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Royalties: Why Some Strike It Rich In The Natural Gas Patch, And Others Strike Out

Business
Jim Barrett stands next to a wellpad on his farm in Bradford County. He says Chesapeake Energy, which drilled four natural gas wells on his land, is cheating him out of royalty money.

Marie Cusick / StateImpact Pennsylvania

Jim Barrett stands next to a wellpad on his farm in Bradford County. He says Chesapeake Energy, which drilled four natural gas wells on his land, is cheating him out of royalty money.

When natural gas companies approached Charlie Clark and Jim Barrett about the minerals under their farms, the northern Pennsylvania landowners in neighboring counties both decided to let them drill.

They hoped — like so many landowners — to bring in some extra cash.

For Clark, the decision has paid off. But Barrett says he feels cheated, and is now suing his gas company.

That disparity in how royalties are paid spans the Marcellus Shale, and it’s popping up in other oil- and gas-rich regions across the United States. It stems from a complex web of laws, court rulings and legal jargon that determines how money is distributed to property owners who allow energy companies to tap the minerals below their land.

Clark and Barrett might have started out with similar hopes, but their different experiences show how tough it can be for landowners to navigate the gas business — and how resolutions are hard to come by.

A tale of two mineral owners

Clark said he’s grateful every day for the two gas wells drilled on his dairy farm.

He estimates he receives about $10,000 per month in the form of gas royalties.

“This is what we’ve done with our gas money,” Clark said, standing in his new barn filled with dairy cows. “This barn here cost $40,000 to build it, and we were able to build it out of our pocket.”

Growing up in rural Susquehanna County in the northeastern corner of Pennsylvania, his family used to scrimp and save just to buy basics, like new shoes.
But that all changed when the drilling rigs rolled into town and he started receiving royalty checks.

“We’re living like we used to, but without the stress,” Clark said. “The bills are all paid. Your kid’s gotta go to college? No problem.”

He’s a good example of when the royalty process works. It goes like this: Gas companies and landowners sign a lease agreement before drilling begins. The royalty is money paid to the mineral owner, like Clark, for the right to use his resource. It’s negotiated to be a certain percentage of the revenue from the sale of the gas.

Clark is leased to a company called Chief Oil and Gas. The company gets gas it needs, and Clark gets paid. He said it feels like he hit the lottery, but he knows other people with similar gas wells are striking out.

“I thank God every day that it happened here, and I didn’t live over there 10 more miles, or 15 more miles, that way, to the west,” he said.

Barrett lives in that direction, about 40 miles away in Bradford County on what he describes as “a pretty typical mountain farm.”

Like Clark, he’s grateful for the drilling.

“It kept Bradford County alive,” he said. “This would have been a ghost town in 2008 or 2010 if it hadn’t been for the gas industry.”

But for Barrett, the boom has not panned out the way he hoped.

He claims Chesapeake Energy, which operates four wells on his farm, is stealing from him, and he has joined a class action lawsuit against the company. Chesapeake, which did not respond to a request for comment for this story, is defending itself against lawsuits in at least seven states for allegedly under-paying royalties.

He estimates Chesapeake owes him hundreds of thousands of dollars for the gas it’s pumped out of his farm. The company has said in the past that it’s committed to working with its royalty owners to answer questions.

Why the disparity?

Much of the controversy surrounding royalty money boils down to a concept known as post-production costs: the expenses of moving and treating gas through a network of pipelines. To cover the costs, drillers might take deductions from royalty checks.

Some landowners agree to that, while others negotiate a lease that prohibits it. Many sign leases that don’t address it at all.

Some leases have vague language that leaves room for a gas company to take deductions, even if a landowner objects.

Those objections might result in lawsuits, often when deductions seem exceptionally high to a landowner who can’t make heads or tails of the calculations on a royalty check.

Disputes over post-production costs have popped up all over the country as oil and gas production soars, the result of new horizontal drilling and fracking technologies that allow drillers to tap into shale rock.

But by 2014, the United States was producing so much oil and gas that it led to a global oversupply. That’s when the complaints started to roll in, said Gary Preszler, vice president of the National Association of Royalty Owners board.

