Updated September 21, 2026
Pennsylvania landowners receiving natural gas royalties often focus on two numbers: the amount of gas produced and the royalty percentage stated in the oil and gas lease.
But there is another number that can have an enormous effect on the royalty check.
Deductions.
A landowner may receive a royalty statement showing charges for gathering, compression, transportation, processing, dehydration, treating, marketing, fuel, line loss, or other post-production expenses. In some cases, those deductions can substantially reduce the royalty payment.
Pennsylvania landowners should not assume that every deduction appearing on a royalty statement is proper.
Whether a gas company may deduct post-production costs depends heavily on the language of the oil and gas lease, any negotiated addendum, the type of cost being deducted, how the royalty is calculated, where the gas is valued, and the facts surrounding the company’s sale and transportation of the gas.
If your royalty checks contain substantial deductions, the starting point should be the lease and addendum—not the explanation printed on the royalty statement.
What Are Post-Production Costs?
Post-production costs generally refer to costs incurred after natural gas is produced from the well and before or in connection with its movement, treatment, processing, and sale.
Depending on the operation, these costs may include:
- gathering;
- compression;
- transportation;
- dehydration;
- treating;
- processing;
- separating;
- fractionation;
- marketing;
- fuel;
- line loss;
- third-party pipeline charges;
- and other expenses associated with moving or preparing natural gas for sale.
Not every royalty statement uses the same terminology.
A company may combine costs into categories or use abbreviations that are difficult for a royalty owner to understand. The fact that a charge appears on a company statement does not answer whether the charge is permitted under the landowner’s lease.
The Royalty Percentage Is Only Part of the Analysis
A Pennsylvania landowner may have negotiated a 15%, 17%, 18%, 20%, or another royalty percentage.
That percentage is important.
But the royalty percentage alone does not tell the landowner how much money will actually be received.
Two landowners with the same royalty percentage may receive materially different net royalty payments if one lease allows extensive post-production deductions and the other contains strong no-deduction or royalty-protection language.
Landowners therefore need to examine both:
- the royalty percentage; and
- the formula used to calculate the royalty.
A strong percentage combined with weak calculation language can produce disappointing results.
The Oil and Gas Lease Controls
Royalty disputes are fundamentally contract disputes.
The first question should be:
What does the oil and gas lease actually say?
The royalty clause may state that royalties are calculated based on:
- proceeds;
- gross proceeds;
- net proceeds;
- market value;
- market price;
- value at the well;
- proceeds received by the lessee;
- proceeds received from an arm’s-length purchaser;
- or another defined calculation.
Those differences matter.
The lease may also expressly authorize certain deductions, prohibit deductions, or contain language that must be read together with a negotiated addendum.
Landowners should never evaluate royalty deductions by looking only at the royalty statement.
The statement must be compared against the lease.
The Addendum May Change the Company’s Standard Lease
Many Pennsylvania landowners negotiated an addendum or rider when they signed their oil and gas lease.
That addendum may be more important than the boilerplate royalty language contained in the company’s original lease form.
Addenda may contain provisions commonly described as:
- Market Enhancement Clauses;
- Ready for Sale or Use Clauses;
- no-deduction clauses;
- gross royalty provisions;
- affiliate-sale restrictions;
- arm’s-length transaction requirements;
- audit rights;
- or other royalty protections.
The exact language matters.
A negotiated addendum may modify or supersede the printed lease form. A company should not evaluate the landowner’s royalty rights by relying on the boilerplate lease while ignoring negotiated addendum language.
Pennsylvania Law Does Not Make Every Deduction Automatically Proper or Improper
Pennsylvania royalty law is sometimes misunderstood.
The Pennsylvania Supreme Court’s decision in Kilmer addressed the Guaranteed Minimum Royalty Act and held that the statute does not categorically prohibit the use of a net-back calculation involving post-production costs.
That does not mean every Pennsylvania gas company can deduct every post-production cost from every landowner.
The specific lease language remains critical.
A landowner with a lease expressly allowing post-production costs is in a different position from a landowner whose negotiated addendum contains language intended to eliminate or limit deductions.
That is why royalty disputes must begin with the actual contract.
Gathering Charges
Gathering charges are among the most common deductions appearing on Pennsylvania royalty statements.
Gathering generally involves moving natural gas from producing wells through smaller gathering lines toward processing facilities, transmission systems, or downstream markets.
Landowners may see charges identified as:
- gathering;
- gathering fee;
- gathering service;
- gathering transportation;
- low-pressure gathering;
- high-pressure gathering;
- or similar terminology.
