Officials again call on Legislature to fix

post-production costs

TOWANDA - At their meeting on Thursday, the three Bradford County commissioners said they stand by a resolution they passed in May, which calls on the state Legislature to take action that will guarantee that deductions for post-production costs will not reduce property owners' royalty payments below 12 1/2 percent.

The commissioners again called on the Legislature to take action on the resolution, saying that the guarantee of a 12 1/2 minimum royalty payment, which is written in a 1979 law, should apply to existing leases, as well as to new leases.

"I believe (we have proposed) a solid plan for the state to solve the problem" of Bradford County landowners being saddled with "heavy" post-production costs, McLinko said. "The Pennsylvania Supreme Court has said how the problem can be fixed, but the Legislature isn't doing it."

According to the commissioners, some Bradford County residents have been receiving royalty payments of only 2 or 3 percent, due to expenses being deducted from their royalty checks for various post-production costs, such as transporting the gas to market, and compressing the gas.

Miller has said that, based on a very conservative estimate, Bradford County landowners lost $10 million in the last six months of 2012, due to deductions being taken out of their royalty checks for post-production costs. He said the amount of lost royalty payments was even higher during the first half of 2013, since production of natural gas rose from 285 billion cubic feet in the second half of 2012 to 345 billion cubic feet in the first half of 2013.

State Sen. Gene Yaw has stated that any action that the Legislature would take to address post-production deductions could only apply to new leases that landowners would enter into in the future, and not to existing ones, since it would be unconstitutional for the Legislature to alter existing leases, which are legal contracts.

But McLinko said that, considering how extensively developed Bradford County already is in terms of gas drilling and the large number of gas leases in the county have already been signed, Yaw's position means that Bradford County will be "left out" of any solution to the problem.

McLinko said that the county's solicitors, Jonathan Foster Sr. and Jonathan Foster Jr., had done a "tremendous" job of doing legal research to prepare the resolution. In addition, a Pittsburgh law firm that the county had used in the past reviewed the draft of the resolution and helped the county reach a conclusion on what the resolution should say.

"There was a lot of research that went into this resolution," said Daryl Miller, Bradford County commissioner. "It was not something that we did on the spur of the moment."

McLinko said that every resident in Bradford County is affected by post-production deductions, regardless of whether their property has a gas lease on it, because the county itself has 1,000 acres under a gas lease.

The residents of Bradford County "will see the benefits of royalty (payments made to the county) over the years," McLinko added.

Sen. Yaw's position on the matter has been a "disappointment," said Bradford County Commissioner Mark Smith, a Democrat.

"With his editorial (that was published earlier this month in The Daily Review), we see that he is more interested in finding reasons to not do something (about the issue) than in finding a solution (to the problem)," Smith said.

Yaw's statement that only a few ignorant people are asking the Legislature to solve the problem for existing lease-holders "is arrogant and shortsighted," Smith said.

Smith called on Yaw to change his mind and work to address the issue of post-production deductions.

"I hope Sen. Yaw finds a way (to address) the extreme negative effect this is having on property owners," Smith said. "What a blemish this is on the gas industry, because (no one has been) able to fix this."

McLinko pointed out that of the 35,000 parcels in Bradford County, a large majority are less than 10 acres, so post-production deductions are affecting ordinary citizens who cannot afford to litigate against the gas companies.

While those in Harrisburg are advising Bradford County landowners to file lawsuits to address their problems with post-production deductions, "we can't ask these people to sue the gas industry," McLinko said.

What the commissioners are asking for "is not about violating anything in the Constitution or violating a contractual agreement," Miller said. "We are simply (operating within) the decision of the Supreme Court."

Miller was referring to the Pennsylvania Supreme Court's 2010 ruling in the Kilmer vs. Elexco case, which allowed gas companies to deduct post-production costs from royalty payments, even if they reduced royalty payments below 12 1/2 percent.

However, the court's decision gave the state Legislature an opportunity to weigh in on the issue, according to Miller.

Miller also took aim at Yaw's argument that the Legislature cannot alter existing leases, pointing out that the Legislature did just that when it passed Act 66 this summer.

Under Act 66, a gas company that owns most but not all of the leases in the area where it is planning to drill a gas well can draw gas from properties that where the gas rights have been leased by another company, without obtaining the permission of the property owner or the gas company, Miller said.

But Yaw (R-23) said Act 66 is a completely different set of circumstances to the post-production issues. "It's like comparing apples to a rock," he said.

And Yaw said that when he used the word "ignorant," he was not trying to insult anyone, but was pointing out that it is people who are ignorant of the law who are asking the Legislature to alter existing leases.

Yaw also took exception to Smith's contention that he is avoiding helping people address the issue of post-production costs. "They (the commissioners) obviously did not read my op-ed piece. There are details (in the op-ed piece) of our efforts of what we are doing about this (issue) and the legislation we are putting together," Yaw said.

James Loewenstein can be reached at (570) 265-1633; or email: Jloewenstein@thedailyreview.com.