Lindsay Hoskins: Worthy and Unworthy Compensation: Are people receiving a fair amount of money from their gas leases?

The value of the recoverable natural gas in the Marcellus Shale has reached $500 billion, and the gas’ economic impact is expected to be extensive over the years of drilling that ensue for landowners, workers, and local communities. The negative stigma surrounding fracking is driven by the notions of harm to private property, environmental issues, and issues of unfair leasing and royalties. In communities, the implications that follow fracking can be both negative and positive during and long after the fracking is done. This paper reviews the positive and negative effects of The Guaranteed Minimum Royalty Act, Act 13 in Pennsylvania, severance taxes, downtown impacts and boom and bust cycles. The causes and effects of each aspect should prove fracking is an issue with many factors with benefits or harms for people in Pennsylvania and the United States (“Questions Citizens,”2009).

Marcellus Shale drilling started with 60 wells in Pennsylvania beginning in 2007 and increased dramatically to 1,454 wells statewide in 2010. The surge in drilling has created royalty and leasing opportunities for private property owners. Leasing of mineral rights for the land starts with an overall contract that tells landowners what payments they will receive from the gas company. Royalties are negotiated in the lease, along with other stipulations the landowner may wish to implement. Under Pennsylvania’s Guaranteed Minimum Royalty Act of 1979, Pennsylvanians are entitled to 12.5 percent of the money companies make selling the gas. The amount is based on terms negotiated in the lease that recognizes the owner’s right to a portion of the value of gas resulting from the lease of exploration rights (“Pennsylvania Dairy”, 2008).

Many new forms of legislation have been passed to protect landowners and give back to local communities affected in Pennsylvania. “In 1982, in a landmark effort to keep people from being fleeced by the oil industry, the federal government passed a law establishing that royalty payments to landowners would be no less than 12.5 percent of the oil and gas sales from their leases” (Lustgarten, 2013). In the case of Kilmer v. Elexco Land Services, the Supreme Court of Pennsylvania on March 24, 2010, decided that the royalty is 12.5 percent of the sale price minus 12.5 percent of post-production costs, leaving landowners with less money than they initially thought (Kelly, 2010).

As of June 28, 2013, legislation has been proposed to strengthen the act to respond to concerns of landowners with oil and gas leases whose royalty payments have decreased because of the deduction of post-production costs. Post-production costs are costs of bringing the gas to the market to be purchased. The proposed legislation seeks to prohibit companies from deductions ranging from 40 percent to 90 percent (Bagnell Snyder R. & Lepore, 2013).

Some landowners believe they are receiving worthy compensation from gas companies. In some cases, farm owners are using royalty money to pay off debt, purchase new equipment, and stay on their land. In Pennsylvania alone natural gas royalties could amount to $1.2 billion for 2012. By analyzing state tax information and production records and estimates from the National Association of Royalty Owners, the Associated Press has concluded that royalties have topped the 12.5 percent standard rate to a significant increase to 18.75 percent in some cases (Begos, 2013). However, not all the news is good, some landowners are experience negative aspects.

The post-production costs are angering landowners who are losing royalties that they believed was theirs initially, but are being withheld by oil companies by manipulation of costs. Many times these costs are ambiguous, leaving the property owners in the dark, in some cases companies have withheld 90 percent of the income without explaining why. ProPublica, an independent, non-profit newsroom whom has dedicated an entire series to issues around fracking said in an article released August 2013," (Lustgarten, 2013).

Many landowners who were promised they would be millionaires are virtually making nothing off the gas or oil produced on their property. Decrease in royalties can also be attributed to the drop of wholesale price of gas. The decrease in wholesale prices means fewer royalties for landowners (Lustgarten, 2013). As demonstrated in chart 1, gas prices have fluctuated greatly, affecting the overall amount landowners receive.