Board to look into royalty check deductions
TOWANDA - A Bradford County property owner recently received a gross royalty payment of $390 for a couple of months' gas production from under his property, but because there were so many deductions, the royalty check was for only $30, according to Bradford County Commissioner Doug McLinko.
Another property owner in Bradford County was recently supposed to get a 12 1/2 percent royalty payment on the natural gas that is being extracted from under his property, but because the gas company that holds the lease took such large deductions from the royalty payment, the effective royalty payment made to the property owner was only 7 percent, according to McLinko.
At the Bradford County commissioners' meeting on Thursday, McLinko and Bradford County Commissioner Daryl Miller said that they plan to investigate the deductions that are being made to local landowners' royalty payments to find out whether the deductions are occurring nationally and which of the gas companies operating locally are making them.
"Some of these property owners are getting hit pretty hard," McLinko said. "I'm sure it's legal (to make the deductions). (But) is it the fair thing to do?"
The deductions are being made for post-production costs, which are expenditures that are being made to bring the gas to market after it is extracted from the ground, according to McLinko and Miller. Those costs include, among other things, the cost of processing the gas and the cost of transporting it to market.
Miller said he has personally received 10 to 20 complaints about the deductions in the past eight to 10 months. There has been an increase in the deductions since the Pennsylvania Supreme Court in March 2010 ruled in favor of Elexco Land Service Inc. and Southwestern Energy Production Company, whose deductions for post-production costs had brought the royalty payments on land owned by the Kilmer family in Susquehanna County to below 12 1/2 percent, even though the state requires a minimum 12 1/2 percent royalty rate to landowners, according to Miller.
"The Supreme Court found that the royalty payments could drop below 12 1/2 percent," Miller said.
Because the Kilmer case has now been decided, some gas companies are now retroactively requiring landowners to pay a portion of the post-production costs for a number of years in the past, and those retroactive payments are being made through a reduction in landowners' royalty checks, according to Miller.
Miller said it was his understanding that some gas companies were waiting for the Kilmer case to be decided before requiring landowners to make royalty payments.
McLinko said he is concerned that the deductions in the royalty payments will affect the local economy, because landowners spend much of their royalty payments locally, for example, to make upgrades to their homes, and to purchase vehicles.
On Jan. 24, Chesapeake Energy had sent a letter to its royalty owners advising them of some adjustments in their royalty payments this year following the Kilmer decision.
"As a result of these adjustments, you will see a reduction in the amount you receive for your royalty share," Chesapeake wrote.
In the Jan. 24 letter, Chesapeake explained that the reason for the adjustments had to do with the fact that in 2008-09, several lawsuits were filed in Pennsylvania that sought to clarify whether royalty owners should share in the expense of post-production functions needed to get the gas to market.
Chesapeake wrote, "These are costs incurred beyond the wellhead after the gas is ready for sale or use. Opinions varied on this issue as it had never been decided in Pennsylvania."
The company noted that the Pennsylvania Supreme Court agreed to hear the case and in a ruling issued March 24, 2010, the court held in the case of Herbert Kilmer, et al. vs. Elexco Land Services, Inc. et al. that post-production costs such as gathering, compression and transportation are "properly shared" by royalty owners through proceeds deductions, unless the lease expressly provides otherwise.
Chesapeake noted it is complying with the decision.
The letter continues by noting that effective with the January 2012 checks, "Chesapeake will no longer absorb your share of these post-production costs and your payments will be reduced by these amounts."
Chesapeake also noted that it will also recoup the costs that have been suspended back to the date of the Kilmer decision, but not before, "which we believe is the fairest way to handle those deductions."
Currently, these costs are between 55 cents to 65 cents per Mmbtu, according to the letter.
"We know recouping past costs in a single month could create a hardship for some of our royalty owners," the letter continues. "We don't want that to happen, so we will spread the recouping of costs over a minimum of six months."
Chesapeake noted the deductions will be itemized on the check stub details.
"As a result of these adjustments, you will see a reduction in the amount you receive for your royalty share," the letter noted. "The reduction will be more significant until the past months' costs are recouped, but then should become less apparent in the future."
Talisman Energy USA says it is not charging landowners in Pennsylvania for post-production costs.
"Talisman does not take deductions from the royalties paid to the landowners in Pennsylvania," said Berta Gomez, media relations advisor for Talisman Energy.
For Chief Oil & Gas, post production costs have always been a shared expense that landowners help pay for, in Pennsylvania and other states, said Kristi Gittins, a spokesperson for Chief Oil & Gas.
"While the (Kilmer) court case was pending, Chief did not make the deductions on leases that had an eighth (12.5 percent) royalty only, but we continued to share post production costs on all other leases," Gittins said. "Once the court case was decided, Chief started making the deductions for post production costs on eighth royalty leases, just like we were doing on all other leases in Pennsylvania and in other states. We did not go back and retroactively deduct lost income for the time the court case was pending and we did not make the deductions (for the time the court case was pending)."
James Loewenstein can be reached at (570) 265-1633; or email: email@example.com