Multiple Lease Royalty Apportionment Bill Good for PA

Pennsylvania took another step forward for the efficient and environmentally responsible development of its oil and gas resources. On Sunday, June 30, 2013, the Pennsylvania legislature passed Senate Bill 259, the primary objective of which is to provide royalty owners with additional information and greater transparency regarding deductions shown on their royalty statements. Specifically, the Bill requires producers to list deductions in a standardized manner in order to verify that royalty payments received are being made properly.

In addition, the Bill contains a measure that provides for the apportionment of royalties where multiple contiguous oil and gas leases are being jointly developed. It's important to note, however, this Bill pertains to existing leases only - those that already have an agreement in place for the drilling and development of their land. Virtually all oil and gas leases in Pennsylvania allow producers to develop "deep" or shale-based oil and gas deposits such as in the Marcellus and Utica shales. The development of a shale gas well frequently involves multiple properties covered by separate leases. Many historic leases do not contain a mechanism for how to apportion royalties amongst landowners when one or more wells are being developed on multiple properties. Senate Bill 259, in effect, "fixes the glitch" and provides such an apportionment mechanism.

The Bill will have positive benefits to Pennsylvania for a number of reasons. Prior to the Bill, absent express language in a lease, there was no clear legal guidance for oil and gas companies to follow when jointly developing multiple leases. There was no legal authority prohibiting the development of multiple leased properties when the lease royalty apportionment language was silent. Without clear legal guidance, there was confusion amongst landowners and companies alike, which resulted in many leases not being developed. Senate Bill 259 provides for operators to pay landowners in proportion to the production attributable to their respective lease. Importantly, the Bill will also have environmental benefits. If operators were required to develop each lease separately, they would have to construct an individual well pad on each lease which leads to more wells being drilled, is less efficient and results in increased surface disturbance.

Not all landowners or landowner groups support Senate Bill 259. Some refer to it as "forced pooling" and overlook the tremendous transparency benefits being provided to royalty owners, as well as the environmental benefits. The Pennsylvania legislature carefully crafted the Bill so it only applies to property that was already subject to a valid oil and gas lease; therefore, the Bill does not authorize forced pooling. In addition, by providing guidance on how to fairly allocate production from multiple lease tracts, the Bill will encourage the development of existing leases, thereby benefiting the landowners through royalty payments and the Commonwealth through increased impact fees.