New Law Could Affect Your Royalty Payments
February 9, 2012
By: Scott P. Borsack, Esq.
After years of wrangling, political debate and lobbying, the Pennsylvania Legislature has agreed to a special fee assessed against oil and gas exploration companies. By the time you read this alert, Governor Corbett will have signed into law, Senate Bill 1100. You should have heard about this legislation, upon which there was legislative agreement only moments before the governor delivered his budget address to the Legislature. It has the potential to affect landowners and municipalities. Some important highlights of the soon-to-be new law are discussed below.
First and foremost, the new law creates an impact fee that is applied to every producing well in the Commonwealth. There are essentially different charges for vertically drilled wells and those that start vertically and have horizontal legs. Those with horizontals face the highest fee under the law. In order for a well to be subject to the levy, it must be capable of producing more than 90,000 cubic feet of natural gas a day during a calendar month. The fee is collected during the first 20 years of production, on a reducing scale. In the first year, the fee is $50,000, then $40,000 in the second year, $30,000 in third, $20,000 in the fourth through tenth years and $10,000 in the eleventh through twentieth years. The law contains an adjustment factor increasing the fee as the price of natural gas rises above $5.00 through $8.00 (almost tripling the fee). With the current price of the commodity, and the imbalance between supply and demand right now, the price of gas is not likely to be above $8.00 anytime soon. A purely vertical well is entitled to a reduction of the fee based upon the production of the well. For example, a vertical only well which produces more than 180,000 cubic feet a day pays half the impact fee that its vertical with horizontal legged cousins might pay. A vertical that produces between 90,000 and 180,000 cubic feet would pay one quarter of the fee due from the horizontally explored well. If a well is fractured for a second time, drilled into a new formation, say for example a well which starts in Marcellus but is later drilled for Utica, or has additional horizontal legs drilled after initial exploration, it is treated as a new well once these new activities are completed. That means the higher rates apply. So millions of dollars are to be collected as the result of this new impact fee. We should know where this money is going.
In the first year of the new law, $2.5 million will be distributed to county conservation districts and thereafter $5 million will be distributed to county conservation districts. In addition, the sum of $1.5 million shall be distributed each year to the office of the State Fire Commissioner to support training and the purchase of equipment for first responders in the districts where there is active exploration activities. The Fish and Boat Commission is to receive $1,500,000 annually to defray its costs to be incurred in reviewing exploration permits. From what remains, 55% shall be allocated to affected counties to deal with infrastructure issues (roadways, bridges, etc.), emergency preparedness, environmental programs, preservation of waterways, reduction of property taxes, affordable housing, records management, social services, court services or to be deposited into county reserve funds. The 45% which remains will be allocated to counties and municipalities with active exploration based upon the number of active wells located in their jurisdictions. The Pennsylvania Public Utility Commission has been given the authority to enforce this new law, collect the dollars, audit the reports filed by exploration companies and allocate the dollars collected to the various affected parties. The Commission is given the authority to charge each well in the Commonwealth an additional $100 per year to cover the costs incurred to enforce this new law.
Buried at the end of the law are provisions intended to limit the regulation by municipalities of the oil and gas exploration activities within their borders. Several municipalities had begun to interpret their land use laws in such a way as to control exploration activities. The new law reinforces the supremacy of state law in this area and creates a review process for exploration companies to petition the Attorney General to review local ordinances to determine their propriety. Municipalities may also advance their ordinances to the Attorney General for review before enactment to determine whether they conflict with state law. Both the Attorney General and exploration companies can bring actions against municipalities seeking to invalidate ordinances which conflict with state law. Such matters can be heard by Special Masters designated by the Commonwealth Courts to dispense with these disputes.
As you can see, there is quite a bit to this new law. At this point you have to be wondering whether this new law will affect you where it counts – in the wallet. If you are a landowner with a natural gas lease and are receiving royalties, it might affect you. Your exploration company might seek to reduce the amount of your royalty payments by this new impact fee. Some leases provide that the landowner is entitled to a royalty “in an amount equal to the current market value at the wellhead as and when produced of one-eighth (1/8) of all oil, gas and the constituents thereof produced…” In that case you would think that impact fees, costs of transportation, taxes, etc. are not subtracted from the base to determine your royalties. Other leases add in the words “free of costs” further reinforcing the notion that royalty payments should not be reduced by the expenses and costs incurred by the exploration companies to extract and transmit gas. Another popular form of lease pays the royalty on the “revenue realized” by the exploration company, potentially creating the opening to charge the impact fee to the landowner. The language used, together with the veneer placed on leases by the courts could lead an exploration company to reach into your pocket to recover its losses from the impact fee. It may take negotiation or litigation with exploration companies to reverse overreaching if it is discovered. We can help protect your rights in this regard.
