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 1. Section 1.2 of the act of July 20, 1979 (P.L.183, 
7No.60), known as the Oil and Gas Lease Act, is amended by adding 
8a definition to read:

9Section 1.2. Definitions.

10The following words and phrases when used in this act shall
11have the meanings given to them in this section unless the
12context clearly indicates otherwise:

13* * *

14"Postproduction costs." Any and all costs incurred in and
15associated with processing and transporting oil, natural gas or
16gas of any other designation from the point the gas is brought
17to the surface to the point the gas enters the commercial
18market, an interstate transmission system or the system's point
19of use. These costs shall include, but are not limited to,
20gathering, storing, separating, treating, dehydrating,
21compressing, processing, transporting, marketing or other
22marketing enhancements to oil, natural gas or gas of any other
23designation, and proportional costs of separating and marketing
24ethane, propane, butane and other complex hydrocarbons.

25Section 2. Section 1.3 of the act, added July 9, 2013
26(P.L.473, No.66), is amended to read:

27Section 1.3. Royalty guaranteed.

28[A lease or other such agreement conveying the right to
29remove or recover oil, natural gas or gas of any other
30designation from the lessor to the lessee shall not be valid if

1the lease does not guarantee the lessor at least one-eighth
2royalty of all oil, natural gas or gas of other designations
3removed or recovered from the subject real property.]

4(a) Lease validity.--A lease or other agreement conveying
5the right to remove or recover oil, natural gas or gas of any
6other designation from the lessor to the lessee shall not be
7valid if the lease does not guarantee the lessor at least one-
8eighth royalty of all oil, natural gas or gas of other
9designations removed or recovered from the subject real
10property. Deductions from a lessor's royalty of severance or
11other taxes or fees and costs commonly known as production costs
12or costs related to production are prohibited.

13(b) Unconventional gas well royalty calculation.--With
14respect to unconventional gas wells, the deduction of
15postproduction or any other costs, including third party costs,
16shall not be taken if the deduction results in a royalty of less
17than one-eighth of the value of lessor's share of the
18production. For the purpose of royalty calculations for
19production from unconventional gas wells, the royalty
20calculation shall be based on the price received by the lessee
21at the point at which the production enters the commercial
22market and ownership transfers to a business entity nonrelated
23to the lessee in an arm's-length transaction. In the cases where
24that point of sale or use of the production is not the result of
25an arm's-length transaction between unrelated business entities,
26the lessee shall have the burden to prove that the royalty
27calculation and royalty paid are based on the fair market value
28of the production for the relevant time period.

29Section 3. Nothing in this act shall be construed to require 
30the retroactive recalculation or repayment of royalty payments
 

1made prior to the effective date of this act and no lease shall 
2be invalidated for deductions to royalties for postproduction 
3costs that resulted in royalties of less than one-eighth of the 
4value of the lessor's share of the production made prior to the 
5effective date of this act. This act shall apply to all existing 
6and future leases and other agreements to remove or recover oil, 
7natural gas or gas of any other designation in this 
8Commonwealth.

9Section <-3 4. This act shall take effect immediately.