PRINTER'S NO. 2293
THE GENERAL ASSEMBLY OF PENNSYLVANIA
HOUSE BILL
No.
1708
Session of
2017
INTRODUCED BY ORTITAY, BLOOM, FRITZ, GROVE, PHILLIPS-HILL,
MARSHALL, MILLARD, SACCONE AND WATSON, AUGUST 16, 2017
REFERRED TO COMMITTEE ON ENVIRONMENTAL RESOURCES AND ENERGY,
AUGUST 16, 2017
AN ACT
Amending the act of July 20, 1979 (P.L.183, No.60), entitled "An
act regulating the terms and conditions of certain leases
regarding natural gas and oil," further providing for
definitions and for royalty guaranteed; and providing for
written summary of unconventional gas well deductions and for
inspection of records for unconventional gas wells.
The General Assembly of the Commonwealth of Pennsylvania
hereby enacts as follows:
Section 1. Section 1.2 of the act of July 20, 1979 (P.L.183,
No.60), known as the Oil and Gas Lease Act, is amended by adding
definitions to read:
Section 1.2. Definitions.
The following words and phrases when used in this act shall
have the meanings given to them in this section unless the
context clearly indicates otherwise:
* * *
"Corporate structure or financing costs." The lessee's costs
associated with any of the following:
(1) Corporate financing, including corporate bonds.
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(2) Changes in ownership.
(3) Transfers of ownership interests of existing
physical assets.
(4) Changes in the legal entities which hold or acquire
an ownership interest in physical assets.
(5) Adjustments to asset book values and undepreciated
asset balances if the lessee or an affiliated entity owns a
controlling interest in assets used for postproduction
activities.
* * *
"Gas of any other designation." The term includes but is not
limited to, natural gas liquids and other by-products in the gas
stream
* * *
"Point of sale." The point at which ownership of the oil,
natural gas or gas of any other designation transfers to another
person.
"Postproduction costs." Costs incurred in and associated
with processing and transporting natural gas or gas of any other
designation from the point the gas is brought to the surface to
the point of sale. These costs shall be limited to: the costs of
gathering, separating, treating, dehydrating, compressing,
processing, transporting; losses by use as fuel or line loss of
natural gas or gas of any other designation; and the costs of
fractionating, transporting and marketing ethane, propane,
butane and other complex hydrocarbons. The term does not include
corporate structure or financing costs.
"Proceeds." The amount of money obtained by the sale of oil,
natural gas or gas of any other designation.
"Royalty." An interest owner's share of production, free of
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the expenses of production.
"Royalty payment." A payment made by a lessee to an interest
owner in exchange for a royalty.
"Unconventional formation." A geological shale formation
existing below the base of the Elk Sandstone or its geologic
equivalent stratigraphic interval where natural gas generally
cannot be produced at economic flow rates or in economic volumes
except by vertical or horizontal well bores stimulated by
hydraulic fracture treatments or by using multilateral well
bores or other techniques to expose more of the formation to the
well bore.
"Unconventional gas well." A bore hole drilled or being
drilled for the purpose of or to be used for the production of
natural gas from an unconventional formation.
Section 2. Section 1.3 of the act is amended to read:
Section 1.3. Royalty guaranteed.
(a) Minimum royalty.--A lease or other such agreement
conveying the right to remove or recover oil, natural gas or gas
of any other designation from the lessor to the lessee shall not
be valid if the lease does not guarantee the lessor at least
one-eighth royalty of the value at the wellhead of all oil,
natural gas or gas of any other [designations] designation
removed or recovered from the subject real property.
(b) Value at the wellhead.--For the purpose of subsection
(a), the value at the wellhead shall be determined as prescribed
under subsection (d) by deducting the postproduction costs which
were actually and reasonably incurred from the proceeds received
by the lessee at the point of sale.
