On June 27, 2016, the Pennsylvania House Environmental Resources and Energy Committee revived previously introduced legislation designed to clarify that the Guaranteed Minimum Royalty Act would provide for a minimum unconventional gas royalty of 12.5% even when post-production costs are applied. The committee voted to send House Bill 1391 to the full House for consideration. [Link to House Bill 1391.]
Depending on the language of its oil and gas leases, an energy company may deduct a proportionate share of post-production costs from final royalty payments. Such costs can include compression, dehydration, transmission and other expenses incurred between the wellhead and a final market point of sale. When these charges are deducted, final royalty payments often are below 12.5%.
In the 2010 case of Kilmer v. Elexco Land Services, Inc., the Pennsylvania Supreme Court held that the Guaranteed Minimum Royalty Act did not address the deduction of post-production costs and their impact on royalties. As such, the Court determined that, absent a legislative prohibition to the contrary, post-production costs may be deducted from landowner royalties when the lessee has undertaken the job of treating, processing, marketing and selling the natural gas produced under a lease that is otherwise silent as to post-production costs.
This is the bill’s second attempt at passage. In 2014, the same House committee approved a similar bill, but legislative leaders prohibited a full vote. At that time, some energy companies argued that the bill was unconstitutional because it would revise existing leases. The current bill was introduced in 2015, but its sponsors did not press the issue with the full legislature at that time because of the state’s on-going budget stalemate. Currently, the bill’s sponsors are lobbying legislative leaders for a floor debate and formal consideration of the measure.