A class action lawsuit involving natural gas royalty owners who negotiated lease agreements that prohibited the deduction of post-production costs from drilling royalty payments was resolved by mutual agreement Friday in the Middle District Court of Pennsylvania, according to Sen. Gene Yaw (R-Lycoming).

The case, Demchak Limited Partnership vs. natural gas producer Chesapeake Energy, involved situations where post-production costs were deducted under a 'market enhancement clause' despite the lease agreement explicitly prohibiting the deduction of those costs.

Chesapeake Energy, the Oklahoma based company, has been criticized in recent months for using the market enhancement clause to make deductions from the royalty payments.

"We have learned through reliable sources that there has been a settlement agreement reached in a class action lawsuit involving Chesapeake Energy," Sen. Yaw said. "We're also told that the subject of that class action lawsuit was post-production costs. This settlement clearly demonstrates that the judicial system is the proper venue for resolving contractual disputes."

Recently, Sen. Yaw has emphasized that the court system, not the legislature, should resolve contractual disputes, in particular those involving the deduction of post-production costs from varying leaseholder agreements.

"Under the Constitution, the legislature cannot alter the existing contracts of thousands of leaseholders," Sen. Yaw said. "I firmly believe in less government involvement and asking the legislature to rewrite thousands of contracts is not only unconstitutional, but runs contrary to that belief. I believe there is a way we can protect those landowners, and not interfere with current contract language."

Sen. Yaw has proposed legislation protecting landowners from retaliatory conduct by a gas company if a landowner challenges a natural gas company's activities.

Legislators in the House of Representatives have introduced a measure that would address other leaseholder concerns by clarifying that the deduction of post-production costs from unconventional wells may not result in royalty payments less than the guaranteed minimum.

In addition to the House legislation, Sen. Yaw also has been working on another bill that will provide tools to landowners to obtain more detailed accounting information regarding gas pricing, well income and post-production costs.

"While the legislation introduced in the House faces some constitutional hurdles, I believe my legislation would pass any constitutional questions and address the concerns of frustrated leaseholders," Sen. Yaw added. "As I've said before, there is certainly value in having multiple approaches to solving this issue."

NewsClips:

Chesapeake Appalachia To Pay $7.5M To Settle Royalty Lawsuit

Legislation In The Works To Address Gas Royalty Concerns

Report: Drilling Companies Cheating PA Out Of Promised Billions

9/2/2013