Pennsylvania Oil And Gas Lease Act Enhances Royalty Transparency And Authorizes Limited Contiguous Lease Integration

On July 9, Governor Tom Corbett signed Senate Bill 259 into law. This legislation, which takes effect 60 days after enactment, requires specific minimum information to accompany royalty payments in Pennsylvania and authorizes the operator, in limited circumstances, to integrate contiguous leases to develop them jointly by horizontal drilling.

Royalties

Titled the "Oil and Gas Lease Act," SB 259 (hereinafter "the Lease Act") reconstructs what is commonly known as Pennsylvania's Guaranteed Minimum Royalty Act, 58 Pa. Stat. § 33 et seq., which requires oil and gas leases to provide a minimum one-eighth royalty. The Lease Act does not alter the minimum statutory one-eighth royalty requirement; rather, its payment information provisions mandate a level of transparency with respect to the calculation and determination of royalties. Specifically, payments for production to interest owners must, at a minimum, include on the check stub or an attachment the following information, unless this information is otherwise provided on a regular basis:

1. A name, number, or combination of name and number that identifies the lease, property, unit, or well or wells for which payment is being made; and the county in which the lease, property or well is located.

2. Month and year of gas production.

3. Total barrels of crude oil or number of Mcf of gas or volume of natural gas liquids sold.

4. Price received per barrel, Mcf, or gallon.

5. Total amount of severance and other production taxes and other deductions permitted under the lease, with the exception of windfall profits tax.

6. Net value of total sales from the property less taxes and deductions from paragraph (5).

7. Interest owner's interest, expressed as a decimal or fraction, in production from paragraph (1).

8. Interest owner's share of the total value of sales prior to deduction of taxes and deductions from paragraph (5).

9. Interest owner's share of the sales value less the interest owner's share of taxes and deductions from paragraph (5).

10. Contact information, including an address and telephone number.

As noted above, one aspect of the new royalty disclosure requirements is the furnishing of information regarding deductions permitted under the lease. In Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147 (Pa. 2010), the Pennsylvania Supreme Court rejected an attempt by landowner-lessors to void an oil and gas lease that called for the lessors to receive one-eighth of the sales proceeds after deducting the...