(c) Affiliated costs for unconventional gas wells.--For the
purposes of calculating a royalty payment pursuant to a lease
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for an unconventional gas well, if the lessee or an entity
affiliated with the lessee owns any of the assets used to incur
postproduction costs taken as deductions, the lessee or
affiliated entity shall not charge more for those postproduction
costs than the amount that would be reasonably incurred in an
arm's-length transaction with a third party for the activities
on a volumetric basis.
(d) Postproduction costs for unconventional gas wells.--All
of the following shall apply for the purposes of calculating a
royalty payment pursuant to a lease for an unconventional gas
well entered into on or after the effective date of this
subsection:
(1) The lessee may only deduct postproduction costs if
the lease provides express notice that postproduction costs
may be deducted from the sales price in calculating the
royalty payment.
(2) The lessee may not deduct from the sales price any
costs other than postproduction costs:
(i) as defined in this act;
(ii) specifically enumerated in the lease; and
(iii) actually and reasonably incurred by the
lessee.
(3) A lessee may only deduct costs associated with
fractionating and marketing ethane, propane, butane and other
complex hydrocarbons if the lessee provides a royalty payment
to the lessor for those products.
(4) For any period in which an unconventional gas well
produces natural gas and a royalty payment from the lessee to
an interest owner is accumulated under the terms of the lease
or as provided under section 3.3, the amount may not be less
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than $0.
Section 3. The act is amended by adding sections to read:
Section 4. Written summary of unconventional gas well
deductions.
Within 60 days of receiving a written request by certified
mail from the lessor who is party to a lease for an
unconventional gas well concerning a royalty payment made during
the 36-month period immediately preceding the date of the
request, the lessee shall provide a written summary of the
amount and specific description of each category of costs
deducted from the sales price of the natural gas and gas of any
other designation in calculating a royalty payment. The summary
shall not disclose the composition of fees charged by an
unaffiliated third party. A request for a summary under this
section more than once in a six-month period, or duplicative
requests for summaries for the same payment, may be denied.
Section 5. Inspection of records for unconventional gas wells.
(a) Authority.--A lessor who is party to a lease for an
unconventional gas well or a person duly authorized in writing
to act on behalf of the lessor may inspect, but not copy or
reproduce without the written consent of the lessee, the
supporting documentation of the lessee specifically related to
the deduction of costs during the 36-month period immediately
preceding the date of the request.
(b) Procedure.--
(1) A lessor who is party to a lease for an
unconventional gas well or a person duly authorized in
writing to act on behalf of such lessor seeking inspection
under subsection (a) shall make a written request to the
lessee for inspection of records by certified mail.
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(2) Within 60 days of receipt of the request, the lessee
shall do all of the following:
(i) Designate a mutually agreed upon date, time and
place for inspection within 90 days of receipt of the
request. The inspection shall take place during normal
business hours, allow reasonable time to permit
completion of the inspection and occur at a location in
this Commonwealth which shall not impose an unreasonable
travel burden on the lessor or a person duly authorized
in writing to act on behalf of the lessor.
(ii) Provide supporting documentation of costs
deducted from the sales price to the lessor or a person
duly authorized in writing to act on behalf of the
lessor. For services provided by unaffiliated third
parties, supporting documentation may consist of invoiced
amounts for the services provided, but shall not include
the composition of the fees charged by an unaffiliated
third party.
(iii) Make available a knowledgeable individual, in
person or by teleconference, who is able to answer
questions pertaining to accounting issues specifically
related to costs deducted from the sales price that are
the subject of the request.
(c) Confidentiality.--
(1) Except as specified in paragraph (2), information
provided to a lessor who is party to a lease for an
unconventional gas well or a person acting on behalf of such
lessor that makes a request under subsection (a):
(i) Shall be strictly confidential.
(ii) May not be disclosed to any other person other
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than the lessor or the person duly authorized in writing
to act on behalf of the lessor.
(iii) May not be used for any other purpose than
verifying the applicable costs.
(2) Paragraph (1) does not apply to disclosure in a
judicial proceeding.
(d) Frequency.--A request for inspection under this section
more than once in a six-month period or duplicative requests to
review records for the same time period may be denied.
Section 4. This act shall take effect in 60 days.
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