The Pennsylvania chapter of the National Association of Royalty Owners has reaffirmed their strong support for House Bill (HB) 1684 which would plug a loophole and ensure landowners will receive a minimum 12.5% royalties regardless of post-production processing expenses. The bill comes in response to allegations that Chesapeake Energy is screwing landowners by deducting expenses not originally foreseen in contracts signed by landowners, resulting in very small royalty checks.

1. March 31, 2014
For Immediate Release:
NARO-PA Discusses Post-production Cost Deductions and Endorses HB 1684
The issue of post-production costs being deducted from royalty checks is a major issue
facing royalty owners in Pennsylvania today. The practice is costing Pennsylvania natural
gas royalty owners millions of dollars each year.
Trevor Walczak, vice-president of the National Association of Royalty Owners PA
Chapter (NARO-PA) says, “Unfortunately, this issue is one of the growing pains that
accompany the positive, transformational phenomenon that the Marcellus shale has
meant for us. Yes, our gas law does need to catch up to the technology via the courts, but
when we have the opportunity to clarify existing law in the legislature; we need to draft
clear, concise, gas law that protects royalty owners, the people who are on the front lines
of energy independence.”
The Pennsylvania Supreme Court ruling in Kilmer vs. Elexco, March, 2010, stated the
following:
“We note that the General Assembly is the branch of government best suited to weigh the
public policies underlying the determination of the proper point of royalty valuation in
the deregulated gas industry.”
On March 17, 2014, the House Environmental Resources and Energy Committee
amended HB 1684 to include a definition of royalty. The bill, originally introduced by
Rep. Garth Everett (R-Lycoming), intends to protect royalty owners from unwarranted
post-production cost deductions. The “royalty definition amendment” has four important
components:
1. It adds a definition for post-production costs and provides that royalties for
unconventional wells are to be “calculated at the point at which production enters
the commercial market place and ownership transfers to another unrelated
business entity.”
2. In cases where production enters the commercial marketplace and a transfer of
ownership is not between two parties at arm’s length, the lessee shall have the
burden to prove that the royalty calculation and royalty paid are at fair market
value.
3. Deductions for post-production costs shall not be taken if the deduction results in
a royalty of less than 1/8th.
4. Finally, language is added to the bill to insure that nothing in the act shall be
construed to require retroactive recalculation or repayment of royalty payments
made prior to the effective date of the act, and no lease shall be invalidated for
deductions that resulted in royalty payments of less than 1/8th
, prior to the
effective date of the act. The act is to apply to all current and future lease
agreements.

2. This bill and the royalty definition amendment are supported by the National Association
of Royalty Owners PA Chapter (NARO-PA), and they have drawn broad support from
royalty owners statewide. The proposed royalty definition amendment passed the
committee 15-10 in a bi-partisan fashion. The amended bill passed the committee 25-0
and is scheduled for a vote before the entire PA House of Representatives as early as the
week of March 31, 2014.
Walczak continued, “The bill is straightforward in its approach and makes a bold
statement with this amendment that Pennsylvania is taking a stand for its citizens.
Pennsylvania’s royalty owners are the keystone of our energy independence, and they
need to be treated fairly. It is imperative that the legislature take this timely opportunity
to define royalty in an effort to clarify language in the Guaranteed Minimum Royalty
Act.”
Mineral owners and gas companies are partners in a natural gas production venture.
Mineral owners contribute 100% of the gas while the gas companies are providing the
knowledge, expertise and equipment for developing well sites, drilling, completing wells,
and gathering and transporting the gas to market. In exchange, the mineral owners expect
to receive royalties of 12.5% to over 20%, depending on the terms of the individual lease.
Mineral owners typically do not have a working interest in a well. In fact, many of the
leases clearly state the only costs to be borne by the mineral owner are those costs that
actually enhance the value of the gas, such as a cracker plant in regions which produce
wet-gas.
In most cases, royalties were paid without deductions for any of these costs until January,
2012. At that time, some companies interpreted the findings of the Kilmer vs. Elexco case
as a means to allow them to begin deducting expenses from royalty payments. This has
resulted in royalty owners receiving far less than the expected minimum royalty of 12.5%
in many cases.
However, many Marcellus operators agree with our definition of royalty, which is
demonstrated by the fact that they do not take deductions for “post-production costs” as
they do not feel they are entitled to take those deductions under their interpretation of the
lease.
Jacqueline Root, a President of the Pennsylvania Chapter of NARO states, “Individuals
are not the only mineral owners in the state. Schools, churches, cemetery associations,
businesses, local municipalities, and universities are also mineral owners, as well as the
Commonwealth itself. For example, the DCNR and PA Game Commission own
approximately 1.75 million acres of mineral rights in the Marcellus region. These
agencies’ royalties will be subject to deductions, just as those of individuals, local
governments, and other organizations.”

3. Mrs. Root continues, “This could have a huge impact on revenue received by the state for
years to come. Therefore, every resident of the state of Pennsylvania has a stake in this
issue.”
The amended bill will be up for second consideration before the Pennsylvania House of
Representatives during the week of March 31. NARO-PA requests that you would please
contact your state representative and ask him or her to support HB 1684 with the “royalty
definition amendment” intact.
Walczak, the NARO-PA VP, reminds mineral owners statewide “these next few weeks
are critical in moving this legislation forward and keeping the momentum going because
there is still a long road ahead before this bill becomes law. Get engaged. This is a bill
from the people that needs to be promoted by the people. If there is one thing I have
learned in my work with NARO-PA is that our state government is accessible to those
who are passionate, informed, and respectful. Your legislators want to hear from their
constituents on these important issues. ”
"On behalf of all Pennsylvania royalty owners, NARO-PA would like to thank our
Marcellus representatives, Rep. Garth Everett, Rep. Tina Pickett, Rep. Sandra Major, and
Rep. Matt Baker. It is because of their dedicated work on the issue of post production
cost deductions that we have this opportunity to clarify this existing law to the benefit all
Pennsylvanians. They have shown tremendous resolve throughout this effort and should
be recognized for their work. Please take the time to thank them as well." Walczak
advised.
Walczak concluded, “As an education, outreach, and advocacy organization, NARO-PA
will continue our work in Harrisburg to bring the stories of Pennsylvania’s mineral
owners to the entire legislature, but we need your support. We need royalty owners to
join NARO-PA and be actively involved in managing their mineral estate because of the
value it holds to them, their families, and the future of Pennsylvania.”
Media Contact: Trevor Walczak, VP NARO-PA, (570)510-3952, pennroar@yahoo.com
The National Association of Royalty Owners (NARO) is the only national organization
representing solely and without compromise the interests of all oil and gas royalty
owners.
"The mission of NARO is to encourage and promote exploration and production of
minerals in the United States while preserving, protecting, advancing and representing
the interests and rights of mineral and royalty owners through education, advocacy and
assistance to our members, to NARO chapter organizations, to government bodies and to
the public."