Western Pa. landowners disgruntled as drillers' deductions cut payments

| Saturday, July 6, 2013, 9:00 p.m.

Darlene Barni is supposed to get 15 percent royalties on gas from three wells on her property. But after her drilling company subtracts fees for transporting and processing, she doesn't earn even 12.5 percent, the state's legal minimum.

These deductions, while legal, are starting to cause an uproar among landowners, prompting the Legislature to push for new rules. Most complaints have come from northern Pennsylvania, where some royalty owners are losing as much as $2.88 of every $3, according to the National Association of Royalty Owners.

Deductions that severe are unheard of in Western Pennsylvania, but there is rising concern here.

The oil and gas production arm of Royal Dutch Shell plc sent letters to royalty recipients in March saying it will start charging deductions to Pennsylvania landowners, affecting fewer than 30 percent of its landowners, spokeswoman Destin Singleton said.

Barni noticed that annual deductions from Range Resources Corp. rose from 15 percent to 29 percent between 2010 and 2012, though they dropped back to 26 percent this year, she said.

“I don't want the landowners to get raped every year that these costs go up and the royalties keep coming down,” said Barni, 70, of Cecil, where Range taps gas from 5 acres around her home. “Pretty soon there's going to be more taken out than what's in the royalty check itself.”

Every driller has its own methods for royalty deductions, Marcellus Shale Coalition spokesman Patrick Creighton said, deferring comment to companies.

Chesapeake Energy Corp. is the most aggressive at taking deductions but has only a small foothold in Western Pennsylvania, said Tom Lopus, an industry veteran from Marshall who helped found the coalition.

“I do think there are places where Chesapeake has crossed the line, and other companies as well,” said Lopus, who oversees oil and gas operations for Pardee Resources Co. “But for the most part, if you get a clearly defined lease at the beginning of the process, none of this ever has to be discussed.”

Officials with Range Resources did not respond to requests for comment. A Chesapeake spokeswoman declined to comment.

The state Supreme Court decided in a 2010 case, Kilmer v. Elexco Land Services Inc., how royalties would work.

State lawmakers set a 12.5 percent minimum for royalties but did not define a royalty, Justice Max Baer of Mt. Lebanon wrote. The court decided the most consistent thing to do is to calculate the royalty percentage at the wellhead.

That means gas drillers can charge landowners for sharing post-production costs. In Barni's case, her agreement for 15 percent royalties means she'll assume 15 percent of costs of compressing, piping and selling the gas.

“These are private contracts ... and people need to pay attention to what they're signing,” said Sen. Gene Yaw, R-Williamsport.

Yaw sponsored a bill lawmakers passed on June 30 to provide landowners with better information about such deductions. He's reluctant to undo the court precedent for contracts in place: “I don't think the Legislature is going to get involved in telling business how to operate their business.”

Yaw's bill addresses the information that drilling companies include on royalty check stubs sent to landowners. If Gov. Tom Corbett signs it by Wednesday, companies must include contact information, the price received per unit, total sales revenue and other basic facts.

“It's hard to read these papers,” Barni said. “It is confusing.”

Her most recent stub is six pages, with numbers stacked in labeled columns. Deduction labels include “marketing,” “firm capacity” and “PPC CR.80/MMBTU.” Yaw's bill wouldn't necessarily change that, but advocates for landowners support any effort for better information to ensure accurate payments.

Many would like the law to cap deductions, arguing it doesn't make sense to set a minimum royalty and allow deductions that can lower the final payment below the minimum.

“If you're not addressing the real pain — the sticker shock of deductions — how much value is there in this legislation?” said Robert Burnett, an attorney with Houston Harbaugh, Downtown. “Even though we have a guaranteed minimum royalty statute ... it's being violated almost every day.”

State lawmakers could simply define royalties after the sale and ensure that landowners get 12.5 percent of proceeds, he said.

Finding solutions isn't that simple, said state Rep. Garth Everett, R-Lycoming County, who is trying to draft a bill clarifying deductions. With so many oil and gas contracts in place, all with varying language, it's not clear how the state could intervene, he said.

“I don't want anyone to think that we're going to pass legislation and fix all this,” Everett said.

There's a lot at stake as drilling grows. Royalties paid more than $700 million to landowners in 2012, the Allegheny Institute in Castle Shannon estimated. In gas drilling hotspots around the country, royalty deductions have led to court fights over millions of dollars.

In Pennsylvania, some companies don't deduct anything, even when leases permit it, said Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners. That's no guarantee it will stay that way.

A switch, such as Shell's decision to start taking deductions, confuses landowners, said Gene Cooper, 62, of Worth, Butler County, the largest landowner in his Shell drilling unit.

“They drill the well, and the first thing is, they come in and tell you, ‘Oh, we forgot, there's a charge here,' ” he said.

Timothy Puko is a Trib Total Media staff writer. Reach him at 412-320-7991 or tpuko@tribweb.com.

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