Legislation recently signed into law by Governor Tom Corbett has come under fire by some attorneys and industry watchers for what they say is vague and overly broad language allowing natural gas drillers to pool properties into units without leaseholders' consent and to decide, with little oversight, how much the owners of those properties should be paid.
"This is atrocious for the landowners in the commonwealth of Pennsylvania and great for oil and gas companies," said Paul R. Yagelski, a partner at Pittsburgh-based Rothman Gordon who represents landowners in oil and gas lease disputes.
Critics have also questioned what they say appears to have been an eleventh-hour addition of that language into SB 259, which was passed by the legislature June 30 and signed into law by Corbett on July 9 as Act 66, amending the state's Guaranteed Minimum Royalty Act.
Those who oppose the law have argued that it comes dangerously close to allowing for "forced pooling," a process used by some other states that essentially compels landowners who have oil and gas reserves on their properties to enter into production units regardless of whether they've signed leases.
Steve Saunders, a Scranton oil and gas attorney who represents landowners, said he views Act 66 as the result of a successful attempt by lawmakers to quickly and quietly pass a pooling measure without calling it what it is.
"Pooling is like the third rail of Pennsylvania politics," Saunders said.
In fact, the portion of Act 66 that has stirred up controversy is only two sentences long and never actually mentions the word "pooling."
Instead, under the heading "Apportionment," it reads, "Where an operator has the right to develop multiple contiguous leases separately, the operator may develop those leases jointly by horizontal drilling unless expressly prohibited by a lease. In determining the royalty where multiple contiguous leases are developed, in the absence of an agreement by all affected royalty owners, the production shall be allocated to each lease in such proportion as the operator reasonably determines to be attributable to each lease."
Supporters of Act 66 argued that no one stands to be negatively impacted by the new law.
Patrick Henderson, Corbett's energy executive, told The Legal that the apportionment provision of Act 66 "isn't even in the same ballpark" as forced pooling.
"This legislation only deals with people who knowingly, voluntarily [agreed to] and are perfectly fine with leasing their oil and gas rights," Henderson said, adding that Act 66 is only likely to affect very old leases, since almost all newer leases have provisions that mention pooling.
Former state Department of Environmental Protection Secretary Michael Krancer had a similar take, saying Act 66 does not compel anyone to allow oil and gas development on his or her property who hasn't already agreed to do so.
According to Krancer, who is now a partner at Philadelphia-based Blank Rome, where he leads the energy, petrochemical and natural resources practice group, the apportionment provision of the law is primarily aimed at environmental conservation, reducing land disturbance by allowing drillers to produce gas from multiple leased properties at once without having to drill multiple wells.
Krancer said SB 259 is a direct response to the recommendations set forth in the 2011 report by Corbett's Marcellus Shale Advisory Commission.
Section 9.4.26 of the report specifically calls for state statutes to be modernized to, among other things, "ensure the minimization of surface impact through the proper placement and spacing of well pads."
State Senator Gene Yaw, R-Lycoming, who introduced SB 259, said in a statement that, without Act 66, "a company could drill a separate well on each property under its existing leases."
State Representative Garth Everett, R-Muncy, who worked closely with Yaw to introduce a companion bill in the House of Representatives that included the apportionment language that eventually made it into Act 66, said he was surprised by the uproar over what he considered to be a "noncontroversial, ho-hum" piece of legislation.
But while Act 66 does not technically become effective until September 7, driller EQT Corp., one of the companies whose lobbyists pushed for the apportionment legislation, has already cited the new law in a suit filed against 70 landowners it claims have been blocking the company from accessing their properties to perform seismic testing.
"The oil and gas leases do not contain an express prohibition on the joint development of multiple contiguous oil and gas leases by horizontal drilling," EQT said in the complaint, filed in the Allegheny County Court of Common Pleas on July 22. "Consequently, EQT has the right to develop jointly the multiple contiguous leases by horizontal deep drilling."
Yagelski told The Legal the suit is the "first concrete example of how [Act 66] could adversely affect some landowners."
But Everett's district administrator, Charles Hall, told The Legal that, upon initial review of EQT's lawsuit, House and Senate staff members are of the opinion that it deals more with access to land rather than apportionment of properties and that the citation of Act 66 was impertinent to the case.
'A Stealth mission'
Much of the criticism directed at Act 66 appears to stem from what some view as the intentionally hushed, last-minute addition of apportionment language to SB 259, which otherwise deals with transparency in royalty payments.
Jackie Root, president of the Pennsylvania chapter of the National Association of Royalty Owners, said Act 66 is "clearly the product of a stealth mission by an industry lobbyist" to insert the apportionment language into the legislation in late June while the public was distracted by other issues like the state budget, liquor privatization and pension reform.
Root said her organization had met with lobbyists from EQT earlier this year about the possibility of developing "fair pooling" legislation that would have allowed for uniform development with specific oversight, but those talks never amounted to anything.
Root said a lobbyist from EQT later pushed for the apportionment language that eventually made it into Act 66.
That language, Root said, attempts to deal with a complex issue in two sentences and "with no rules in place."
