In gas drilling coun­try, the hon­ey­moon is over on roy­al­ties

Daily Local News (West Chester, PA) - - BUSINESS - By Michael Ru­binkam

WYALUSING, PA. >> Jan Brown pores over his roy­alty state­ment and won­ders where all the money went.

A few months ago, the na­tion’s sec­ond-largest nat­u­ral gas pro­ducer si­phoned $2,201 worth of gas from his 240-acre prop­erty — but paid him only $359 af­ter tak­ing de­duc­tions for trans­porta­tion and pro­cess­ing.

Brown, 59, who re­lies on the roy­al­ties as his sole source of in­come, says the de­duc­tions are out­ra­geous and claims his lease for­bids them. He feels cheated and duped.

In Penn­syl­va­nia and other lead­ing gas-pro­duc­ing states, a bat­tle royal has de­vel­oped over roy­al­ties, with landown­ers bit­terly dis­put­ing the sums that some drillers have been tak­ing from roy­alty checks al­ready se­verely di­min­ished by a col­lapse in prices.

Ch­e­sa­peake En­ergy Corp. alone is fac­ing roy­alty law­suits in Texas, Ohio, Louisiana, Ok­la­homa, Arkansas and Penn­syl­va­nia — in­clud­ing one filed by the Penn­syl­va­nia at­tor­ney gen­eral — and says it has re­ceived sub­poe­nas from the U.S. De­part­ment of Jus­tice, the U.S. Postal Ser­vice and states over its roy­alty prac­tices.

The de­duc­tions’ im­pact is es­pe­cially acute in Penn­syl­va­nia, where gas ex­tracted from the

Mar­cel­lus Shale, the na­tion’s largest nat­u­ral gas field, has been sell­ing at a steeper dis­count than any­where else in the coun­try. Some landown­ers have seen their roy­alty checks dwin­dle to noth­ing at all, de­spite a 1979 state law that man­dates a landowner roy­alty of at least 12.5 per­cent of the value of the gas. In rare cases, landown­ers have even got­ten state­ments with neg­a­tive bal­ances.

“This is rob­bery,” de­clared Brad­ford County Com­mis­sioner Doug McLinko, an ar­dent sup­porter of gas drilling who has nev­er­the­less found

him­self at war with the in­dus­try. “Peo­ple up here are fight­ing mad.”

En­ergy com­pa­nies have sunk more than 1,000 wells in McLinko’s ru­ral county since 2009. In the early years of the frack­ing boom, roy­al­ties could amount to tens of thou­sands of dol­lars per month. The money helped save many fam­ily farms.

Then prices tum­bled, the wells be­gan pro­duc­ing less gas as they aged and res­i­dents be­gan tak­ing a closer look at their dras­ti­cally shrunken checks. Many of them didn’t like what they saw: huge de­duc­tions for the cost of get­ting the gas from well to mar­ket.

Char­lene and John Tewks­bury, who own a dairy farm, said that for ev­ery

$1.20 their gas fetched this year, Ch­e­sa­peake has been tak­ing about $1.15 in de­duc­tions. They fig­ure the de­duc­tions have to­taled $277,000 since their wells be­gan pro­duc­ing gas in 2011 — cash they want back.

“It’s a lot of money. It could have done some­thing in this state, but, in­stead, Ch­e­sa­peake kept it,” Char­lene Tewks­bury said.

Ch­e­sa­peake did not an­swer ques­tions from The As­so­ci­ated Press about its prac­tice of tak­ing de­duc­tions, but said in a state­ment it has been work­ing with the Penn­syl­va­nia at­tor­ney gen­eral’s of­fice and class-ac­tion plain­tiffs on a “global res­o­lu­tion” of the roy­alty dis­pute. A me­di­a­tion ses­sion is sched­uled for Oct. 25.

The dis­agree­ment cen­ters

on how the gas should be val­ued for roy­alty pur­poses.

Landown­ers con­tend they’re en­ti­tled to 12.5 per­cent of what­ever the gas sells for, cit­ing the state’s min­i­mum roy­alty law and the gas com­pa­nies’ own sales pitches that in­duced landown­ers to sign drilling leases. Drillers say the roy­alty is prop­erly cal­cu­lated based on the mar­ket price, less post-pro­duc­tion de­duc­tions for trans­porta­tion and pro­cess­ing, a method per­mit­ted in most states.

In 2010, the state Supreme Court sided with the gas com­pa­nies — but also noted that state law­mak­ers are “best suited” to de­cid­ing how the roy­al­ties should be paid.

Law­mak­ers have sched­uled

a pro­ce­dural vote Tues­day on a bill in the state House that would pre­vent de­duc­tions from re­duc­ing landowner roy­al­ties to be­low the 12.5 per­cent state min­i­mum. The gas in­dus­try has been lob­by­ing against it, as­sert­ing it would un­con­sti­tu­tion­ally in­ter­fere with tens of thou­sands of ex­ist­ing pri­vate con­tracts. Any con­trac­tual dis­putes should be de­cided in the courts, not through leg­is­la­tion, the drillers ar­gue.

“We un­der­stand and share the frus­tra­tion be­ing voiced by some min­eral own­ers,” Mar­cel­lus Shale Coali­tion spokes­woman Erica Clay­ton Wright said in a state­ment, but added that landown­ers and drillers both “share in the suc­cess and chal­lenges that the

mar­ket brings.”

With de­duc­tions now re­duc­ing landown­ers’ roy­alty pay­ments by 80 or 90 per­cent — or more — the is­sue has reached a boil.

Brown, the landowner, pro­duced a state­ment show­ing that Ok­la­homa Ci­ty­based Ch­e­sa­peake paid an ef­fec­tive roy­alty rate of just 2 per­cent — while an­other com­pany that owns a por­tion of his lease, Sta­toil, took no de­duc­tions at all and gave him the full 12.5 per­cent.

He said he re­cently called Ch­e­sa­peake and told them to take his wells off­line.

“I’m not against the gas com­pa­nies. I just want them to treat us fair,” Brown said. “They made a promise; I ex­pect them to live up to the promise.”

THE AS­SO­CI­ATED PRESS

Jan Brown looks over a roy­alty state­ment at his home in Wyalusing, Pa.

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