The Pennsylvania legislature is considering amendments to the Guaranteed Minimum Royalty Act (GMRA) that would require oil and gas lessees to disclose to oil and gas lessors the post-production costs deducted from the sale of gas to calculate the royalty owner’s 12.5 percent minimum guaranteed royalty.
House Bill 1414 would require oil and gas producers (lessees) to include on the royalty owner’s check stub, or an attachment, the total amount of severance and other production taxes and other deductions permitted under the applicable division order, lease, servitude or other agreement. H.B. 1414 seems to be a legislative response to Kilmer v. Elexco Land Services, Inc. and a number of other similar cases in which the lessors under oil and gas leases sought to void their leases because the deduction of post-production costs prior to calculating the lessor’s royalty purportedly resulted in a royalty less than that required by the GMRA. While the Kilmer case turned on other issues, one claim raised by the Kilmers was that the deduction of post-production costs would invite gas companies to inflate those costs and, as a result, reduce royalty payments. The Pennsylvania Supreme Court was not swayed by the Kilmers’ argument finding that gas companies have a strong incentive to keep their costs down because the companies pay seven-eighths of those costs.
The legislature, declining the court’s invitation to clarify the GMRA by defining important terms such as “royalty,” “at the wellhead,” “post-production costs,” and “point of sale,” instead focused on addressing the Kilmers’ least persuasive argument. In doing so, the legislature missed an opportunity to provide clarity that would be welcome to oil and gas lessors and lessees.