Jim Barrett stands next to a well pad on his farm in Bradford County, Pa. He accuses Chesapeake Energy of cheating him out of royalty money. Marie Cusick/StateImpact Pennsylvania hide caption
Marie Cusick/StateImpact Pennsylvania
Jim Barrett stands next to a well pad on his farm in Bradford County, Pa. He accuses Chesapeake Energy of cheating him out of royalty money.
Marie Cusick/StateImpact Pennsylvania
The U.S. is one of only a few countries in the world that allow private individuals to own the minerals under their land, a policy that dates to the Founding Fathers as they sought to elevate private interests over those of the British Crown. This financial incentive to allow new drilling goes a long way in explaining the nation's natural gas boom. The National Association of Royalty Owners estimates some 12 million American landowners receive royalties for the exploitation of oil, gas and other mineral resources under their property.
But as U.S. production reaches record levels — it recently surpassed the previous high point in 1970 — a complex web of laws and court rulings is evolving over how these royalties are distributed. That's creating vast differences in how much money property owners actually get and prompting a number of lawsuits accusing energy companies of shortchanging them.
A tale of two mineral owners
This disparity is playing out across Pennsylvania's gas-rich Marcellus Shale.
When natural gas companies approached Charlie Clark and Jim Barrett, two farmers living in neighboring counties, both decided to let them drill.
Clark says it felt like he had "won the lottery," and he is grateful every day for the two gas wells drilled on his dairy farm. He estimates he receives about $10,000 per month in the form of gas royalties.
"This is what we've done with our gas money," Clark says, standing in his new barn filled with cows. "This barn here cost $40,000 to build it, and we were able to build it out of our pocket."
When he was growing up in rural Susquehanna County in the northeastern corner of Pennsylvania, his family used to scrimp and save just to buy basics, like new shoes.
Now, since the drilling rigs rolled into town and he started receiving royalty checks, Clark has a newfound sense of financial security.
"We're living like we used to, but without the stress," Clark says. "The bills are all paid. Your kid's gotta go to college? No problem."
He's a good example of when the royalty process works. It goes like this: Gas companies and landowners sign a lease agreement before drilling begins. The royalty is money paid to the mineral owner, like Clark, for the right to use his resource. It's negotiated to be a certain percentage of the revenue from the sale of the gas.
Clark is leased to a company called Chief Oil and Gas. The company gets gas it needs, and Clark gets paid. But he knows other people with similar gas wells are striking out.
"I thank God every day that it happened here," he says, and not a few miles to the west.
Dairy farmer Charlie Clark bought a new hay baler with the royalties he received from natural gas development on his land. Marie Cusick/StateImpact Pennsylvania hide caption
Marie Cusick/StateImpact Pennsylvania
Dairy farmer Charlie Clark bought a new hay baler with the royalties he received from natural gas development on his land.
Marie Cusick/StateImpact Pennsylvania
That's where Jim Barrett lives, about 40 miles away in Bradford County on what he describes as "a pretty typical mountain farm."
Like Clark, he is grateful for the drilling.
"It kept Bradford County alive," he says. If not for the gas industry, he says, his community "would have been a ghost town in 2008 or 2010" after the Great Recession.
But for Barrett, the gas boom has not panned out the way he had hoped.
He says Chesapeake Energy, which operates four wells on his farm, is stealing from him, and he has joined a class-action lawsuit against the company. Chesapeake, which declined to comment for this story, is defending itself against lawsuits in at least seven states for allegedly underpaying royalties.
By Barrett's calculations, Chesapeake owes him hundreds of thousands of dollars for the gas it has pumped out of his farm. The company has said in the past that it is committed to working with its royalty owners to answer questions.
Clark and Barrett might have started out with similar hopes, but their different experiences show how tough it can be for landowners to navigate the gas business and how resolutions are hard to come by.
Why the disparity?
Much of the controversy surrounding royalty money boils down to a concept known as post-production costs: the expenses of moving and treating gas through a network of pipelines. To cover the costs, drillers might take deductions from royalty checks.
Some landowners agree to that, while others negotiate a lease that prohibits it, says attorney John McFarland, who represents landowners with the Texas-based law firm Graves, Dougherty, Hearon and Moody. Many others sign leases that don't address it at all. Even when possible deductions are addressed, McFarland says, the lease language can be vague. That leaves room for a gas company to take deductions even if a landowner objects.
Disputes over post-production costs have popped up all over the country as oil and gas production has soared, the result of new horizontal drilling and fracking technologies that allow drillers to tap into shale rock.
By 2014, the United States was producing so much oil and gas that it led to a global oversupply. That's when complaints over these deductions really started to roll in, says Gary Preszler, vice president of the National Association of Royalty Owners board.
