Pennsylvania Supreme Court Rules on Royalty Case

Posted: April 19, 2010

The PA Supreme Court issued an opinion interpreting the Guaranteed Minimum Royalty Act. The Court's opinion finds in favor of the gas company, meaning that leases can provide for calculation of royalties that deduct post-production costs from the amount due the landowners.
Photo by J. Craig Williams

Photo by J. Craig Williams

by Robert Jochen

On March 24, 2010, the Pennsylvania Supreme Court issued an opinion in a case of first impression interpreting Pennsylvania’s Guaranteed Minimum Royalty Act (GMRA), 58 PA. STAT. § 33.  Kilmer v. Elexco Land Services, Inc., 2010 WL 1170215 (Pa. 2010).  In early 2008, the plaintiff-landowners filed a complaint seeking to invalidate their 2007 lease claiming that the lease’s royalty provision violated the GMRA.  Under the GMRA, a lease is not valid unless it guarantees a royalty of at least one-eighth of all oil or natural gas removed from the property.  The plaintiffs’ lease provided them with one-eighth of the sales proceeds received by the gas company, but authorized a reduction for the payment of post-production costs.  The plaintiffs argued that allowing for deductions of post-production costs reduced the royalty to less than the one-eighth required by the GMRA.  The defendants (gas company) argued that the “net-back method” of assessing royalties, whereby one-eighth of the post-production costs are subtracted from one-eighth of the sale price of the gas, did not violate the GMRA.  Although the GMRA is silent regarding the definition of royalty and the method for calculating it, the court held that “the GMRA should be read to permit the calculation of royalties at the wellhead, as provided by the net-back method used in the Lease.” 

For more information on legal issues associated with natural gas, please visit the Agricultural Law Center’s Natural Gas Resource Area.

This article appeared in The Dickinson School of Law April 2010 issue of "The Agricultural Law Brief"