Many energy-producing states took a hit. In most of them, like North Dakota where Preszler lives, wells produce both oil and gas.

When prices plummeted, oil suddenly wasn’t worth what it used to be. But the gas still needed to be transported and treated, and that cost stayed constant, Preszler said.

“That’s when people saw their checks being reduced significantly,” he said. “Even though those deductions may have been taken previously, they just … disregarded it because to them it seemed like just a small and minimal amount.”

In Pennsylvania, it was a different story. Wells here produce mainly gas, so landowners like Barrett noticed right away if companies took out big, unexplained cuts. Some Pennsylvania landowners have been complaining for years about exorbitant deductions.

But many never have a reason to complain. Clark, for example, said he feels his deductions are reasonable.

Their experiences, both of which are shared by landowners in other states, are uniquely American.

“This is the only country on the planet where individuals actually own the mineral interest,” said Jerry Simmons, executive director of the royalty owners group. “Everywhere else, it’s owned by the government.”

He estimates 12 million American landowners own minerals.

Over the years, some sued when they felt they were being cheated. That has led to a patchwork of court rulings in many states, determining how leases are interpreted.

Some landowners hire a lawyer to negotiate a lease with explicit language that prohibits deductions or spells out exactly which costs can be taken out. The greater stake an individual has in a well, the more bargaining power they have to negotiate a lease that works in their favor, University of Texas law professor Owen Anderson said.

But not all go that route.

“As often happens, these landowners and mineral owners sign these leases the company offers without negotiating terms and without getting legal advice,” Anderson said.

Later, if they believe they’re not getting paid fairly, their options are slim. They can hire an expert to audit their royalties and go to court, but some can’t afford to do that.

Preszler said the better option is to prevent landowners from signing bad leases.

“It’s a lot easier to try to get the terms correctly done at the front end than to try to manage and fix a problem later,” he said.

His group is developing a seminar to better educate landowners.

Little hope for relief

Advocates in Pennsylvania want to strengthen the law that is supposed to ensure mineral owners are paid a fair royalty.

A decades-old state law guarantees a minimum 12.5 percent royalty, but Pennsylvania’s Supreme Court has ruled that deductions can still be taken, even if they result in a royalty below that rate. For four years, royalty owners in Pennsylvania have pushed to change the law to ensure they receive at least that rate.

So far, the Legislature hasn’t passed a bill.

Lawsuits are still playing out in Pennsylvania, including one brought by Pennsylvania’s attorney general. Josh Shapiro is seeking to recover money for thousands of Pennsylvanians, including Barrett, stemming from a lawsuit filed in 2015 that claims several gas companies violated the Unfair Trade Practices and Consumer Protection Law by promising landowners royalty money they never paid.

Susquehanna County resident Charlie Clark purchased a new hay baler for his dairy farm with royalty money he received from natural gas development on his land.

Marie Cusick / StateImpact Pennsylvania

Susquehanna County resident Charlie Clark purchased a new hay baler for his dairy farm with royalty money he received from natural gas development on his land.

Back on his farm in Susquehanna County, Clark said even though he’s “won the lottery” with gas royalties, he thinks the law should ensure everyone is paid fairly.

“I guess I really don’t understand why the government hasn’t stepped in and done and little bit more, because it would benefit them too,” he said. “Any extra money we’d get, we’d be taxed on.”

Over in Bradford County, Barrett said he and his wife will have to sell the farm to retire.

But he wants to be able to pass it onto his grandkids.

“My dad and his uncles, their goal was to keep the farm going for their sons,” he said.

His grandfather and great-grandfather did the same, passing the farm to the next generation.

Although Barrett’s hopeful things will change to give him a shot at keeping the farm in his family, like many mineral owners across the country, he knows one thing: There’s not much more he can do about it.

WSKG



5 Comments on "Royalties: Why Some Strike It Rich In The Natural Gas Patch, And Others Strike Out"

  1. Boat on Thu, 1st Mar 2018 2:04 pm 

    US oil companies get another huge tax break.

    https://community.oilprice.com/topic/1088-white-house-cut-offshore-drilling-royalty-rates-by-a-third/

    Did you say US energy independence? Trump’s going for it.

