Acting to protect royalty payments BY JAMES LOEWENSTEIN (Staff Writer) Published: May 29, 2013

From the Daily Review--for the complete article go to --->

TOWANDA - Smithfield Township Supervisor Jackie Kingsley says that a gas company is deducting anywhere from 0 to 50 percent of her family's gas royalty payments for post-production costs.

Another Bradford County resident says that Chesapeake Energy Corp., which is the primary lease holder on her property, has been deducting anywhere from 35 to 50 percent of her gas royalty payments for post-production costs.

Five different Bradford County residents had a 12 1/2 percent royalty rate written on their lease, but, due to deductions for post-production costs, their most recent royalty payments actually ranged from 1.47 percent to 3.11 percent, according to Bradford County Commissioner Doug McLinko.

The Bradford County commissioners on Tuesday passed a resolution aimed at helping to address what they are calling unreasonably large deductions from royalty checks for post-production costs.

The resolution asks the Legislature to address the Pennsylvania Supreme Court's March 2010 ruling in the Kilmer vs. Elexco Land Service Inc. case, which allowed deductions for post-production costs to reduce royalty payments below the state's 12 1/2 percent guaranteed minimum royalty rate.

Specifically, the resolution asks the state legislature to take action that would prevent deductions for post-production expenses from reducing royalty payments below 12 1/2 percent.

"Just about everyone knew that with every lease, we were guaranteed a minimum of a 12 1/2 percent royalty," said Eric Matthews, chairman of the Bradford County Republican Party. "Then the state Supreme Court made a decision that changed that interpretation. We want the Legislature to correct that."

McLinko said there are "hundreds and hundreds" of cases in Bradford County where unreasonably large deductions are being taken out of gas royalty checks.

"I'm very upset about this," McLinko said. "This (cases where unreasonably large deductions are being taken out of royalty payments) is out of control."

The deductions are being taken out for various expenses, such as transporting the gas to market, processing the gas and transporting the gas to market.

McLinko said he has talked to county commissioners from other gas-producing states who are "shocked" when they find out the size of post-production deductions that are being taken out of the Bradford County property owners' checks.

McLinko said that gas companies differ on the extent to which they deduct post-production costs from royalty payments.

One company might make "unreasonable" deductions, another might make "reasonable" deductions, while a third might make no deductions at all, he said.

Pickett said that she has received complaints from her constituents who are shocked at how large the deductions for post-production costs are. A large number of those complaints, she said, are against Chesapeake Energy. However, Pickett quickly pointed out, the large number of complaints against Chesapeake may be related to the fact that the company has drilled the most wells in Bradford County, and is presumably is the largest producer of natural gas in the county.

Pickett said there are other issues related to post-production costs, including the fact that many people can't determine the specific expense that is being deducted from their royalty check and have no way of knowing whether the gas company is overcharging them for the deductions.

The resolution passed by the commissioners on Tuesday is simply a "starting point" for addressing the issues related to post-production costs, McLinko said.

McLinko said that royalty payments can be crucial to a family's budget.

For example, an elderly couple's monthly royalty payment of $500 to $600 could be a "game changer" for them, because it might enable them to pay their property taxes so they can stay in their home, or buy medications.

Pickett said "it's not that simple" for the Legislature to accomplish what the resolution is seeking, because the gas industry has a precedent of deducting for post-production costs and because there are court cases that have set a precedent on deducting post-production costs.

However, she said that she is trying to address the issues related to post-production costs.

"It's a work in progress" to do that in the Legislature, she said.

The commissioners' resolution was passed 2-0 by McLinko and Bradford County Commissioner Daryl Miller at a special meeting of the commissioners on Tuesday.