PENN ROAR January 2013 Volume 3 Pennsylvania’s Royalty Ow ners Action Report Issue 1 Penn ROAR, 359 Route 106 Greenfield Twp, PA 18407 [email protected] 570-267-4083 for advertising Inside NARO-PA premiere party & January 22 @ Montrose VFW … see page 5 This Issue Page 3… Market Enhancement Clauses and ‘Deductions’: New Well Owners Do I Have a Claim Against the Gas Company for Improper Booklet Answers Many Questions Royalty Payments? By: Douglas A. Clark, The Clark Law Firm, PC Page 4… An extremely hot issue at the present New Documentary addressing royalty calculation in effort to Aims to Correct time involves post-production costs or eliminate or reduce post-production costs. “Lies” and “deductions” that landowners are seeing One common royalty addendum “Misinformation” subtracted from their gas royalty checks. provision, often referred to as a “Market Typically, boilerplate Oil and Gas Leases Enhancement Clause”, began to surface in offered to landowners clearly permit the gas Page 6… many Oil and Gas Lease Addendum. The New Tax Rates & company to deduct post-production costs for “Market Enhancement Clause” provides as Rules to Affect Your the cost of producing, gathering, storing, Wallet for 2013 separating, treating, follows: dehydrating, processing, MARKET Page 7… transporting and marketing ENHANCEMENT Legislative Update the oil and gas. CLAUSE In the 2010 Pennsylvania All oil, gas or Page 8… Supreme Court’s decision in other proceeds accruing Marcellus Shale Kilmer v Elexco Land to Lessor under this lease boom sparks Services, Inc. et al., 605 or by state law shall be student's interest in oil, gas law Pa.413, 990 A.2D 147 (Pa. without monetary 2010), the Pennsylvania Page 10... deduction, directly or indirectly, for the Supreme Court held that post-production costs A One-Percenter cost of producing, gathering, storing, Gives Far More Than such as gathering ,compression, transportation separating, treating, dehydrating, He Takes and others are properly shared by royalty compressing, processing, transporting, owners through proceeds deductions unless the and marketing the oil, gas and other Page 13… Oil and Gas Lease expressly provides proceeds produced hereunder to The Accommodation otherwise. transform the product into marketable Doctrine Most leases signed by landowners form; however, any such cost which before 2008 were boilerplate leases and did not result in enhancing the value of the have Addendum language addressing royalty marketable oil, gas or other products calculation issues and post-production costs. to receive a better price may be However, beginning around 2008, leases were deducted from Lessor’s share of heavily negotiated as gas company competition production so long as they are based on for Marcellus Shale leaseholds became fierce. Lessee’s actual cost of such As a result of these negotiations landowners enhancements. However, in no event strengthened royalty provisions in the form shall Lessor receive a price that is less www.naro-us.org Addendum added to the boiler plate gas lease. than, or more than, the price received Landowners sought Addendum terms by Lessee. Continued to page 2 NARO-PA files Amicus Curiae Continued from page 1 Many landowners understood this production costs from the wellhead to the downstream point Market Enhancement Clause to eliminate, or at of sale as these costs are necessary to turn the gas into a worst, reduce the post-production costs that a marketable commodity. The companies in Kilmer gas company could subtract from their royalty acknowledged that gas at the wellhead requires extensive share. Unfortunately many landowners with post-production activities necessary to process the gas into a the Market Enhancement Clause Addendum marketable product. Chesapeake now asserts the opposite. term are now starting to receive royalty checks Unfortunately for landowners it appears that the only and are suffering from severe sticker shock way to resolve this issue is to formally challenge when they see the often substantial deductions Chesapeake’s position seeking to settle or litigate this issue companies are taking for post production costs. through court action or arbitration, depending upon the The most often cited company for dispute resolution terms in the lease. If these issues go taking post-production costs under the Market unchallenged, the status quo will continue and landowners Enhancement Clause is Chesapeake will continue to receive their royalty checks with significant Appalachia, LLC (“Chesapeake”). Chesapeake post-production costs deductions. is on record taking the position that the gas Whether landowners want to pursue a claim against a produced from leases in northeastern gas company for improper royalty payments is a personal Pennsylvania is in