PA Landowners Feeling Cheated out of Gas Royalties

Some landowners here in New York's Southern Tier look across the border with envy. They see farmers putting a new roof on their barns, buying new equipment, or retiring altogether. When they return from a drive down Route 220 through Bradford County they loudly proclaim: "Everything is fixed! You can't see the wells and the gas companies have fixed the roads better than they were before."

What they don't see are the farmers who are losing their livelihood because drilling has made farming untenable. They ignore the reports of water contamination, writing such complaints off as "anti-fracker lies" and reminding people that "flaming water from faucets is nothing new - we've had methane in water in these parts for years".* Not true for everyone - as I don't have flaming water at my house. Yet.

While they see the "for sale" signs, they don't see the losses in property value; homes once worth more than $250,000 made nearly worthless by lack of drinkable water. They don't see the folks made homeless when rents tripled during the boom, nor the hotel and motel rooms left vacant by roustabouts headed off to Ohio to extract for the newest bestest gas.

They don't see the jobs that didn't pan out, the jobs that lasted for three months, towns wondering where their promised gas taxes went - and they don't see the landowners, who signed leases in good faith, wondering where 30% of their royalties went. It's so bad that Bradford County commissioners are complaining to the state legislature. Gas companies are deducting a whole bunch of post-production costs, including transporting the gas to market, compressing the gas to put it into an interstate pipeline, and dehydrating the gas.

Even the head of the Pennsylvania chapter of the National Association of Royalty Owners is getting hot under the collar, claiming that "landowners are being saddled with a deduction for transporting gas to market that is far higher than what their fair share of the cost should be". To make matters worse, some landowners can't even figure out what the deductions are for.

*actual quotes from people at meetings.

What NY Landowners Can Learn from TX

New York landowners hoping to cash in on the projected Marcellus wealth beneath their feet may want to pay attention to what's happening in Texas. 

Some Barnett Shale royalty owners who leased to Chesapeake will get a surprise with their next royalty check: less money. That’s because Chesapeake Energy recently announced that they will begin deducting post-production costs of shipping gas through their gathering lines.

Why? Well, says Henry Hood, senior vice president and general counsel for the huge gas corporation, post-production costs run from 70 cents to $1 per 1,000 cubic feet (mcf) of gas produced. And with gas prices sagging around $4 per mcf, they’ve got to do something to recoup their costs (besides leave the gas in the ground until it’s needed).

According to the Dallas/Fort Worth Star Telegram, Chesapeake’s decision to assess royalty owners for post-production costs was triggered by its agreement with Total – the French oil giant that forked over $2.25 billion for a 25 percent interest in Chesapeake's Barnett Shale operations. The French company is deducting post-production costs from its share of the royalty checks so Chesapeake figured this was a good time to jump on the bandwagon. You can read their notes to royalty owners here.

Of course, if you have a lease that doesn't allow them to deduct post-production costs, you're all set.