Whether those costs may properly be charged to the royalty owner depends on the lease and addendum.
A landowner with strong royalty-protection language should not simply assume that a gathering deduction is permitted because the company routinely takes it.
Compression Charges
Natural gas often must be compressed to move through gathering or transmission systems.
Compression costs may appear as a separate deduction or may be included within another category.
Compression charges can become significant over time.
A landowner should determine:
- whether compression deductions are specifically permitted;
- whether the addendum specifically prohibits compression deductions;
- where the compression occurs;
- why the compression is necessary;
- whether the charge represents the company’s actual cost;
- and whether an affiliate is providing the compression service.
The word “compression” appearing on the statement does not resolve the legal issue.
Transportation Charges
Transportation deductions may involve the movement of natural gas through pipelines after production.
Depending on the lease language, transportation expenses may or may not be chargeable against the royalty.
Landowners should ask:
- Where is the gas being transported?
- At what point is the gas considered sold?
- Who owns the transportation system?
- Is the transportation company affiliated with the producer?
- What rate is being charged?
- Does the lease permit transportation deductions?
- Does the addendum restrict them?
Transportation can be one of the largest recurring deductions on a royalty statement.
Over the life of a producing lease, even relatively small monthly deductions can become substantial.
Dehydration, Treating, and Processing
Natural gas may undergo dehydration, treating, processing, or other operations before sale or delivery into downstream markets.
These costs may appear separately or may be combined.
The lease language determines whether these expenses may be shared with the royalty owner.
The landowner should not assume that every process performed after the gas leaves the well automatically qualifies as a permissible deduction.
The key questions are what the lease says and what the company actually did.
Marketing Fees and Administrative Charges
Royalty statements sometimes contain less obvious charges.
A landowner may see:
- marketing fees;
- administrative charges;
- management fees;
- transaction costs;
- service fees;
- or other expenses.
These deserve careful review.
If a deduction is not clearly authorized by the lease, the landowner should ask the company to explain both the nature of the charge and its contractual basis.
Vague descriptions are particularly concerning when they recur every month.
Affiliate Transactions Deserve Special Attention
Modern oil and gas companies often operate through multiple affiliated entities.
One affiliated company may produce the gas. Another may gather it. Another may compress or transport it. Another may purchase or market it.
This structure can complicate royalty calculations.
Landowners should determine whether:
- gas is being sold to an affiliate;
- gathering is performed by an affiliate;
- transportation is performed by an affiliate;
- compression is performed by an affiliate;
- the fees are based on actual costs;
- the transaction is comparable to an arm’s-length transaction;
- and the lease contains language governing affiliate sales.
Affiliate transactions should not automatically be treated as improper.
But they deserve careful scrutiny because they may affect both the price used to calculate royalties and the expenses deducted from that price.
The Sales Price Matters
A royalty dispute may involve more than deductions.
The landowner should also examine the price received for the gas.
Important questions include:
- What price did the gas company receive?
- Where was the sale made?
- Was the purchaser affiliated with the producer?
- Was the gas sold under a long-term contract?
- Is the reported price consistent with the lease formula?
- Are deductions being used to convert a downstream sales price back to another valuation point?
A royalty percentage applied to the wrong price can produce an improper payment even if each individual deduction appears mathematically correct.
Read the Royalty Statement From Left to Right
Royalty statements can be intimidating.
But landowners should learn to identify the major components.
A statement may contain:
- property or owner number;
- well name;
- unit name;
- production month;
- gas volume;
- sales volume;
- price;
- gross value;
- owner decimal;
- royalty percentage;
- taxes;
- deductions;
- adjustments;
- and net payment.
The landowner should compare statements over multiple months rather than reviewing only one check.
Patterns are often more revealing than a single statement.
Watch for Sudden Changes
A sudden change in royalty payments deserves attention.
Warning signs may include:
- new deduction categories;
- dramatic increases in gathering costs;
- dramatic increases in compression costs;
- changed sales prices;
- changed owner decimals;
- prior-period adjustments;
- negative entries;
- unexplained recoupment;
- changed unit names;
- or royalty payments falling much faster than production.
A sudden decrease does not automatically mean the company made an error.
Production volumes and commodity prices change.
But unexplained changes should be investigated.
Royalty Deductions Are Different From Royalty Recoupment
Landowners should distinguish ordinary deductions from recoupment.
A post-production deduction is a cost charged against current royalty revenue.
Royalty recoupment occurs when the company claims it previously overpaid the landowner and attempts to recover that alleged overpayment from future checks.