a “marketable condition” at decision that should only be made after fully understanding the well head. In fact, Chesapeake actually your rights and options. Landowners who believe they are sells the gas at the wellhead to their wholly improperly receiving royalty payments should contact a legal owned subsidiary Chesapeake Energy professional experienced in oil and gas matters to discuss their Marketing, Inc. (“CEMI”). CEMI is a options and explore whether raising a claim against the gas marketing company which takes title and company for improper royalty payments is right for them. possession of gas at the wellhead and incurs Remember, only with a full understanding of these issues and costs and expenses to transport the gas from your options will you be able to make a decision that his right the wellhead to the downstream point of sale. for you and your particular circumstances.● Chesapeake concludes that under the Market Enhancement Clause they are permitted to deduct these post-production costs, including gathering and transportation fees, from the wellhead to the downstream point of sale asserting that these costs “enhance” the value of marketable gas. Although some companies apparently share Chesapeake’s interpretation of the Market Enhancement Clause, not all oil and gas companies are interpreting the Market Enhancement Clause in the same fashion. The question arises whether the gas is truly in “marketable form” at the wellhead or whether marketability actually occurs at the first interstate pipeline receipt point where gas is often sold. A second question arises as to whether Chesapeake’s sale to CEMI, an affiliated third party, constitutes a true market transaction appropriately establishing the gas price from which landowners royalties are calculated or whether the starting point for royalty calculation should be set at the first non-affiliated third party transaction. Interestingly, the defendant gas companies in the Kilmer argued that they should be permitted to deduct the post- Page 2 Penn ROAR March 2012 New Well Owners Booklet Answers Many Questions When should you test your water? What should you test it for? WILKES-BARRE, PA—October 12, 2012— To learn more about the Citizen Groundwater/ Surfacewater Brian Oram, a professional geologist and Database and other Grassroots Efforts or to schedule an soil scientist and founder of B.F. outreach event, go to http://www.water-research.net. Environmental Consultants, announced today that his firm is making available “The About B.F. Environmental Consultants, Inc. Pennsylvania Guide for Groundwater for B.F. Environmental Consultants, based in Northeastern Private Well Owners: What Do the Numbers Pennsylvania and the Poconos, has been providing Mean?” through the Water Research Center professional geological, soils, hydrogeological, and Portal at http://www.water- environmental consulting services since 1985. The company research.net/privatewellPA.htm specializes in the following areas: hydrogeological and wastewater evaluations for siting land-based wastewater “The goal of this booklet is to help educate and disposal systems; soils consulting (soil scientists), inform citizens on issues related to water environmental monitoring, overseeing the siting, conservation, ensuring that private water exploration, and development of community/ commercial supply systems produce safe drinking water for water supply sources; baseline water testing, conducting your family, protecting the long-term quality of “certified baseline samplers training programs”, our streams and drinking water sources, and environmental training/ professional training courses, and helping you to understand the potential sources other environmental services. For more information about of pollution to our water resources,” Oram B.F. Environmental Consultants, said. visit www.bfenvironmental.com and www.water- research.net.● The booklet provides general information explaining certified water testing, chain-of- custody, and drinking water regulations and standards. It provides information related to the health (primary standards) or aesthetic (secondary standards) concerns for each GREEVY& ASSOCIATES parameter and provides information on water Oil & Gas Attorneys quality parameters that do not specifically have a drinking water limit. Lester L. Greevy • Recognized Authority “This reference is a guide to understanding John A. Shoemaker water quality that works by providing guidance on selecting water quality testing parameters for baseline testing from a citizen's perspective Pipelines, Well Sites& Pooling Issues and by serving as a tool to help interpret water Leases, Rights & Title Issues quality data,” Oram added. Royalties & Future Management In some cases, the document provides guidance Family