Everett acknowledged that it was industry lobbyists who originally urged him to include the apportionment language in his bill, though he said he couldn't remember specifically who they were.
In a follow-up phone call to Everett's office, Hall, the district administrator, confirmed to The Legal that Everett recalled at least one lobbyist from EQT pushing for the apportionment language.
A spokeswoman for EQT did not return several calls seeking comment.
According to Everett, the lobbyists who approached him had expressed concern that because the state Oil and Gas Act did not specifically provide for the aggregation of leases that are otherwise silent on the issue, production could be impeded if a landowner refused to cooperate.
Root said she believes a "very savvy" lobbyist "sold a lot of our legislators who are not well-educated on oil and gas a bill of goods."
"I hope [the lobbyist] duped them," Root added. "If the legislators did this deliberately, that's very scary."
But Everett told The Legal he fully understood the implications of the apportionment language and does not see it as negatively impacting landowners.
The stated purpose of SB 259 when Yaw first introduced it in January was to "require gas companies to list all deductions on royalty check pay stubs" in order to "provide openness and transparency for mineral rights owners as seen in other natural gas producing states."
At the time, SB 259 did not include the controversial apportionment language.
That language originated in HB 1414, legislation introduced by Everett in mid-May that was otherwise nearly identical to Yaw's bill.???Everett told The Legal he and Yaw are friends who frequently work together to file similar bills in the House and Senate, in hopes of increasing the odds of getting a measure to pass.
"If we're just trying to get our bill done, we don't care which one goes," Everett said.
According to Everett, HB 1414 was approved by the House Environmental Resources and Energy Committee with no opposition.
The apportionment "language was in there. Everybody saw it, nobody said a word about it," Everett said.
The Senate unanimously passed SB 259, without the apportionment language, in February.
HB 1414 was unanimously passed by the House in mid-June and sent to the Senate.
A few weeks later, on June 25, the House amended SB 259 to include HB 1414's apportionment language.
On June 28, the House passed SB 259 by a vote of 167-33. On June 30, the Senate passed the newly-amended bill by a vote of 48-2 and sent it to Corbett, who signed it into law July 9.
Root said her organization was shocked that the newly-amended SB 259 passed so quickly.
"Over and over we were told it was too volatile, nobody wants it and the governor won't sign it," Root said.
leverage and oversight
In November 2010, Everett wrote a position paper to address concerns among his constituents about his intention to support legislation that would have allowed for forced pooling of both leased and unleased properties.
Everett told The Legal recently that Act 66 is different.
Everett said he prefers to use the term "unitization" rather than "pooling" when discussing the new law.
"As soon as people hear 'pooling' they jump right away to forced, compulsory pooling of nonleased properties," Everett said.
All Act 66 really does, according to Everett, is formalize the practice of aggregating leased properties, which companies were already doing anyway.
But Yagelski said many old leases in Pennsylvania did not contemplate the possibility of horizontal drilling and are therefore silent on the issue of pooling.
By giving the oil and gas industry authority to group those properties into production units, Yagelski said, Act 66 robs the landowners of the leverage to renegotiate the terms of those old leases to provide for a better royalty payment.
"I'm seriously wondering whether this act isn't unconstitutional," Yagelski said. "It's imposing obligations [on landowners] and taking away the ability of one party to negotiate a contract."
But Henderson said there's a school of thought among some gas operators that Act 66 wasn't even necessary because they believed leases that were silent as to pooling were fair game to be integrated into production units anyway.
"They think this is belt-and-suspenders," Henderson said.
Meanwhile, Everett said he believes most of the people who are angry about the new law are attorneys or advisers who stand to profit from assisting landowners in either renegotiating leases or litigating lease disputes.
Everett maintained that Act 66 simply allows oil and gas operators to develop existing leases.
"I just felt these people had already signed leases to have gas development done on their properties so there's no need to renegotiate new leases. That was my position and the theory of the whole legislation," Everett said, adding that landowners whose leases have lapsed after a period of inactivity are still free to negotiate new contracts.
But Yagelski also took issue with the fact that Act 66 leaves it up to oil and gas companies to determine the "'reasonable'" apportionment of royalty payments for each landowner in a production unit, noting that there appears to be no oversight and no recourse for a landowner to challenge a company's determination.
While Yagelski acknowledged that Act 66 specifically allows for landowners in a production unit to reach an agreement with each other regarding the apportionment of royalties, he said he had doubts about how easy that would be in practice.
But Henderson said the total portion of a unit's production that is set aside for royalty payments is determined based on the royalty percentages spelled out in the landowners' leases and Act 66 doesn't change that.
According to Henderson, it's simply up to the oil and gas operators, absent an agreement by the landowners, to divide the royalty money among the properties in a unit based on each property's contribution to the total production.
As for where landowners can turn if they don't feel they've received a "reasonable" portion of the royalties from a company, Everett said the answer is simple: the courts.
"Just like when we put the word 'reasonable' in any statute, it means maybe a judge someday is going to decide what 'reasonable' is," Everett said.
Henderson added that some leases contain arbitration clauses.
Zack Needles can be contacted at 215-557-2493 or firstname.lastname@example.org. Follow him on Twitter @ZNeedlesTLI. •