Senate passes bill cutting royalty payments from gas companies to mineral lease holders
A bill that would allow natural gas companies to deduct transportation and processing costs from royalties paid to mineral lease holders passed by a 26-6 vote in the Senate last week and has now moved to the House for consideration.Sen. Jack Taylor, R-Steamboat Springs, is one of only six legislators who opposed Senate Bill 141.”I have a different perspective, because I’ve received and paid royalties,” he said.Taylor once owned an interest in a coal mine in Routt County and is a partner in natural gas leases in northwest Colorado.”I wish I’d known when we signed the contract in December what I do now. I would have put in a phrase, `We will not pay for transportation or processing costs,'” he said.JoAnn Savage of Rifle is incensed that natural gas production companies, who already take the lion’s share of profits from her mineral leases, want an even bigger slice of the pie.She and other mineral rights holders, who receive royalties for leasing those rights to gas companies, say the bill would overturn a ruling by the state Supreme Court. In that ruling, the court sided with the mineral rights owners, concluding that gas companies should not take the cost of transporting the gas to market out of their royalties.Typically, mineral rights holders like Savage, who receives royalties on 92 wells in the Rifle area, get 12.5 percent of the proceeds while the gas companies get 87.5 percent, she said.Savage inherited her royalties from mineral leases that were contracted in the 1950s.”The contracts don’t say anything about costs,” she said. “If they wanted to take costs out, they should have said so.”If the bill passes, “before giving royalties they’re now saying they’ll take 40 to 50 percent more out of the 12.5 percent.”It could mean huge financial losses for the 50,000 royalty owners in Colorado, Savage said.”In one year it would take $50 million from the royalty owners in the state,” she said.If those expenses have been deducted from her royalties in the past, it wasn’t itemized on her royalty statements, she said.”You write and ask (about the deductions) and they don’t answer,” she said.Savage now has a court case pending against Barrett Resources, to whom she’s leased her mineral rights, over this same issue.The Colorado Oil & Gas Association, which wrote the first draft of the bill, counters that transportation and other costs have always been deducted from the proceeds from gas wells, and that the new bill would not mean lower royalty amounts for mineral rights holders.According to COGA general counsel Ken Wonstolen, the issue is whether the producer and the royalty owner should share the costs of moving the gas from the well to the market, since they share ownership of the gas.”Most leases provide the royalty owner can take one-eighth of the natural gas at the wellhead. But if they did so, what would they do with it?” he said.Owners would say, “Take it all to market. Then the producer says, `fine, you pay your share and we will pay our share'” of transportation costs, Wonstolen said.Deducting transportation and other related costs is “nothing new,” he said.In 1992, Congress repealed a natural gas regulatory price control act. This deregulation splits the industry between producers who get the product out of the ground and sell it, and transporters, or pipeline companies, that bring the product to market but who are no longer on the selling end, Wonstolen said.Now many producers have the added expense of paying a separate company to transport their product to market.”Those costs have been deducted from the downstream price ever since,” he said. So the assertion that the new bill, in overturning the state Supreme Court decision, would result in a 40 to 50 percent reduction in royalties because of a new deduction for transportation costs just doesn’t hold water, Wonstolen said.But Taylor has a different perspective.”In the early 1990s (the gas companies) began deducting the costs for the first time. Contracts were probably not specific. With these loosely worded contracts they feel they can do what they want. They’ve got big-time attorneys who write these things,” Taylor said.Taylor argued against the bill in the Senate. “I wasn’t comfortable with the bill from the get-go,” he said.Nor would he speculate if it will pass or be defeated.”There’s a big groundswell of support for it and a late groundswell of opposition,” he said.
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