costs on to leaseholders – but would bar companies from cutting negative royalty checks and implement other measures aimed at protecting landowners who receive gas royalties.

The proposal, introduced Friday by Rep. Jason Ortitay, R-South Fayette, would require natural gas producers to provide landowners with written summaries of the deductions they make from royalty checks, and allow leaseholders to inspect company records related to deductions from their payments.

“While my proposal – or any legislation – cannot change existing leases, if approved, it would put in place important protections to make sure landowners receive the royalties to which they are entitled,” Ortitay said in a statement.

Ortitay’s bill faces a competing proposal introduced earlier this year.

House Bill 557, sponsored by Rep. Garth Everett, R-Lycoming, would amend the 1979 law that governs oil and gas leases to set royalties at a firm minimum of 12.5 percent of the gross proceeds from gas sales. Ortitay’s legislation would allow drillers to keep applying that same minimum to the value of the gas, minus costs related to processing and transporting it.

In an emailed statement, Erica Clayton Wright, a spokeswoman for the Marcellus Shale Coalition trade group, said, “Our industry absolutely recognizes and shares the pain echoed by some mineral owners – who are our partners in resource development – tied to deeply depressed commodity prices, which has impacted local jobs, revenues as well as royalties. While we’re still reviewing this proposal, contract-related matters will always be most effectively addressed by the courts.”

Deductions from royalty checks are the subject of an ongoing lawsuit the state attorney general’s office brought in 2015 against Chespeake Energy Corp. The suit claims Chesapeake Energy “engaged in a self-dealing scheme” to inflate the post-production costs that cut into landowners’ royalty checks and failed to disclose to landowners it was reducing royalty payments because of costs it paid to affiliated companies.

Language that would bar drillers and affiliated entities from deducting more from royalty checks for post-production costs than “would reasonably be incurred in an arm’s-length transaction with a third party” is also part of Ortitay’s bill.

“It’s in the company’s best interest to get the most money they can with the least deductions, and the leaseholder’s as well,” Ortitay said.