In last month's Update we told you about HB 1684, a bill aimed at clarifying Pennsylvania's Guaranteed Minimum Royalty Act of 1979 (GMRA).  Now Chesapeake Energy Corp. is facing a growing group that alleges is it improperly deducting post-production costs (e.g. marketing and transportation costs) from royalty payments.  Scout Petroleum, a land-based oil and gas company, is asking an arbitration panel to order a full refund for those deductions.  On April 1, Chesapeake filed an injunction to prevent Scout and similarly-situated claimants from being granted class action status.  Chesapeake's practices are also being reviewed by the Pa. Attorney General (see here). 

The issue is a complex one.  While the GMRA sets the minimum payment to landowners for production at one-eighth, it does not clarify how royalties should be calculated.  In 2010, the Pa. Supreme Court held in Kilmer v. Elexco that the GMRA should be read to permit the calculation of royalties at the wellhead and adopted a definition of the term that allows post-production deductions.  Meanwhile, the growth in Pennsylvania's gas production has created strain on the Midstream infrastructure, causing marketing and transportation costs to rise.  The upshot is that producers look to lessees to help bear the burden of those increased costs to better protect themselves from market fluctuations.

Stay tuned to the Update for the latest developments on this critical issue.