By: Scott P. Borsack, Esq.
After years of wrangling, political debate and lobbying, the Pennsylvania Legislature has agreed to a special fee assessed against oil and gas exploration companies. By the time you read this alert, Governor Corbett will have signed into law, Senate Bill 1100. You should have heard about this legislation, upon which there was legislative agreement only moments before the governor delivered his budget address to the Legislature. It has the potential to affect landowners and municipalities. Some important highlights of the soon-to-be new law are discussed below.
First and foremost, the new law creates an impact fee that is applied to every producing well in the Commonwealth. There are essentially different charges for vertically drilled wells and those that start vertically and have horizontal legs. Those with horizontals face the highest fee under the law. In order for a well to be subject to the levy, it must be capable of producing more than 90,000 cubic feet of natural gas a day during a calendar month. The fee is collected during the first 20 years of production, on a reducing scale. In the first year, the fee is $50,000, then $40,000 in the second year, $30,000 in third, $20,000 in the fourth through tenth years and $10,000 in the eleventh through twentieth years. The law contains an adjustment factor increasing the fee as the price of natural gas rises above $5.00 through $8.00 (almost tripling the fee). With the current price of the commodity, and the imbalance between supply and demand right now, the price of gas is not likely to be above $8.00 anytime soon. A purely vertical well is entitled to a reduction of the fee based upon the production of the well. For example, a vertical only well which produces more than 180,000 cubic feet a day pays half the impact fee that its vertical with horizontal legged cousins might pay. A vertical that produces between 90,000 and 180,000 cubic feet would pay one quarter of the fee due from the horizontally explored well. If a well is fractured for a second time, drilled into a new formation, say for example a well which starts in Marcellus but is later drilled for Utica, or has additional horizontal legs drilled after initial exploration, it is treated as a new well once these new activities are completed. That means the higher rates apply. So millions of dollars are to be collected as the result of this new impact fee. We should know where this money is going.
In the first year of the new law, $2.5 million will be distributed to county conservation districts and thereafter $5 million will be distributed to county conservation districts. In addition, the sum of $1.5 million shall be distributed each year to the office of the State Fire Commissioner to support training and the purchase of equipment for first responders in the districts where there is active exploration activities. The Fish and Boat Commission is to receive $1,500,000 annually to defray its costs to be incurred in reviewing exploration permits. From what remains, 55% shall be allocated to affected counties to deal with infrastructure issues (roadways, bridges, etc.), emergency preparedness, environmental programs, preservation of waterways, reduction of property taxes, affordable housing, records management, social services, court services or to be deposited into county reserve funds. The 45% which remains will be allocated to counties and municipalities with active exploration based upon the number of active wells located in their jurisdictions. The Pennsylvania Public Utility Commission has been given the authority to enforce this new law, collect the dollars, audit the reports filed by exploration companies and allocate the dollars collected to the various affected parties. The Commission is given the authority to charge each well in the Commonwealth an additional $100 per year to cover the costs incurred to enforce this new law.
Buried at the end of the law are provisions intended to limit the regulation by municipalities of the oil and gas exploration activities within their borders. Several municipalities had begun to interpret their land use laws in such a way as to control exploration activities. The new law reinforces the supremacy of state law in this area and creates a review process for exploration companies to petition the Attorney General to review local ordinances to determine their propriety. Municipalities may also advance their ordinances to the Attorney General for review before enactment to determine whether they conflict with state law. Both the Attorney General and exploration companies can bring actions against municipalities seeking to invalidate ordinances which conflict with state law. Such matters can be heard by Special Masters designated by the Commonwealth Courts to dispense with these disputes.
As you can see, there is quite a bit to this new law. At this point you have to be wondering whether this new law will affect you where it counts – in the wallet. If you are a landowner with a natural gas lease and are receiving royalties, it might affect you. Your exploration company might seek to reduce the amount of your royalty payments by this new impact fee. Some leases provide that the landowner is entitled to a royalty “in an amount equal to the current market value at the wellhead as and when produced of one-eighth (1/8) of all oil, gas and the constituents thereof produced…” In that case you would think that impact fees, costs of transportation, taxes, etc. are not subtracted from the base to determine your royalties. Other leases add in the words “free of costs” further reinforcing the notion that royalty payments should not be reduced by the expenses and costs incurred by the exploration companies to extract and transmit gas. Another popular form of lease pays the royalty on the “revenue realized” by the exploration company, potentially creating the opening to charge the impact fee to the landowner. The language used, together with the veneer placed on leases by the courts could lead an exploration company to reach into your pocket to recover its losses from the impact fee. It may take negotiation or litigation with exploration companies to reverse overreaching if it is discovered. We can help protect your rights in this regard.