Shale gas was going to make them rich. Then the checks arrived

Lynne and Bill Seligman thought they were protecting themselves in 2008 when they agreed to allow an Oklahoma company to explore for natural gas under their 91-acre Sullivan County, Pa., farm. They even paid a lawyer to help negotiate the lease.

But since Chesapeake Energy Co. drilled a well to capture gas from the rich Marcellus Shale formation deep under that property, the Seligmans, who live in Chester County, have seen their gas income shrink dramatically — and not just because production declined or gas prices fell.

“I just feel they cheated us,” said Lynne Seligman, 64, a retired nursing-home consultant. “They made us promises they didn’t fulfill, and I guess that’s what really irritates me.”

Chesapeake has slashed royalty payments to many like the Seligmans, subtracting “post-production costs” from income the landowners said they were promised under the state’s Guaranteed Minimum Royalty Act of 1979. The law provides that owners of mineral rights receive a minimum one-eighth share, or 12.5 percent, of the sale price of their oil and gas.

Camera icon Michael Bryant / Staff Photographer
A Marcellus Shale drilling operation near Waynesburg, Pa.

Many Marcellus producers began to deduct post-production costs after the Pennsylvania Supreme Court sanctioned the practice in 2010. But Chesapeake, the state’s largest producer, has been the most aggressive about billing landowners for the costs.

Last year, Chesapeake reduced the Seligmans’ $317.57 royalty share for April and May by 90 percent, mailing the Kennett Square family a paltry check for $30.96 for the two months. The deductions were attributed to the costs of gathering, compressing, and transporting the gas.

Other disillusioned landowners say Chesapeake has reduced royalty payments below zero, essentially docking them for the gas produced on their properties.

Russ Forba, whose siblings share ownership of a large family property in Wyoming County, said Chesapeake assessed them “negative revenue” for 10 months during the last two years, and estimated that the company has deducted $1.5 million from their royalty payments since its wells began producing in 2014.

The most recent check, for production in August and September, amounted to $2,400, a 96 percent reduction from the gross royalty of $55,000, Forba said.

Chesapeake is now defending itself from an onslaught of lawsuits in federal and state courts. On Dec. 15, a Bradford County judge allowed to proceed a state attorney general’s suit accusing Chesapeake and Anadarko Petroleum Corp. of cheating landowners, and the federal issues appear to be moving toward a settlement, according to court filings.

The landowners are also pressing the state legislature to rewrite the royalty law to limit deductions, affecting all gas producers. But they say they have been frustrated by the powerful gas industry, which argues that the government cannot constitutionally alter existing gas leases, and that the proposed revisions would make Pennsylvania less attractive for energy investment.

“I have no desire at all to do anything to stop the industry from investing in Pennsylvania, but I think it’s very, very unfair that they’re not paying the landowners the royalties they deserve,” said State Rep. Garth Everett (R., Lycoming), who has sponsored legislation for five years to require minimum payments to landowners of 12.5 percent.

In recent years, members of the Pennsylvania chapter of the National Association of Royalty Owners have staked out spots in the state Capitol’s corridors to buttonhole legislators. Their lobbying efforts have been unsuccessful, though the political neophytes say they’ve learned a lot about lawmaking.

“It’s good to know how state government works, or why it’s not working,” said Jacqueline Root, a Tioga County landowner who is president of the NARO chapter. She said she hopes the legislature will take up the measure in January, when it reconvenes.

Currently, the royalty legislation is attached to a House proposal to enact a severance tax on natural gas, which has also been stalled for years. The prospects of getting approval for either in the Republican legislature seem remote.

Gas-industry defenders say that not all landowners feel cheated. They portray Chesapeake Energy as the principal villain. It is accused in the lawsuits of shortchanging landowners by overpaying for post-production costs to an affiliated “midstream” company that processes and moves its gas to market.

Chesapeake denies wrongdoing. In federal court filings, the company says the Pennsylvania Attorney General’s Office, as well as landowners, “simply got its facts wrong” about its business arrangements.

