Oil & Gas Alert
June 19, 2009
Authors:
David R. Fine
david.fine@klgates.com
+1.717.231.5820
George A. Bibikos
george.bibikos@klgates.com
+1.717.231.4577
K&L Gates is a global law firm with
lawyers in 33 offices located in North
America, Europe, Asia and the Middle
East, and represents numerous GLOBAL
500, FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies,
entrepreneurs, capital market
participants and public sector entities.
For more information, visit
www.klgates.com.
Pennsylvania Supreme Court to Interpret the
Minimum Royalty Act
Exercising an extraordinary jurisdiction power reserved only for the most compelling
cases, the Pennsylvania Supreme Court has agreed to hear directly an appeal that will
give the Court its first opportunity to interpret the requirements of the Pennsylvania
Minimum Royalty Act (the MRA ), 58 P.S. § 33.
As a result of interest in the Marcellus Shale formation, landowners and production
companies in Pennsylvania have executed a considerable number of new natural gas
leases in recent years over wide areas, including parts of the Commonwealth which
had not previously experienced natural gas drilling activities. Many of those leases
include royalty clauses that authorize lessees to deduct the landowner s share of
post-production costs before paying royalties. Hundreds of landowners have sued
seeking to have their natural-gas leases invalidated because they contend that the
deduction provision violates the MRA. The statute guarantees landowners at least a
one-eighth royalty of oil or gas removed or recovered from their property. It does
not, however, specifically address post-production expenses.
In Kilmer v. Elexco Land Services, Inc., and Southwestern Energy Production
Company, No. 2008-57 (Susquehanna Co.), the first case to decide the issue,
plaintiffs and defendants had initially filed cross-motions for summary judgment at
the county-court level regarding whether the MRA precludes lessors from deducting
post-production costs from royalty payments where the lease provides for such a
deduction. The defendants argued that the history of the MRA demonstrates that the
Pennsylvania General Assembly intended the royalty to be measured at the wellhead
so that a lease guaranteeing a one-eighth royalty as measured at the wellhead
complies with the statute and the parties were free to negotiate regarding the
allocation of post-production expenses.
On March 3, 2009, Judge Brendan J. Vanston of the Court of Common Pleas of
Wyoming County (specially sitting in Susquehanna County) granted the defendant
producer s motion, denied the plaintiff landowners motion and concluded that the
MRA does not preclude parties from contracting that post-production costs be
factored into the determination of the amount of royalty payable under [an] oil or gas
lease . . . . Judge Vanston agreed with the position advanced by K&L Gates
lawyers on behalf of lessees in Kilmer and dozens of other pending cases in
Pennsylvania state and federal courts regarding the proper interpretation of the MRA.
The landowners appealed Judge Vanston s order to the Pennsylvania Superior Court.
The producer promptly filed a petition asking the Supreme Court to exercise its
extraordinary jurisdiction to hear the case without waiting for the Superior Court to
review it first, on the suggested assumption that the issue would ultimately be
decided by the Supreme Court.
Oil & Gas Alert
The petition argued that the interpretation of the
MRA is a purely legal issue that is of particular
importance in Pennsylvania (a fact demonstrated in
part by the fact that there are nearly 80 pending
cases focused on the proper interpretation of the
MRA).
On June 16, 2009, the Supreme Court agreed and
granted the petition allowing the case to be heard
directly without further delay. The Court ordered
that the parties brief the following issue: Whether
58 P.S. § 33 precludes parties from contracting that
post production costs be factored into the
determination of the amount of royalty payable
under an oil or natural gas lease. The appeal is
docketed at 63 MAP 2009. The Court has not yet
set a briefing or argument schedule. By order of
June 19, 2009, the court expedited briefing and
scheduled oral argument for September 16, 2009, in
Pittsburgh.
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GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
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This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2009 K&L Gates LLP. All Rights Reserved.
June 19, 2009
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