Marcellus gas leases pushing impact fees on landowners
October 16, 2013 4:00 AM
Mladen Antonov/AFP/Getty Images
A Consol Energy horizontal gas drilling rig explores the Marcellus Shale near Waynesburg.
By Anya Litvak Pittsburgh Post-Gazette
In the last months of 2012, Steve Townsend, an attorney with Downtown-based ShaleAdvice LLC, began seeing the words "impact fee" in Chesapeake Energy's oil and gas leases.
The Oklahoma-based company wanted landowners to agree that Pennsylvania impact fees would be deducted from their royalty payments in proportion to their interest. So if landowners agreed to a 15 percent royalty, they'd be responsible for 15 percent of the impact fee.
Such an arrangement is expressly forbidden under Act 13, the state's major oil and gas law that established the impact fee in February 2012, and Mr. Townsend removed the provision from his clients' leases before they signed.
But other landowners agreed to the language, according to a random sample of leases accessed at MarcellusUSA.com, a warehouse of scanned oil and gas leases in Pennsylvania and Ohio.
And it may not actually be illegal, in Mr. Townsend's reading of the law. "[If] I'm a landowner, I'm allowed to negotiate whatever I want in my lease," he said. "[Companies] bury it in the end of the piece. If the landowner agrees, it's legal."
Act 13 spells out its intent bluntly.
"A producer may not make the fee ... an obligation, indebtedness or liability of a landowner, leaseholder or other person in possession of real property, upon which the removal or extraction occurs," the law states.
The legislation goes on to say that if such a provision is included in a lease, that part of the document "shall be null and void." That's true for leases signed before and after Act 13 took effect, the law states.
A Chesapeake Energy spokesman said the company declined to comment on the matter.
Lorraine Seiber, a church elder and a trustee of First United Presbyterian Church of Darlington, said she didn't know the impact fee deduction was part of a Chesapeake Energy lease that bears her signature. Ms. Seiber approved the document within the past month, after two years of negotiations with gas companies.
"I wish that the [company] rep had brought that to our attention," she said.
Ms. Seiber said she wasn't involved in the due diligence. That was Kevin Vosler, treasurer for the board of directors for the church's cemetery.
He wasn't aware of the impact fee deduction either, but he said he wasn't surprised by the provision.
"Our understanding was whatever was left over after the profits would be what our royalties would be taken from," he said. "We could really use the money."
Chesapeake isn't the only company whose leases aim to deduct fees from landowners' royalties. Chevron has had similar language in its leases since at least October 2011, before Act 13 was passed. The California-based company's leases allow it to "deduct from payments ... lessor's pro-rata share of any taxes, charges or fees imposed by any government body."
It might take some time -- and landowners asking for royalty audits -- to figure out if Chesapeake or Chevron actually deduct the impact fee from payments because most leases signed within the past year aren't likely to see production for months, maybe years.
Both companies' leases also reference severance taxes as allowable deductions from royalties, although no such tax exists in Pennsylvania.
"One of the talking points that the industry used is [that an] impact fee, unlike a severance tax, would not be deducted from royalties," said state Rep. Jesse White, D-Cecil, who introduced a bill in June that reiterates the prohibition on severance tax and impact fee deductions from royalties.
"The understanding was that under the current definition of the way things were, a severance tax would have been a permissible post-deduction cost, but an impact fee would not have been because it's not a tax."
Jackie Root, president of the Pennsylvania chapter of the National Royalty Owners Association, is against a severance tax for oil and gas. The impact fee struck just the right balance to advance gas development and protect communities, she said.
"There's no question" that royalty owners shouldn't be paying it, she said.
"The law says they can't deduct it," Ms. Root said. "Who do they think they are?"
Chesapeake has had its share of issues with royalty deductions recently.
In September, it agreed to a $7.5 million settlement with Pennsylvania landowners who claimed the company deducted post-production expenses from their payments in violation of their leases.
Post-production costs refer to what might be necessary to get gas from the wellhead to the market. That could include the cost of piping, storing, processing and marketing the fuel.
Producers say, and recently courts have agreed, that post-production expenses are allowable deductions from royalties as long as they are not expressly prohibited by leases, because without them, the gas would not be sold.