Oil and Gas Lawyer Blog
Royalty owner opposition to Chesapeake is heating up in Pennsylvania.
Chesapeake has sent royalty owners letters saying it has overpaid them by failing to deduct post-production costs and demanding reimbursement. Post-production cost deductions are exceeding revenues on Chesapeake’s royalty checks, resulting in a “negative royalty.” The Commissioners of Bradford County, in the heart of the Marcellus play, have commissioned a video advocating for passage of a bill to require companies to pay a minimum royalty of 1/8th, regardless of the amount of post-production costs. Pennsylvania has a Guaranteed Minimum Royalty Act that requires all leases to contain no less than 1/8th royalty. But the state’s Supreme Court ruled in 2010 that the Act didn’t prevent companies from deducting post-production costs.
Chesapeake has the same problem in Pennsylvania that it had in the Barnett Shale play. In both cases, it made contracts between its affiliated companies to charge high fees for gathering and marketing its gas and then sold those affiliated gathering companies for a substantial premium. It’s now stuck with those very unfavorable post-production costs, and is charging those costs back to the royalty owners.