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Royalties from gas well leases are a source of income for many landowners in Southwestern Pennsylvania, but determining just how much companies are paying each year is guesswork.
Royalties are a percentage of the revenue that the operator receives from the sale of natural gas extracted from wells on a landowner’s property. The minimum royalty rate under Pennsylvania law is 12.5 percent, but many landowners negotiate leases that exceed that amount. In addition, some of those leases allow companies to deduct “post-production costs,” which are the costs of gathering, processing and transporting the gas, before applying the royalty percentage. Deduction of certain costs has been the subject of legal challenges, but has so far been upheld.
In Pennsylvania, where much drilling in the Marcellus shale has been taking place, gas producers don’t publish the dollar amount of royalties paid to landowners, making it impossible to determine exactly how much is paid yearly. The Independent Fiscal Office of Pennsylvania attempts to estimate the yearly amount paid in royalties using data from other sources.
An IFO report issued in September estimates that royalty payments totaled $1.06 billion in 2017, a decline from the peak of $1.62 billion in 2014, but much higher than the $645 million estimated to be paid in 2016. Gas prices took a nosedive in 2015 and 2016, leading to lower royalty payments even as gas production increased. However, prices rebounded somewhat in 2017.
“For tax year 2018, the analysis projects a further increase in royalties paid to Pennsylvania landowners. Compared to 2017, the average spot price at major Pennsylvania hubs increased by more than one-third, while total output increased by 14 percent,” the report states.
The IFO infers its estimates by using sources like personal income tax forms, tiny amounts of information released from companies, and predictive mathematical formulas. Income from royalties is taxable. Recipients must report those amounts on the Pennsylvania personal income tax return, however royalty income is not reported separately, but is combined with rental, patent and copyright income.
Given the relatively recent surge in unconventional well drilling and its high concentration in a small number of rural counties, “it is possible to use tax data for those these counties to derive a rough estimate of total natural gas royalties paid over time,” the report states. But again, we are playing a guessing game. These data sets being used are reliable for the most part, but no one can be absolutely sure without concrete data from the firms that pay royalties.
The IFO report also looked at the amounts paid to the eight top gas-producing counties. The biggest amount of royalties is estimated to have been paid to Washington County landowners in 2017, at $264 million. Greene County was also on the list at $129 million.
Data and inference can get one close to the truth, but unless state officials that the data be released to the public by gas operators, we won’t know for sure just how much is paid.
Contributed by Gracie Gegick, Student Research Fellow