The gas industry and its supporters maintain that a resolution is best left to the courts.

“The fix that people are looking for is not a legislative issue,” said State Sen. Gene Yaw (R., Lycoming). “It’s a contract issue. It’s going to be resolved through litigation. There are probably a thousand different contracts out there, and everyone of them is a little different, and to try to fix that issue legislatively is an impossibility.”

Many landowners say that their royalty payments are so small, it’s not worth hiring a lawyer, and that their leases contain arbitration clauses prohibiting them from suing the gas company or pursuing a class action.

“Litigation is an easy answer you often hear from legislators aligned with the gas-company interests, but realistically, it’s not a possibility for most landowners,” said Robert Sher, a Philadelphia businessman with real estate and gas interests in Tioga County.

Though industry officials shy away from criticizing Chesapeake publicly, they point out that other producers have paid billions in royalties to landowners since shale-gas development began more than a decade ago, catapulting Pennsylvania into the role of second-largest gas-producing state.

Range Resources has paid more than $1.6 billion in lease bonuses and royalty payments in Pennsylvania, mostly in its core area of Washington County. EQT, based in Pittsburgh, paid $77.4 million in Pennsylvania royalties last year.

Cabot Oil & Gas, the state’s second-largest producer, has paid out more than $1 billion in royalties on natural-gas production in Susquehanna County. Cabot subtracts some post-production costs, said company spokesman George Stark, but the reductions do not wipe out the royalties.

“We’ve all heard the stories about negative checks going out,” said Stark. “We don’t have that scenario.”

Some landowners get no post-production reductions because they are specifically forbidden in the leases or because of longstanding practice.

The biggest landowner, the state Department of Conservation and Natural Resources, saw less than 1 percent of the $80 million in royalties it collected last year deducted for post-production costs, and that was mostly by Chesapeake.

Camera icon CLEM MURRAY / Staff Photographer
A shale-gas drilling rig operating in Loyalsock State Forest.

“Our major operators and lessees are not taking deductions,” said Arianne Proctor, a DCNR program manager who administers the state leases. “We do have some issues with Chesapeake that we are working on with them to settle out.”

DCNR’s elaborate leases governing gas extraction on 386,000 acres in state forests require producers to pay royalties based on market price but do not specifically prohibit deductions. “But that’s how our leases have always been applied, and we have a long history of operators paying us accordingly,” said Proctor.

The Marcellus Shale Coalition, the industry trade group, attributes landowners’ discontent to the depressed price of natural gas, which is lower in Pennsylvania because of the lack of pipelines to get the gas to market.

“Given these shared commodity-market pressures, it’s critical that we remain focused on working together to encourage infrastructure development and other ways to leverage our region’s abundant resources to benefit all Pennsylvanians,” coalition spokeswoman Erica Clayton Wright said in a written statement.

For many landowners, the distrust is also founded on the murky way some gas companies calculate and report royalties and deductions, as well as the multilayered ownership arrangements among companies producing the gas.

Camera icon JOSE F. MORENO / Staff Photographer
Lynne and William Seligman walk near their home in Kennett Square.

After the Seligmans signed their lease in 2008 with Chesapeake, the company later partnered with Anadarko to consolidate their Marcellus properties. Chesapeake and Anadarko then sold portions of their interests to other producers. So each month, the Seligmans get royalty payments from four different companies that control the gas produced from their land. Each company reports different market prices, and different deductions.

“It’s an incredibly complicated thing to sort out,” Lynne Seligman said. She now regrets having signed the lease.

Root, the head of the royalty owners’ group, estimated that nearly 200,000 landowners receive royalties from Pennsylvania gas properties. Some are struggling dairy farmers who had counted on the gas royalties to salvage their small holdings. But others, like the Seligmans, are comfortably well off, and the gas income was an unexpected bounty.

“The image is one of our problems,” said Root. “We’re not starving children here. Sometimes, our case gets portrayed as the greedy royalty owners. But c’mon, this is a lot of people getting ripped off by a big industry. It’s a matter of getting something you should be due.”