August 30, 2014

Post-Production Costs Reduce Gas Royalty Payments to PA Leaseholders

Rep. White Plans Legislation to Protect Royalty Payments to Leaseholders

MEMORANDUM

Posted: June 28, 2013
From: Representative Jesse White
To: All House members
Subject: Prohibiting Deduction of “Post-Production” Costs From Oil and Gas Royalty Payments to Leaseholders

In the near future, I plan to legislation designed to protect the royalty payments of Pennsylvanians who lease their oil and gas rights. My legislation says the lessee (driller) shall not deduct from royalties any severance taxes, impact fees or applicable fees charged by any Commonwealth agency or department, or any “post-production” costs.

Post-production costs are defined as all losses of produced volumes, whether by use as fuel, line loss, flaring, venting or otherwise, and all costs actually incurred by the lessee from and after the wellhead to the point of sale, including, without limitation, all gathering, dehydration, compression, treatment, processing, marketing and transportation costs incurred in connection with the sale of such production. My legislation would only apply to new or renewed leases to avoid issues of constitutionality.

This is an immediate problem which needs addressed in clear and unequivocal language to protect the financial interests of those who signed a lease in good faith. If a company can deduct unlimited and undefined post-production costs, what incentive is there for that company to try and contain costs? The lessor is stuck in that lease and has virtually no recourse except for litigation, which creates an unreasonable financial burden and will crowd our courts.
I have personally heard from my constituents about excessive deductions for post-production costs, and the problem is happening across Pennsylvania.

Testifying at a Senate Environmental Resources and Energy committee hearing on June 27, 2013, Bradford County Commissioners Chairman Doug McLinko said, “Our constituents have shown us evidence of extraordinary post-production cost in Bradford County, with deductions of 40 and 50% all the way up to as much as 90%.”  “…we have seen checks come with zero payment.  We have seen retroactive charges being billed to land owners for tens of thousands of dollars where the property owners actually have a bill sent to them and they go without any royalty payments until it is paid in full.” Similar concerns were raised by the Pennsylvania Farm Bureau at the same hearing.

It is entirely reasonable to require producers to pay their own post-production costs. To do otherwise is roughly the equivalent of asking a farmer who sells wheat to allow Wonder Bread to directly deduct the price of baking the bread, slicing it, putting it into bags and delivering it to the supermarket. It’s an unreasonable and unacceptable practice that needs to end.

This is not an issue where we should be allowing watered-down, vague language which can be exploited as a loophole to deprive Pennsylvanians, particularly our farmers, of the royalty checks they rightly deserve. Please join me in co-sponsoring this legislation and protecting the property rights and pocketbooks of Pennsylvania land owners.