Do I Have a Claim Against a Gas Company for Improper Royalty Payments?

Do I Have a Claim Against a Gas Company for Improper Royalty Payments for Unauthorized Royalty Deductions of Post‐Production Costs? Contact The Clark Law Firm Today to Learn Your Rights

An extremely hot issue at the present time involves post‐production costs or “deductions” that Landowners are seeing subtracted from their gas royalty checks. Typically, boilerplate Oil and Gas Leases offered to Landowners clearly permit the gas company to deduct post‐production costs such as the costs of gathering, transporting, compression, separating, treating, dehydrating, storing, processing and marketing the oil and gas.

In the 2010 Pennsylvania Supreme Court’s decision in Kilmer v Elexco Land Services, Inc. et al., 605 Pa. 413, 990 A.2D 147 (Pa. 2010), the Pennsylvania Supreme Court held that post‐production costs such as gathering, compression, transportation and others are properly shared by royalty owners through proceeds deductions unless
the Oil and Gas Lease expressly provides otherwise.

Most Oil and Gas Leases signed by Pennsylvania Landowners before 2008 were boilerplate leases and did not include Addendum language addressing royalty calculation issues and seeking to preclude or minimize post‐production cost deductions. However, beginning around 2008, gas leases were heavily negotiated as gas company competition for Marcellus Shale and Utica Shale leaseholds became fierce. As a result of these negotiations Landowners and their attorneys strengthened royalty calculation provisions by adding Addendum terms to the company offered boilerplate gas lease. Landowners sought Addendum terms addressing royalty calculation in effort to eliminate or reduce deductions for post‐production costs.

One common royalty addendum provision, often referred to as a “Market Enhancement Clause”, began to surface in many Oil and Gas Lease Addendum. The “Market Enhancement Clause” typically provides as follows:

MARKET ENHANCEMENT CLAUSE
All oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without monetary deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other proceeds produced hereunder to transform the product into MARKETABLE FORM; however, any such cost which result in ENHANCING the value of the marketable oil, gas or other products to receive a better price MAY BE DEDUCTED from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee. (Emphasis Added).

The “Ready for Sale or Use Clause” is another common royalty addendum provision seeking to eliminate or reduce a company’s ability to deduct post‐production costs. The “Ready for Sale or Use Clause” typically provides as follows:

READY FOR SALE OR USE CLAUSE
Royalties shall be paid without deductions for the costs of producing, gathering, storing, separating, treating, dehydrating, compressing, transporting, or otherwise making the oil and/or gas produced from the lease premises READY FOR SALE OR USE. All oil and/or gas royalty shall be delivered free of cost into the tank or pipeline (for oil) and into the pipeline (for gas), with the exception of Lessor’s prorated share of taxes, measured by volume, on the oil and/or gas royalty. (Emphasis Added).

Many Landowners understood the Market Enhancement Clause and Ready for Sale or Use Clause to eliminate, or at worst, reduce the post‐production costs that a gas company could deduct from their royalty share. Unfortunately many Landowners with the Market Enhancement Clause and Ready for Sale or Use Clause Addendum terms are now receiving royalty checks and are suffering from sticker shock when they see the often substantial deductions gas companies are taking for post‐production costs.

The most often cited company reasoning for taking post‐production costs under the Market Enhancement Clause and Ready for Sale or Use Clause is the gas company assertion that the gas produced from leases in Pennsylvania is in a “marketable form” or “ready for sale or use” and in “pipeline quality” at the well head. Companies reason that under the Market Enhancement Clause and Ready for Sale or Use Clause they are permitted to deduct post‐production costs, including gathering and transportation fees, from the wellhead to the downstream point of sale because these costs “enhance” the value of gas that is marketable and ready for sale or use at the wellhead. Companies argue these post‐production costs are not “deductions”, but “enhancements” and therefore deductible. It is very important to note that there is a discrepancy between gas companies in how to interpret the Market Enhancement Clause and Ready for Sale or Use Clause and whether deductions for post‐production costs are permissible under these provisions.

The critical undecided issue is whether the gas is truly in “marketable form” or “ready for sale or use” at the wellhead or whether marketability actually occurs at the first interstate pipeline receipt point where gas is often sold

Unfortunately for Landowners it appears that the only way to resolve these issues is to formally challenge any gas company taking the position that deductions for post‐production costs are permitted under the Market Enhancement Clause or Ready for Sale or Use Clause. If these gas companies go unchallenged, the status quo will continue and Landowners will continue to receive their royalty checks with up to 100% of post‐production costs deducted from their royalty payments.

If your Oil and Gas Lease contains the Market Enhancement Clause or Ready for Sale or Use Clause and any gas company paying you royalties is taking deductions for post‐production costs contact The Clark Law Firm, PC today. Attorney Doug Clark will review your Oil and Gas Lease and royalty payments and advise you whether you may have a claim for improper royalty payments.

Remember, post‐production cost deductions can result in thousands and possibly even into the millions of dollars over the lifetime of your gas lease. Do not simply stand by and watch the gas company deduct thousands upon thousands of dollars from your royalty payments. Learn your royalty rights today. Attorney Doug Clark is Pennsylvania’s Landowner Lawyer and he takes on gas companies to make sure you get the royalty payments you deserve. Do not get cheated on your royalty payments, contact us today.