Kane issues subpoenas in wider review of gas royalty payments

Kane issues subpoenas in wider review of gas royalty payments

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MC  Kathleen KaneAttorney General Kathleen Kane has issued administrative subpoenas throughout the shale industry in Pennsylvania, broadening her review of natural gas royalty payment practices beyond Chesapeake Energy Corporation.
Sources confirmed administrative subpoenas have been issued throughout the energy industry for information about royalty calculations and payments in what is seen as an industry-wide survey to look at practices of such companies operating in Pennsylvania.

The Office of Attorney General’s Bureau of Consumer Protection Antitrust Section issued the subpoenas. Kane spokesman J.J. Abbott and a spokesman for the Marcellus Shale Coalition declined to comment on the matter.

Landowners have complained to legislators that Chesapeake, the largest drilling company operating in Pennsylvania, was deducting “excessive” post-production costs from royalty payments, causing those payments to drop below the mandated one-eighth minimum guaranteed royalty.

Responding to constituent complaints, Gov. Tom Corbett and Sen. Gene Yaw, R-Lycoming, asked Kane earlier this year to review Chesapeake’s royalty payment practices.

The 1979 Guaranteed Minimum Royalty Act says royalty payments must be 12.5 percent, or one-eighth, of the production value. However, the law says companies are allowed to tax leaseholders for post-production costs, which include things like adding compression, dehydration, gathering, and transportation.

Legislative efforts to address the issue and clarify the minimum royalty payments stalled a few months ago. The industry pushed back hard against legislation they said amounted to lawmakers trying to tamper with private leases. The industry believes companies are responsible for the costs of bringing the gas to the surface, but companies and leaseholders share the cost of preparing and delivering the gas to market, pursuant to terms of a lease.

Rep. Garth Everett, R-Lycoming, who sponsored one of the bills, has said rural Pennsylvanians signed “company leases” with little legal knowledge, unaware of the specifics of the agreement they signed. He called the leases “one-sided” in favor of industry.

“The legislation needs to provide relief, not only to those with one-eighth leases, but to those with higher percentage agreements. This must include not just rules on how royalties are calculated but also remedies for land owners who feel that their royalties are not being calculated correctly,” said Everett.

Everett’s bill, House Bill 1684, was passed by the Environmental Resources and Energy Committee with bipartisan support. It seeks not only to remedy the lease payments, but to ensure that drilling companies do not deduct excessive and unwarranted post-production costs from the payments as well. The Pennsylvania Supreme Court in 2010 issued a ruling suggesting that the General Assembly further clarify the 1979 law on how royalty payments are calculated, and the legislation would do that.

The Oklahoma City-based Chesapeake last August settled a federal class-action lawsuit filed in Scranton brought by more than 1,000 leaseholders for no less than $7.5 million to cover the cost of post-production deductions.
In broadening her office’s investigation, Kane issued administrative subpoenas, which differ from traditional subpoenas and are considered controversial because judicial oversight is not required.

Pennsylvania’s Administrative Code gives state departments, as well as independent and departmental commissions subpoena power to require “the attendance of witnesses and the production of books and papers pertinent to any hearing before such department, board, commission, or officer, and to examine such witnesses, books, and papers.”

Refusal to comply with the administrative subpoena could result in a contempt of court charge, according to the administrative code.

Kane, a Democrat elected to office in 2012, campaigned on aggressively monitoring the natural gas industry in Pennsylvania.

Kane’s office in January filed charges in criminal court against XTO Energy, an Exxon-Mobil subsidiary, for alleged violations of state environmental laws. In June, she filed numerous criminal charges including fraud and conspiracy against a Marcellus Shale waste hauling business in Northumberland County.

–Kevin Zwick, Capitolwire