Shale gas was going to make them rich. Then the checks arrived
Lynne and Bill Seligman thought they were protecting themselves in 2008 when they agreed to allow an Oklahoma company to explore for natural gas under their 91-acre Sullivan County, Pa., farm. They even paid a lawyer to help negotiate the lease.
But since Chesapeake Energy Co. drilled a well to capture gas from the rich Marcellus Shale formation deep under that property, the Seligmans’ gas income has shrunk dramatically – and not just because production declined or gas prices fell.
“I just feel they cheated us,” said Lynne Seligman, a retired nursing-home consultant. “They made us promises they didn’t fulfill, and I guess that’s what really irritates me.”
Chesapeake has cut royalty payments to many like the Seligmans, subtracting “post-production costs” from income the landowners said they were promised under the state’s Guaranteed Minimum Royalty Act of 1979. The law provides that owners of mineral rights receive a minimum one-eighth share, or 12.5 percent, of the sale price of their oil and gas.
Many Marcellus producers began to deduct post-production costs after the Pennsylvania Supreme Court sanctioned the practice in 2010. But Chesapeake, the state’s largest producer, has been the most aggressive about billing landowners for the costs.
Last year, Chesapeake reduced the Seligmans’ $317.57 royalty share for April and May by 90 percent, mailing the Kennett Square family a check for $30.96 for the two months. The deductions were attributed to the costs of gathering, compressing, and transporting the gas.
Other disillusioned landowners say Chesapeake has reduced royalty payments below zero, essentially docking them for the gas produced on their properties.
Russ Forba, whose siblings share ownership of a large family property in Wyoming County, said Chesapeake assessed them “negative revenue” for 10 months during the past two years, and estimated that the company has deducted $1.5 million from their royalty payments since its wells began producing in 2014.
The most recent check, for production in August and September, amounted to $2,400, a 96 percent reduction from the gross royalty of $55,000, Forba said.
Chesapeake is defending itself from an onslaught of lawsuits in federal and state courts. On Dec. 15, a Bradford County judge allowed a state attorney general’s lawsuit to proceed, accusing Chesapeake and Anadarko Petroleum Corp. of cheating landowners, and the federal issues appear to be moving toward a settlement, according to court filings.
The landowners are also pressing the state legislature to rewrite the royalty law to limit deductions, affecting all gas producers. But they say they have been frustrated by the powerful gas industry, which argues that the government cannot constitutionally alter existing gas leases, and that the proposed revisions would make Pennsylvania less attractive for energy investment.
“I have no desire at all to do anything to stop the industry from investing in Pennsylvania, but I think it’s very, very unfair that they’re not paying the landowners the royalties they deserve,” said state Rep. Garth Everett, a Republican who has sponsored legislation for five years to require minimum payments to landowners of 12.5 percent.
In recent years, members of the Pennsylvania chapter of the National Association of Royalty Owners have staked out spots in the state Capitol’s corridors to buttonhole legislators. Their lobbying efforts have been unsuccessful, though the political neophytes say they’ve learned a lot about lawmaking.
“It’s good to know how state government works, or why it’s not working,” said Jacqueline Root, a Tioga County landowner who is president of the association chapter. She said she hopes the legislature will take up the measure in January, when it reconvenes.
Currently, the royalty legislation is attached to a House proposal to enact a severance tax on natural gas, which has also been stalled for years. The prospects of getting approval for either in the Republican legislature seem remote.
Gas-industry defenders say that not all landowners feel cheated. They portray Chesapeake Energy as the principal villain. It is accused in the lawsuits of shortchanging landowners by overpaying for post-production costs to an affiliated “midstream” company that processes and moves its gas to market.
Chesapeake denies wrongdoing. In federal court filings, the company says the Pennsylvania attorney general’s office and landowners “simply got its facts wrong” about its business arrangements.
The gas industry and its supporters maintain that a resolution is best left to the courts.
“The fix that people are looking for is not a legislative issue,” said Republican state Sen. Gene Yaw. “It’s a contract issue. It’s going to be resolved through litigation. There are probably a thousand different contracts out there, and every one of them is a little different, and to try to fix that issue legislatively is an impossibility.”