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Unitization and Pooling for Horizontal Drilling is the Name of the Game in PA

Posted By Cliff Tuttle | September 2, 2013

image by Slatezurz.com

image by Slatezurz.com

No. 968

The Oil and Gas Lease Act, signed by the Governor on July 9, 2013, is about to become effective next Monday, September 9.

Unless prohibited by lease language, an operator will now have the right to pool multiple leases and incorporate them into a horizontal drilling plan.  Further, unless there is a division order specifying the allocation of royalties among owners, the operator may allocate the royalties among the interest holders in the proportion that the operator reasonably believes to be attributed to each property.

The statute also mandates the reporting of certain information to the leasor on the check stub or by a report.

The Oil and Gas Lease Act of 2013 apparently does little or nothing to assist the Courts in adjudicating oil and gas issues that have been crowding the dockets.   The new statute does not address the festering question whether the royalty is paid upon the wellhead price of the price at point of sale.  Nor does it state whether the one-eighth minimum is paid upon the net price (less expenses) or upon the gross.

In Kilmer v. Elexco Land Services, 990 A2d 1147 (2010), Justice Baer noted that the term “royalty” as used the Guaranteed Minimum Royalty Act, (GMRA) 55 P.S. Sec. 33, is not defined.  It is still not defined in the amendments, although it does define the terms “check stub”, “division order”, “interest owner” and “mcf”.

The Supreme Court, in effect, permits the Lease being interpreted to define the term.  The Lease stated the method of calculating the royalty, which the Court will not disturb, even if they reduce the payment to the landowner below the mandatory minimum of o12 1/2%.

“Accordingly, consistent with our rules of statutory interpretation, we hold that the GMRA should be read to permit the calculation of royalties at the wellhead, as provided in the net-back method in the Lease…”  Thus, there is no standard definition of royalty — only the definition contained in the document signed by the parties.  If post-production costs reduce the net received by the landowner below a full one-eighth of  the actual selling price, there is no violation of the statutory one-eighth guaranty.

The reluctance of the legislature to go further in defining terms like “royalty” is understandable. Rather than providing certainty, any definition which speaks of net costs or prices at the wellhead versus point of sale is likely to come into conflict with the provisions of specific leases and may prove to be inapplicable under certain facts.

So, we are left with the terms of the lease. If a landowner does not wish to be unitized, the lease must say so.  If the landowner wants a net royalty of a specified amount, the lease must say that,too.




CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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