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Unfair Share: How Oil and Gas Drillers Avoid Paying Royalties

Thousands of landowners are receiving far less than they expected based on the sales value of gas or oil produced on their property. Some are being paid virtually nothing at all.
 
 
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Don Feusner ran dairy cattle on his 370-acre slice of northern Pennsylvania until he could no longer turn a profit by farming. Then, at age 60, he sold all but a few Angus and aimed for a comfortable retirement on money from drilling his land for natural gas instead.

It seemed promising. Two wells drilled on his lease hit as sweet a spot as the Marcellus shale could offer – tens of millions of cubic feet of natural gas gushed forth. Last December, he received a check for $8,506 for a month’s share of the gas.

Then one day in April, Feusner ripped open his royalty envelope to find that while his wells were still producing the same amount of gas, the gusher of cash had slowed. His eyes cascaded down the page to his monthly balance at the bottom: $1,690.

Chesapeake Energy, the company that drilled his wells, was withholding almost 90 percent of Feusner’s share of the income to cover unspecified “gathering” expenses and it wasn’t explaining why.

“They said you’re going to be a millionaire in a couple of years, but none of that has happened,” Feusner said. “I guess we’re expected to just take whatever they want to give us.”

Like every landowner who signs a lease agreement to allow a drilling company to take resources off his land, Feusner is owed a cut of what is produced, called a royalty.

In 1982, in a landmark effort to keep people from being fleeced by the oil industry, 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.

From Pennsylvania to North Dakota, a powerful argument for allowing extensive new drilling has been that royalty payments would enrich local landowners, lifting the economies of heartland and rural America. The boom was also supposed to fill the government’s coffers, since roughly 30 percent of the nation’s drilling takes place on federal land.

Over the last decade, an untold number of leases were signed, and hundreds of thousands of wells have been sunk into new energy deposits across the country.

But manipulation of costs and other data by oil companies is keeping billions of dollars in royalties out of the hands of private and government landholders, an investigation by ProPublica has found.

An analysis of lease agreements, government documents and thousands of pages of court records shows that such underpayments are widespread. Thousands of landowners like Feusner are receiving far less than they expected based on the sales value of gas or oil produced on their property. In some cases, they are being paid virtually nothing at all.

In many cases, lawyers and auditors who specialize in production accounting tell ProPublica energy companies are using complex accounting and business arrangements to skim profits off the sale of resources and increase the expenses charged to landowners.

Deducting expenses is itself controversial and debated as unfair among landowners, but it is allowable under many leases, some of which were signed without landowners fully understanding their implications.

But some companies deduct expenses for transporting and processing natural gas, even when leases contain clauses explicitly prohibiting such deductions. In other cases, according to court files and documents obtained by ProPublica, they withhold money without explanation for other, unauthorized expenses, and without telling landowners that the money is being withheld.

Significant amounts of fuel are never sold at all – companies use it themselves to power equipment that processes gas, sometimes at facilities far away from the land on which it was drilled. In Oklahoma, Chesapeake deducted marketing fees from payments to a landowner – a joint owner in the well – even though the fees went to its own subsidiary, a pipeline company called Chesapeake Energy Marketing. The landowner alleged the fees had been disguised in the form of lower sales prices. A court ruled that the company was entitled to charge the fees.

 
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