On March 17, 2014, HB 1684 passed out of the Pennsylvania House of Representative's Environmental Resources and Energy Committee and now awaits the consideration of the whole House. The bill seeks to define the term "post production costs" and mandates that deductions by gas producers/ lessees of natural gas rights cannot deduct for post production costs to the extent that the net royalty paid on extracted gas is reduced to below 12.5%.
In its current form, the bill would provide that royalties for unconventional wells would be calculated when the gas enters the commercial marketplace, as ownership of the gas passes on to an unrelated entity (an entity "at arms length"). In the event such receiving/ purchasing entity does not meet the definition of "unrelated", the lessee/ producer has the burden of proof in showing that the royalty generated is at fair market value.
HB 1684 also provides for a 12.5 percent "Minimum". That is to say, post production costs cannot drive the royalty actually paid out after calculation to an amount below the 12.5 percent mark. And, such post production costs will have to be itemized for the benefit of the owner in accordance with the guidelines set forth in the legislation.
While the bill would affect current as well as future lease agreements, it does not retroactively impact royalties already paid out. That said, this is especially important in light of a recent push to enforce "forced grouping" or "forced pooling" beyond the Utica region, into the gas-rich lands that are considered to fall within the Marcellus region.
Forced Grouping is a something of a variation of eminent domain, wherein land owners who have not signed a deal to lease their gas rights are compelled to accept the deal given to a majority of their neighbors. The underlying reasoning is simple: Natural Gas is not segmented by the above-ground property line. This means "hold-outs" can effectively hijack economically useful and beneficial production on an entire deposit, absent some provision such as forced grouping.
Setting aside discussion of individual property rights vs the needs of society for the purposes of this one article, as a tangible matter the "fairness" of such compulsory grouping largely depends on the terms of the leasing agreements entered into by the majority of area landowners.
The arguments for forced grouping revolve around the economics of energy, fostering and encouraging production and keeping prices down for the ultimate end-user. However, JHI believes that for the anticipated Marcellus Shale boom to be fully realized, the land owners who hold the rights to the gas beneath their feet must be full participants in such a boom.
If it becomes law as presently drafted, this owner-friendly legislation will add greater credibility to gas producers/ lessees arguing in favor of the enforcement of forced grouping.
While some folks are "hold-outs" for other reasons, in economic terms such might not necessarily be bad news for land owners who hold the rights to Marcellus Shale natural gas. If you are such an owner, know your rights. Gas producers/ lessees have top-shelf attorneys dedicated to pursuing the interests of these companies. You should have a high quality lawyer guarding your rights and interests.
In light of this new legislation, talk with your neighbors about a common strategy for moving forward. JHI will continue to track developments in Pennsylvania law impacting the increasingly controversial and complex issues surrounding Marcellus Shale natural gas exploitation.