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Throughout Pennsylvania, landowners are continuing to experience frustration and anger when they open their royalty statements. The practice of deducting postproduction costs from the gas royalty has become widespread as more and more gas drillers elect to pass these costs on to the landowner. Although the landowner negotiated an 18 percent royalty in his lease, the actual net payment may be closer to 10 percent or even lower. The royalty payment is reduced by operational costs, known as postproduction costs that the driller incurs as the gas is moved down-stream. These costs can be significant and landowners across Pennsylvania are questioning the fairness and legality of this practice, which is subject to abuse. The Oil and Gas Practice Group at Houston Harbaugh has significant experience litigating these claims on behalf of royalty owners.
As the Marcellus Shale development enters its nineteenth year, drillers are becoming more creative and aggressive in their effort to avoid lease language that was intended to prohibit or restrict the deduction of post-production costs. Many landowners sought to insulate their royalties from such deductions by negotiating royalty clauses which either expressly or implicitly designated the royalty valuation point as being at the point-of-sale, as opposed to the wellhead. The effect of this subtle yet critical distinction was to preclude application of the so-called “net back” method. Under this method, drillers may deduct costs incurred between the wellhead and the downstream point-of-sale. Conversely, when the point-of-sale is designated as the royalty valuation point, drillers are, in theory, prohibited from deducting those intervening costs. This is typically accomplished by drafting a royalty clause which states that the royalty will be paid on the “price paid” to the driller or the “proceeds received” by the driller. But, what happens when the royalty clause inadvertently references both valuation methods? Unfortunately, many oil and gas leases in Pennsylvania contain this drafting ambiguity. And drillers have seized on this ambiguity. They now routinely argue that any reference to the wellhead in the royalty clause, regardless of context, automatically means that the royalty must be valued at that location. The Oil and Gas Group of Houston Harbaugh is well-versed in the nuances of royalty litigation and has the experience, talent and knowledge to challenge and contest such practices. If you suspect that a driller is ignoring your lease language and wrongfully deducting post-production costs, call the Oil and Gas Practice Group at Houston Harbaugh. We know royalty litigation. Let our experience work for you.
Get Help With Oil and Gas Royalty Disputes
The attorneys at Houston Harbaugh, P.C., are strong advocates for the rights of royalty and property owners in Pennsylvania. Get help with your oil and gas lease dispute. Call our law offices in Pittsburgh at 412-281-5060. You may also reach us online by completing our contact form.
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