Open Records: A Potential Solution to Royalty Payment Questions (Guest Post)

Started March 10, 2017 at 09:06 am by in Marcellus Shale

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03/10/17 09:06:56AM

By Paul R. Yagelski (follow or message Paul)

Inspection of Records and Freedom From Retaliation

You’ve received your royalty statements and you believe that your oil and gas company’s figures are wrong. Can you check the figures on your royalty statements? Can you check the oil and gas company’s records to verify the accuracy of their royalty statements? What happens if the figures are wrong, but you are afraid to tell the oil and gas company. You are afraid of retaliation. What can you do?

If you do not have an audit or inspection clause in your oil and gas lease or if you are afraid of retaliation if a lessee breaks your lease and you report it, the Pennsylvania Senate has recently passed two bills, Senate Bill No. 138 and Senate Bill No. 139, which address inspection of records and a lessor’s freedom from retaliation.

Senate Bill No. 138

Senate Bill No. 138 amends Pennsylvania’s Oil and Gas Lease Act to allow a lessor to inspect the records of a lessee.

Under the Senate Bill, a lessor must make a written request for inspection of records for any property for which the lessor has been paid royalties within the three-year period immediately preceding the date of the request. The lessee is to designate a date for inspection as mutually agreed upon or within ninety days of receipt of the request. Lessee is also to designate a time for inspection which is reasonable to permit completion of the inspection and provide supporting documentation of payment information required under the Act.

Senate Bill No. 139

Senate Bill 139, the Natural Gas Lease Anti-Retaliation Act, is an act providing for the protection of the lessor of natural gas rights who reports a violation or suspected violation of a contractual agreement.

Section 3, entitled “Protection of Lessors,” provides that a lessee may not retaliate by ceasing development or production or take other reprisals against the lessor because the lessor takes a good faith action.

A lessor who alleges retaliation may bring a civil action for damages or injunctive relief, or both, within one year after the occurrence of the alleged violation. A court that finds in favor of the lessor may order the lessee to pay reasonable damages to the lessor and may impose a civil fine of up to $1,000 per day for each day the provisions of Section 3 have been violated.

Both Senate Bill 138 and Senate Bill 139 have been referred to the Environmental Resource and Energy Committee of the General Assembly’s House of Representatives.

If you haven’t entered into an oil and gas lease yet, you should require an audit clause, so that you can check the oil and gas company’s figures for accuracy. If you already have a lease but no audit clause, think of contacting your House Representative to express support for Senate Bill 138 and to also express support for the Anti-Retaliation Act, Senate Bill 139.

* The Information contained herein is not intended to provide legal advice and does not create an attorney-client relationship.

Paul R. Yagelski, Esquire of Rothman Gordon, P.C.

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03/10/17 10:57:36AM @pete:

@paul-r-yagelski, what if the breach or mis-payment goes back longer than 3 years

David Allen Lilly
03/13/17 07:05:04PM @david-allen-lilly:

I have an audit clause in my lease, here in Ohio. I do not know what state law allows here but I do know that an audit is very expensive and may leave you short on information need to verify the lease royalties are being paid properly.

I have 12.5 acres in a producing unit. With so few acres it would be hard to swallow the cost of the audit because the shortages might not cover.

Also, if the audit cannot show you who the product was sold to you will never know if you are dealing with a company that does in house sales. 

I betcha the good royalty owners of Ohio would approve a royalty tax that specifically is spent verifying lease adherence in regards to royalties.

As with most other issues between royalty owners, producers and the law, the royalty owners are on the shortest end of the stick.

Paul R. Yagelski
03/13/17 01:20:56PM @paul-r-yagelski:

Good question. The way the Act reads at this time, inspection would be limited to the three year period. Accordingly, under the proposed provisions of the Act, the oil and gas company would only be required to provide documentation for the three year period.

If you have an audit clause in your lease, I would check that to see how far back you can go. If you do not have a lease but have been offered one, I would try to get an audit clause with a lookback period of greater than three years.

Barry D
03/13/17 08:41:30PM @barry-d:

It does not appear that the legislation deals with the issue of location.

Where would the inspection take place?

It's my understanding that the records would be made available for inspection at and in the offices of the company.

Being that most of the companies working in shale development are not local it would require long distance travel for the landowner. Or, hiring a firm in the locale of the company to review the records.

Just a thought.

EJ Ohio
03/14/17 05:47:09PM @ej-ohio:

They have cleverly made it nearly impossible to do a cost effective or accurate audit.  This is obviously not by mistake. 

I can see how many Billions of dollars could be shorted the landowners each year.  But there will never be any way to prove it so I guess that means it never happened?  Right?

David Allen Lilly
03/15/17 07:17:26AM @david-allen-lilly:

We need the states to get involved and I would pay a special royalty tax to fund the necessary manpower needed to do the job.

There are many reasons why audits are not doable for most royalty owners. I am not a big fan of governmental intrusion into private business matters but in this particular case I don't see any other viable alternative.

Each producer should have a certain number of random, in-house audits annually, based on the percentage of the market they produce.

It has been said here on this site many times that there are untold millions of lost tax revenue for the states because of incorrect royalty payments and reported production.for any of this.

The state of Ohio certifies gasoline pumps as accurate, they should do the same with the product produced from the wells.

I will not hold my breath for any of this, I am afraid the states are owned by the producers.




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