In March 2010, Pennsylvania oil and gas royalty owners in Susquehanna County lost a lawsuit that challenged the “net-back method” where gas companies pay royalties after deducting one-eighth of the cost of bringing the gas to market. The court also rejected landowner claims that gas companies might inflate post-production costs to drive down royalty payments. The gas royalty owners were seeking to nullify their existing leases.
The Supreme Court ruling has backed the oil and gas industry by allowing gas companies to deduct a portion of post-production costs when calculating royalty payments paid to landowners for natural gas removed from their land.
The court stated in part, “Natural gas can be sold at different degrees of processing for different prices and at different prices based upon the proximity of the market to high demand cities,” the court said in its ruling. “If one company sells at a point halfway to fully processed (or half-way to New York City), the landowner will get dramatically lower royalties than a neighbor whose gas is sold after it is fully processed. The use of the net-back method eliminates the chance that (landowners) would obtain different royalties on the same quality and quantity of gas coming out of the well depending on when and where in the value-added production process the gas was sold.”
To read more about this lawsuit, please visit the Sun Gazzette.
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