Many energy-producing states took a hit during the downturn, as companies went bankrupt, workers were laid off, and tax revenue collected from oil and gas dropped. In most of them, like North Dakota, where Preszler lives, wells produce both oil and gas. When prices plummeted, oil suddenly wasn't worth what it used to be, he says, but the gas still needed to be transported and treated, and that cost stayed constant.
"That's when people saw their checks being reduced significantly," he says. Some even received statements with a negative balance, meaning they wouldn't receive more royalties until the balance turned positive again.
In Pennsylvania, wells produce mainly gas, so landowners like Barrett noticed right away when companies took out big, unexplained cuts. Some Pennsylvania landowners have been complaining for years about exorbitant deductions. Still, many never have a reason to complain. Clark, for example, says he feels his deductions are reasonable.
A patchwork of court rulings, allegations of cheating
Over the years, some landowners sued when they felt they were being cheated. That has led to a patchwork of court rulings in many states, determining how leases are interpreted.
Some landowners hire a lawyer to negotiate a lease with explicit language that prohibits deductions or spells out exactly which costs can be taken out. The greater stake an individual has in a well, the more bargaining power he or she has to negotiate a lease that works in his or her favor, says University of Texas law professor Owen Anderson.
But not all go that route.
"As often happens, these landowners and mineral owners sign these leases the company offers without negotiating terms and without getting legal advice," Anderson says.
Later, if they believe they're not getting paid fairly, their options are slim. They can hire an expert to audit their royalties and go to court, but some can't afford to do that.
Preszler says the better option is to prevent landowners from signing bad leases.
"It's a lot easier to try to get the terms correctly done at the front end than to try to manage and fix a problem later," he says. His group is developing a seminar to better educate landowners.
In Pennsylvania, a decades-old law guarantees a minimum 12.5 percent royalty. But the state's Supreme Court has ruled that deductions can still be taken, even if they cut into that rate. For four years, mineral owners have pushed to keep that from happening, but so far the Legislature has not passed a bill.
It's a different story in West Virginia, where royalty owners just scored a victory. Lawmakers did step in after the state Supreme Court sided with energy companies in a case last year. Now, the governor has signed a new law prohibiting gas and oil companies from deducting post-production expenses in certain types of leases.
Meanwhile, lawsuits are playing out in several states, including one brought by Pennsylvania's attorney general accusing several gas companies of stiffing thousands of landowners by promising royalty money that was never paid. So far, he has not agreed to an offer by Chesapeake Energy to settle its royalty cases in the state for $30 million.
Back on his farm in Susquehanna County, Clark says even though he is pleased with his gas royalties, he thinks the law should ensure everyone is paid fairly.
"I guess I really don't understand why the government hasn't stepped in and done a little bit more, because it would benefit them too," he says. "Any extra money we'd get, we'd be taxed on."
Over in Bradford County, Barrett just wants to protect his family's legacy. "Every farmer would say they want their farm to continue," he says.
Barrett's land was passed down from his great-grandfather, and he hopes to hand it over to his grandchildren. But without the royalty money he expected, he and his wife may have to sell the farm to retire.
Should I sell my oil and gas royalties? ›
People sell royalties for a variety of reasons. As a royalty owner, you are fortunate to own an asset that can be quickly converted to cash. It is advisable to sell while you are still receiving royalties – after all, oil and gas are finite resources, and all well eventually run dry.How many acres do you need to drill a gas well? ›
Every gas well drilled in such pool: a) Shall be on a drilling unit consisting of (1) one hundred sixty (160) contiguous surface acres, or (2) a governmental quarter section containing not less than one hundred forty- four (144) acres or more than one hundred seventy-six (176) acres.How long do gas royalties last? ›
Here's the short answer: Mineral rights last as long as you do. If you own your mineral rights outright (perhaps as a part of your entire property estate), then you will be the owner of your mineral rights so long as you are alive. Mineral rights are required to earn oil and gas royalties, so they can be very valuable.How much are oil and gas royalties worth? ›
One quick and dirty approach is the “rule of thumb.” Those following the rule of thumb say that mineral rights are worth a multiple of three to five times the yearly income produced. For example, a mineral right that produces $1,000 a year in royalties would be worth between $3,000 and $5,000 under the rule of thumb.Who profits most from high oil prices? ›
Chevron, ConocoPhillips, Exxon and Shell all reported record profits in 2022 — a year in which Russia's war on Ukraine collided with the post-pandemic economic recovery to drive oil prices to their highest levels in history.Do oil royalties affect Social Security? ›
All of these social security benefits can be affected by other income you receive, and, in certain situations, be reduced by that income. This includes income generated from oil and gas leases and royalties.How long does it take to dig a 100 foot well? ›
Depending on the conditions of the weather, ground and water depth as well as drilling conditions, it typically takes 1 to 3 days, sometimes longer, to drill a well.How deep is a typical natural gas well? ›
Oil and gas wells can range in depth from a few hundred feet to more than 20,000 feet. In some parts of the world, wells go as deep as 30,000 feet, Zdarko says. Ranging from 1,000 to 2,500 feet deep, Aera's San Joaquin Valley wells are considered shallow.How far down do you have to dig to get to well water? ›
Drilling a Water Well for household use will usually range from about 100 feet to 500 feet deep, but... When drilling a new well for your home or business, the depth of the well depends on the geology and underground water levels of the area.Do royalties ever expire? ›
For artists in the US, the copyright protection of a song lasts for the lifetime of the copyright holder and an additional 70 years after their demise. This law applies to all bodies of works that have been published since 1978. The payment on these royalties also lasts for the duration of the copyright protection.
