Since it was signed by the Governor in July 2013, Pennsylvania’s new law allowing drillers to pool leased properties into one unit for horizontal wells, as long as the oil and gas contracts in effect do not prohibit these combinations, has met with much criticism. See prior blog dated September 10, 2013, “Pennsylvania State Representative wants to repeal new gas pooling law.”

 Representative Jesse White (D-Washington) has now introduced House Bill 1700 which would ban the “forced pooling” of natural gas leases. Rep. White refers to forced pooling as “eminent domain for drillers” because it would allow operators to drill under property even if the landowner does not want to lease his land.

He wants to ensure that lessors who agreed to shallow drilling are not inadvertently drawn into having deeper, Marcellus Shale wells drilled on or under their property. The proposed statute provides that the “rule of capture” still applies, and a driller is not precluded “from extracting gas that has seeped onto an adjacent property, for which a valid lease exists.”

House Bill 1684 and House Bill 1650 both would limit what can be deducted from royalty payments. H.B. 1684 provides that a lease cannot allow any deductions for “severance or other production taxes or costs associated with producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, marketing or other marketing enhancements to be deducted from any royalty payable to a lessor if such deductions result in a royalty of less than one-eighth calculated under the first marketable product doctrine.”

Under H.B. 1650, the “lessee shall compute and pay oil and gas royalties…on the gross proceeds received by the seller based on the fair market value at the point of sale.” The lessee cannot deduct severance taxes, impact fees, and post-production costs (gathering, dehydration, compression, treatment, processing, marketing and transportation costs).


This post was written by Barclay Nicholson (barclay.nicholson@nortonrosefulbright.com or 713.651.3662) from Norton Rose Fulbright’s Energy Practice Group.