Shrinking royalty checks
TOWANDA - Mary Jane Foelster of Sayre says that since February, Chesapeake Energy Corp. has not paid her more than 70 percent of the royalties that she and her husband had been expecting to receive from the company for the gas that is being extracted from under their property in Litchfield Township.
Instead, the company is keeping the money to pay for so-called post-production costs, she said. Post-production costs are expenses that a gas company incurs after the gas leaves the wellhead, such as the cost of transporting the gas to market and dehydrating the gas.
Foelster said her most recent royalty check, which was for August and September, was particularly puny. Based on the one-eighth royalty that is written into her lease, the check should have been in the amount of $1,026, Foelster said. Instead, due to deductions that were made for post-production costs, the amount of the check was only $47, she said.
Mary Jane Foelster is one of many local landowners who have been bringing similar complaints about their royalty payments to the Bradford County commissioners, according to Bradford County commissioners Doug McLinko and Daryl Miller.
Certain gas companies "are robbing our landowners," including the Foelsters, McLinko said at the most recent meeting of the Bradford County commissioners. The problem of royalty payments being significantly shrunk by deductions for post-production costs "is widespread throughout our county," said McLinko, a Republican who has historically been a strong supporter of the gas industry.
At the meeting, the commissioners said they have been fighting to try to get the problem of large post-production expenses resolved, but have been running into opposition from the gas companies and politicians at the state level.
McLinko lashed out at the state Senate, saying members of the Senate just find solutions not to address the problem.
And Democratic Commissioner Mark Smith faulted Gov. Tom Corbett and Sen. Gene Yaw (R-23) for not getting the problem resolved.
"There are government officials, right up to the administrative offices of Tom Corbett, that believe this is OK (the taking of large deductions from royalty checks for post-production expenses)," Smith said.
Smith also said the commissioners have been siting down with gas companies for the past six months to try to find a solution to the problem.
He said the last time he sat down to discuss the matter with a gas company, "They basically told me, 'We have the governor, we have guys like Gene Yaw on our side, and we're going to fight this tooth and nail ... They want to keep robbing people of their royalty checks."
A number of gas companies, including Chesapeake, "are taking monstrous deductions" from royalty checks, which is hurting landowners, Smith said.
"The ringleader of the opposition (to getting the problem taken care of) is Senator Yaw," Smith said. "Our biggest roadblock to any progress on this issue has been our own state senator."
The Pennsylvania Supreme Court (when it handed down the Kilmer vs. Elexco decision in 2010) told us all that the legislators can fix this (problem) and should fix this, and that's what should be done," Smith said. The Kilmer vs. Elexco decision allowed post-production deductions to reduce royalty payments below the 12.5 guaranteed minimum royalty that was established by the Guaranteed Minimum Royalty Act of 1979.
When it handed down the decision, the Supreme Court said it lacked direction from the Legislature on how to interpret the Act.
McLinko said that House Bill 1684, which is co-sponsored by Rep. Tina Pickett and Rep. Matt Baker, is intended to address the problem of large deductions for post-production expenses.
The bill would prevent post-production costs from reducing royalty payments below 12.5 percent.
McLinko said the bill has not been allowed to come out of the House Environmental Resources and Energy Committee for a vote on the House floor.
Pickett said in an interview held after the meeting that the bill would be passed if it came up for a vote by the full House. The bill asks the Legislature to reaffirm its intentions when it established the 12.5 percent guaranteed minimum royalty, she said.
So if the intent of the Legislature was to give landowners a 12.5 percent minimum royalty, regardless of any post-production expenses, then House Bill 1684, if it passed, would apply to existing leases as well as any future leases that landowners entered into, she said.
Patrick Henderson, Gov. Corbett's energy executive, took exception to Smith's comments.
"Governor Corbett is very concerned about any reports that Pennsylvania landowners are not being treated fairly and in accordance with their lease agreements," Henderson wrote in an email to The Review. "He has expressed this concern, and his commitment to assist Pennsylvania landowners, on many occasions. He has also discussed this issue with Commissioners McLinko and Miller, as well as members of the state House and Senate who likewise are concerned about their constituents' rights.
"Commissioner Smith's comments are inaccurate and unprofessional," Henderson wrote. "His unattributed accusations from an alleged meeting are inflammatory, and if they were true, he ought to have the decency and forthrightness to state who, exactly, made such claims.
"Baseless, partisan accusations such as those repeatedly lobbed by Mr. Smith do nothing to advance what Governor Corbett is committed to doing: ensuring Pennsylvania landowners are treated fairly," Henderson wrote.
Yaw was also contacted after the commissioners' meeting, and in an interview re-affirmed his argument that landowners need to use the court system to address their problems with deductions for post-production expenses.
"If enough people took action against Chesapeake, it will get their (attention)," Yaw said.
Yaw reiterated that he would vote for House Bill 1684 if it came before the Senate.
However, he said that the bill is not the cure-all that some say it will be. House Bill 1684, if passed, will be interpreted differently by different parties, and those competing interpretations will be the subject of court battles, he said.
Brittany Thomas, a spokesman for Chesapeake Energy, said that Chespeake declines to comment for the story.
James Loewenstein can be reached at (570) 265-1633; or email: firstname.lastname@example.org.