Both can reduce royalty payments, but the legal analysis is different.
A statement may sometimes contain both deductions and recoupment adjustments.
Each issue should be evaluated separately.
Unitization Can Affect the Amount Paid
A royalty payment may also change because of unitization.
If the total unit acreage changes, the wells included in the unit change, or the landowner’s participating acreage changes, the owner decimal may change.
That is not necessarily a post-production deduction.
Landowners should distinguish between:
- a royalty percentage problem;
- a unit-allocation problem;
- a decimal-interest problem;
- a deduction problem;
- a sales-price problem;
- and a recoupment problem.
Different issues require different analysis.
Compare the Lease to the Statement
A practical royalty review should compare the language of the lease directly to the royalty statement.
For each deduction, ask:
- What is the charge?
- Where does it appear?
- How much is being deducted?
- Is it recurring?
- What lease provision permits it?
- Does an addendum restrict it?
- Is the company using an affiliate?
- Is the amount based on an actual cost?
- Does the deduction match the contract language?
This comparison often reveals whether further investigation is warranted.
Ask the Company for an Explanation
If deductions are unclear, landowners can request additional information.
The request may seek:
- an explanation of deduction categories;
- the contractual basis for deductions;
- the point of sale;
- gathering information;
- transportation information;
- compression information;
- affiliate relationships;
- price calculations;
- and corrected statements if an error occurred.
A company explanation should be compared against the lease rather than accepted automatically.
Audit Rights May Be Valuable
Some oil and gas leases or addenda contain audit provisions.
An audit provision may allow a landowner to inspect records supporting royalty calculations.
The scope of an audit right depends on the language.
If the lease provides audit rights, those rights may help the landowner evaluate:
- sales information;
- production data;
- transportation costs;
- gathering costs;
- compression charges;
- processing charges;
- affiliate transactions;
- and other royalty calculations.
Landowners should know whether their lease contains an audit provision before a dispute arises.
Timing Matters
A landowner who believes royalties are being underpaid should not wait indefinitely.
Legal deadlines can apply to royalty claims.
Records may also become harder to obtain over time.
Landowners should preserve:
- leases;
- addenda;
- royalty statements;
- division orders;
- unit documents;
- checks;
- direct-deposit information;
- company correspondence;
- owner-relations communications;
- and any documents explaining deductions.
A complete record makes royalty analysis substantially easier.
Do Not Sign an Amendment or Release Without Understanding the Royalty Effect
A gas company may later ask a landowner to sign:
- a lease amendment;
- ratification;
- revised division order;
- settlement agreement;
- royalty agreement;
- unit amendment;
- acknowledgment;
- or release.
The landowner should determine whether the document changes royalty calculations or releases existing royalty claims.
A document presented as a routine amendment may affect future deductions.
A settlement or release may eliminate claims for prior underpayments.
Landowners should not sign first and investigate the royalty impact later.
Questions Pennsylvania Royalty Owners Should Ask
Before accepting substantial post-production deductions, Pennsylvania landowners should ask:
- What does my royalty clause actually require?
- Does my addendum change the royalty language?
- Does my lease expressly permit gathering deductions?
- Does my lease expressly permit compression deductions?
- Does my lease permit transportation deductions?
- Are processing, treating, or dehydration charges permitted?
- Are marketing or administrative fees authorized?
- Is an affiliated company providing any of these services?
- Is the gas being sold to an affiliate?
- What sales price is being used?
- Has my owner decimal changed?
- Has the unit changed?
- Are prior-period adjustments or recoupment also involved?
- Does my lease contain audit rights?
- Has the company explained the deductions in writing?
- Are the deductions consistent from month to month?
- Am I being asked to sign an amendment, division order, or release?
These questions should be answered before a landowner assumes the deductions are proper.
Speak With a Pennsylvania Gas Royalty Attorney About Questionable Deductions
Post-production deductions can reduce Pennsylvania natural gas royalties for many years.
Whether gathering, compression, transportation, processing, dehydration, treating, marketing, or other costs may properly be deducted depends on the specific oil and gas lease, negotiated addendum, royalty calculation language, and facts.
At The Clark Law Firm, PC, Attorney Doug Clark represents Pennsylvania landowners only. He does not represent gas companies, pipeline companies, mineral buyers, or landmen.
If your royalty statements contain substantial or unexplained deductions, or if you believe a gas company is violating the royalty provisions of your lease or addendum, contact PAGasLeaseAttorney.com for a review of your lease and royalty statements.
