|This article is part of the FrackSwarm coverage of fracking.|
Fracking royalties are payments from an oil or gas company to a landowner as part of a lease agreement to drill and frack on their land. Royalties payments do not begin until production begins. The payments are dependent upon the market price of the resource. Royalty checks are issued as long as the well is producing.
In 1982, the federal government passed a law establishing that royalty payments to landowners would be no less than 12.5 percent of the oil and gas sales from their leases.
A 2010 Pennsylvania Supreme Court decision, Kilmer v. Elexco Land Services, determined the state’s minimum royalty guarantee applied to revenues before expenses were calculated, allowing energy companies to charge back deductions against those royalties, when allowed by leases.
A 2013 ProPublica analysis of lease agreements, government documents, and thousands of pages of court records showed that royalty underpayments are widespread, as energy companies were found "using complex accounting and business arrangements to skim profits off the sale of resources and increase the expenses charged to landowners." Landowners often have to file a lawsuit to understand the calculations behind their reduced royalties.
The Department of Interior has rules governing what deductions are allowable. Roughly 30 percent of the nation’s drilling takes place on federal land. A spokesman for the Department of Interior’s Office of Natural Resources Revenue said that over the last three decades, the Interior uncovered more than a dozen instances in which drillers were “willful” in deceiving the department, with the government recouping more than $4 billion in unpaid fees from such cases.
ProPublica notes that "There are few such protective mechanisms for private landowners, though, who enter into agreements without regulatory oversight and must pay to audit or challenge energy companies out of their own pockets."
- "Shale FAQ," Shale Gas reporter, accessed Aug 2013.
- Abrahm Lustgarten, "Unfair Share: How Oil and Gas Drillers Avoid Paying Royalties," ProPublica, Aug 13, 2013.
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