  2. deadly on Fri, 2nd Mar 2018 4:21 am 

    When you own minerals, you own all of the minerals on the land. The landowner/mineral owner doesn’t have to lease at all. The landowner/mineral owner can participate in the process of obtaining the oil and gas and pay for the drilling and pumping the oil.

    After it is all paid for, the participating mineral owner then receives all of the income from the sale of the commodity, oil or gas.

    The mineral owner can also benefit if there is coal, potash, anything that is there that is of economic importance.

    You can lease, take one sixth, or you can participate and receive one hundred percent of the sale of the oil or gas.

    If you own the minerals only, you set up a company that receives the royalties and or income from participating on wells drilled.

    After there are ten or twelve wells paying out royalties from leases and participating, the money begins to accumulate to higher amounts. You’ll need a tax accountant and legal advice.

    Of course, if you participate and something goes wrong with a well, you are responsible for your portion of the costs. Can’t have a well that isn’t producing oil because of mechanical failure, it has to be repaired.

    The oil company will send you a bill, you will be required to pay for any costs. It won’t be for a thousand dollars, it will probably be a few hundred thousand dollars. Better be prepared for the bad news, hang on to the money, don’t spend it.

    You can’t spend all of the money received from an oil company, you might need some of it later on down the line.

    You have to be able to pony up the funds or lose your interest.

    There is a particle of risk in being a mineral owner and you participate.

    That risk is revealed when the money has to go out and is not coming in. It’s called a loss.

    The landowner might have to provide some land for a well site, so the landowner will receive money for the land needed by the oil company to have a well located there.

    In Russia, an oil company arrives and begins drilling for oil.

    You live there, but you don’t own the minerals, tough luck.

    Mineral ownership got the whole ball of wax rolling for the exploration of oil, how it all really happened.

    Titusville, Pennsylvania, the birthplace of the commercial development of oil, all because minerals were owned by the landowner.

    There is an oil well in Pennsylvania that has been producing oil for over 150 years.

  3. rockman on Fri, 2nd Mar 2018 2:52 pm 

    deadly – I can’t begin to estimate how many mineral owners have asked me for advice over the last 40 years. Spent a lot of time on the ground and was easy to pick me out. Always had the same answer: get a lawyer. And depending where I was had the name and number of lawyers that really knew how to put the screws to the companies. And often they would say something like “Hell, no. He wants $1,200.” And this was when tens if not of $thousands were at stake. I’ve given the same advice when it was my company leasing. Just asked the landowner to not tell. LOL. I gave similar advice to a nice old coonass lady with a big chunk of royalty from one of my wells. The check is now less then 10% of what it was due to depletion. But she has gotten over $400,000 cumulatively. Told her to not get her suckered into selling her “now nearly worthless royalty”. There are two productive zones up hole from the current completion that will produce even more then the current completion. Pissed my engineer off a bit when I told him what I did. He had not thought about buying her royalty cheap but might have if he eventually thought of it. But she’s a widow taking care of one son in and out of rehab and a single mom /aughter with 3 kids.

    And it’s not only the companies the mineral owners get pissed with. Same well as above: royalty called and asked why his check was more then 10% less then what he expected. Had to explain how it works in Louisiana. Yes, he owned X% royalty. But the state has the highest oil severance tax in the country: 12.5%. And while he owned X% of the oil coming out of the well he had to give the state 12.5% of his oil to them. He wasn’t very happy with La. politicians before I explained it to him. Much less now that they are taking 12.5% of his royalty check. LOL.

  4. fmr-paultard on Fri, 2nd Mar 2018 3:09 pm 

    i can’t believe deagle is so stupid.
    http://www.deagel.com/country/forecast.aspx

  5. Anonymouse1 on Fri, 2nd Mar 2018 3:21 pm 

    Fook are your stupid homilies ever boring narrativeman. You must have been a real hit at parties back in the day. If you are ever trouble having falling asleep, just read another one his boring fucking tales from the cancer patch like the one above. Guaranteed to put you out like a light.

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