1Amending the act of July 20, 1979 (P.L.183, No.60), entitled "An
2act regulating the terms and conditions of certain leases
3regarding natural gas and oil," prohibiting certain
4deductions from royalties.

5The General Assembly finds and declares as follows:

6(1) The act of July 20, 1979 (P.L.183, No.60), known as
7the Oil and Gas Lease Act, provides royalty owners with a
8guaranteed minimum 1/8 royalty for oil, natural gas or gas of
9any other designation removed or recovered.

10(2) The act protects royalty owners from unfair or
11deceptive leases or other contractual arrangements as a
12legitimate exercise of the Commonwealth's police power.

13(3) Despite this guarantee of a minimum return, lessees
14have engaged in efforts to reduce the guaranteed minimum
15royalty by transferring a share of postproduction, market-
16enhancement and similar costs to royalty owners.

17(4) In 2010, the Pennsylvania Supreme Court's decision

1in Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147, 1157
2(Pa. Cmwlth. 2010), noted that the "General Assembly is the
3branch of government best suited to weigh the public policies
4underlying the determination of the proper point of royalty
5valuation."

6(5) It is within the legitimate police power of the
7Commonwealth to clarify that any deduction for
8postproduction, market-enhancement or similar costs should
9never result in royalty owners receiving less than the
10guaranteed minimum 1/8 royalty provided by the Oil and Gas
11Lease Act.

12The General Assembly of the Commonwealth of Pennsylvania
13hereby enacts as follows:

14Section 1. The act of July 20, 1979 (P.L.183, No.60), known
15as the Oil and Gas Lease Act, is amended by adding a section to
16read:

17Section 1.4. Deductions from royalties.

18(a) General rule.--A lease or other such agreement,
19conveying the right to remove or recover oil, natural gas or gas
20of any other designation, shall not allow for any severance or
21other production taxes or costs associated with producing,
22gathering, storing, separating, treating, dehydrating,
23compressing, processing, transporting, marketing or other
24marketing enhancements to be deducted from any royalty payable
25to a lessor if such deductions result in a royalty of less than
26one-eighth calculated under the first marketable product
27doctrine.

28(b) Construction.--Nothing in this act shall be construed to
29preclude enforcement of lease terms which result in a royalty of
30greater than one-eighth calculated under the first marketable

1product doctrine.

2Section 2. The addition of section 1.4 of the act shall
3apply to all leases and other agreements that are entered into
4on or after September 20, 1979, and are subject to section 2 or
53 of the act.

6Section 3. This act shall take effect immediately.