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Chesapeake Energy has come under increased scrutiny in recent months for allegedly defrauding Pennsylvania mineral owners.

The Wall Street Journal reported in March 2014 that some mineral owners are seeing deductions of more than 35% on their royalty checks! The publication compared the royalty checks of Pennsylvania mineral owners and found that Chesapeake’s lessors had higher deductions than other companies operating in the area.

The deductions stem from post-production costs (i.e. transporting, processing, and marketing the oil or gas). In 2010, the Pennsylvania Supreme Court ruled in Kilmer v. Elexco Land Services, Inc. that the word “royalty” was not defined in state law, and the industry could rely on its own interpretation. As a result, oil and gas companies gained the legal right to deduct post-production costs from a mineral owner’s royalty. The caveat is the lease agreement between the oil and gas company and the mineral owner allows the company to deduct post-production costs in some cases.

In states such as Pennsylvania where mineral owner’s royalties are not protected from post-production costs, it is up to mineral owners to protect themselves. Phrases to watch out for include “cost free” royalty clause and “market enhancement” clause. Also, pay close attention to terms such as “gross proceeds” and “gross market value.” You want to make sure that your royalty is calculated on the gross proceeds from the well and not less than gross market value.

Pennsylvania mineral owners are guaranteed a minimum royalty of 12.5% under the Pennsylvania’s Guaranteed Minimum Royalty Act of 1979. This guarantee however does not protect mineral owners from being dinged for post-production costs. It is unclear if the state will be able to do anything about deductions from mineral owners’ royalty checks because of the precedent set by Kilmer v. Elexco Land Services, Inc. and Chesapeake’s lease agreements with the mineral owners. According to the Wall Street Journal, public outcry has grown so loud that Pennsylvania Governor Tom Corbett wrote an open letter to the state attorney general to investigate.

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Land owners in Mississippi are seeking public access to CO2 pipelines controlled by Denbury.

The two pipelines supplying oil fields in the state are 50% utilized and land owners believe shared use could create additional value for themselves and the state.

The pipelines were built employing eminent domain, but there is only one owner and one carrier. A senate bill that will be considered in the coming days could force Denbury to open its pipelines to public use.

Mineral owners are typically paid 2-2.5% of the price of oil for CO2. More competition on pipelines could create more competition CO2 lease agreements. It will be interesting to see if anything comes of the issue.

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Kansas Could Inact Limits on the Number of Oil Wells on a Property

February 17, 2014

A state senator in Kansas has introduced a bill that could limit the number of oil wells drilled on property in the state. A hearing to discuss the bill has not been scheduled and proposal might not be addressed until the next legislative session. The problem is magnified by surface owners that do not own […]

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ND Supreme Court Rules Missouri River Shoreline Minerals Are Owned by the State

January 29, 2014

The North Dakota Supreme Court has ruled Missouri River mineral rights found below the shoreline are owned by the state. You might not think this is significant, but the prize is about 25,000 acres and $140 million oil companies have set aside in bonuses and royalties. Development in the Bakken makes each acre significant. Waterfront […]

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Oil Export Ban Is Hurting Your Royalty Checks!

December 12, 2013

The Oil export ban is in the news more this year than we have seen in decades. The main reason is production has increased 60% or 3 million b/d in the U.S. since 2008. The U.S. is producing more oil today (almost 8 million b/d) than we have as a nation in more than 25 […]

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Allocation Wells In Old Oil & Gas Fields In Texas

June 25, 2013

Have you seen an “Allocation Permit” or been contacted about participating in an “Allocation Well”? Allocation wells are becoming more common across Texas where old fields were developed with conventional techniques and units were formed that cover all depths. Those old producing units might not have the best shape for a long horizontal lateral. The […]

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Marcellus Leasing Agents Have Been Replaced With Mineral Buyers

May 30, 2013

The days of landmen running around in courthouses in Pennsylvania isn’t over, but their purpose is a little different. Mineral buyers, who hope to cash in when natural gas prices recover, are filing deeds daily in Pennsylvania courthouses. They offer money today in exchange for minerals. Some will pay back in spades and some won’t. […]

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Colorado Property Sellers Might Have To Disclose Mineral Ownership

April 25, 2013

A recent law passed through the house in Colorado that will require property sellers to disclose possible third-party mineral rights ownership. That will include oil, gas, coal, and other minerals. In Colorado, minerals are often severed and this law would require that buyers be made aware that there is a possibility someone else owns the […]

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QEP Resources Settles OK Royalty Suit for $115 Million

February 15, 2013

QEP Resources has reached a $115 million settlement in a class action lawsuit filed by royalty owners in the state of Oklahoma. The class action lawsuit was filed on behalf of QEP’s Oklahoma royalty owners asserting claims related to royalty valuations related to wells QEP operated or from which it marketed the gas. The Settlement […]

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Natural Gas Royalties Paid in the Billions

January 31, 2013

Over $20 billion in natural gas royalties were paid in 2010. That’s the most recent year the NARO has provided statistics. Pennsylvania is the most recent state to splash onto the scene. An estimated $1.2 billion was paid to royalty owners across Pennsylvania in 2012. One company, Range Resources, has paid out over $1 billion […]

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