In Pennsylvania, Reed Smith won two recent appellate court decisions for the oil and gas industry. In Katzin v. Central Appalachia Petroleum, LLC, No. 135 M.D.A. 2011, 2012 PA Super. 10 (Pa. Super. Ct. Jan. 19, 2012), the Superior Court of Pennsylvania held that a standard royalty provision complied with Pennsylvania’s Minimum Royalty Act (“MRA”), even though the provision did not specify what post-production costs may be deducted from the lessor’s royalty payments. In Chesapeake Appalachia, LLC, v. Ginger Golden, No. 883 C.D. 2011, 2012 Pa. Commw. LEXIS 41 (Pa. Commw. Ct. Jan. 27, 2012), the Commonwealth Court of Pennsylvania held that a county recorder of deeds did not have the authority to set her own policy as to what documents she would record, and instead was required to accept and record all properly acknowledged assignments of multiple oil and gas leases in the form presented by the company.
Katzin v. Central Appalachia Petroleum, LLC
The Katzin case provides certainty that standard royalty provisions providing for a one-eighth royalty are valid under Pennsylvania’s MRA, even if they do not spell out exactly what post-production costs will be charged to the lessor.
Pennsylvania’s MRA provides that an oil and gas lease is invalid if it does not guarantee the lessor at least one-eighth royalty of all oil or natural gas produced. In Kilmer v. Elexco Land Services, Inc., 990 A.2d 1147 (Pa. 2010), the Supreme Court of Pennsylvania held that the net-back method for determining the royalties payable under an oil and gas lease was valid under the MRA. The net-back method allows for the pro-rata deduction of costs associated with post-production activities, such as compression, processing and gathering. The Supreme Court held that a producer could deduct a pro-rata share of all post-production costs from a lessor’s royalty and still comply with the Act.
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