How long does it take to get paid royalties? ›
It can take up to a year for royalties to start coming in.
It will generally take an average of 9-12 months before you see your first royalty payment.
Royalties last their entire life of the songwriter and another 70 years after they have passed away. This can result in well over 100 years of royalties. This is why some songwriters have one huge hit song and the royalties they continuously earn can sort them out for life.What is the average profit to an oil company per gallon of gasoline? ›
The oil and gas industry has an average profit margin of 4.7%. This means that about 4.7% of the money the industry brings in is considered profit and doesn't go toward paying for the company's costs.Who owns the most oil and gas? ›
Saudi Aramco is the world's largest integrated oil and gas company and its stock is not traded in the United States.Who pays oil and gas royalties? ›
U.S. federal oil and gas royalties are payments made by companies to the federal government for the oil and gas extracted on public lands and waters. With a royalty, owners of the resource—in this case, U.S. taxpayers—collect a share of the profits based on the value or volume of the oil and gas extracted.Who controls oil prices in the US? ›
Unlike most products, oil prices are not determined entirely by supply, demand, and market sentiment toward the physical product. Rather, supply, demand, and sentiment toward oil futures contracts, which are traded heavily by speculators, play a dominant role in price determination.Who controls the price of oil in the world? ›
OPEC produces about 40% of the world's crude oil and its members' exports make up around 60% of global petroleum trade. The group aims to regulate global oil prices by coordinating on reductions or increases in production.Who is the biggest buyer of oil in the world? ›
|Country/Region||Crude Oil - Imports (bbl/day - est.)||Year of Information|
Royalty Income Tax Rates
10% for income $0-8,700. 15% for income $8,700-34,500. 25% for income $34,500-83,600. 28% for income $83,600-174,400.
Oil & gas royalties are paid monthly, consistent with the normal accounting cycle of the producer, unless the obligation does not meet the minimum check requirement for that particular state. These laws are generally known as aggregate pay laws, usually set at either $25 or $100.
Does having money affect your Social Security benefits? ›
If you're younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you're younger than full retirement age during all of 2023, we must deduct $1 from your benefits for each $2 you earn above $21,240.Will oil and gas royalties go up? ›
The royalty rate for new leases will increase to 18.75% from 12.5%. That's a 50% jump and marks the first increase to royalties for the federal government since they were imposed in the 1920s. Biden suspended new leasing just a week after taking office in January 2021.Is a royalty a cost of good sold? ›
Also, if you're paying royalties for the software being offered to customers, then that would be a cost of goods sold. And for that matter, if the company is helping its customers with implementation – to start using the service – then that could be considered a cost of goods sold.Are royalties a good investment? ›
Investing in royalty income can provide long-term returns to investors seeking to fund retirement or diversify a portfolio beyond stocks and fixed-income securities. Owning rights to royalties provides a steady income that tends to be insulated from fluctuations in the equity and bond markets.Did Biden increase oil royalties? ›
The royalty rate for new leases will increase to 18.75% from 12.5%. That's a 50% jump and marks the first increase to royalties for the federal government since they were imposed in the 1920s.How much does the US government make off of oil? ›
US Revenues from Fossil Fuels, Responsible for $138 Billion Annually, Expected to Fall Regardless of Climate Action.Do royalties run out? ›
For artists in the US, the copyright protection of a song lasts for the lifetime of the copyright holder and an additional 70 years after their demise. This law applies to all bodies of works that have been published since 1978. The payment on these royalties also lasts for the duration of the copyright protection.How much is a typical royalty fee? ›
Royalty fees typically range between 5 and 9 percent of the franchisee's gross sales. In some cases, the franchisor may set a minimum amount, which must be paid regardless of whether your business is deriving any revenue.What is a typical royalty payment? ›
Royalty Rate For Services
The average royalty percentage applied to licensed services varies between 2-15 percent of the total buy, depending on the attractiveness of the property.
Royalty Calcn. Hardback royalties on the published price of trade books usually range from 10% to 12.5%, with 15% for more important authors. On paperback it is usually 7.5% to 10%, going up to 12.5% only in exceptional cases. All the royalties displayed below are on the "cover price".
What income is not taxable? ›
The following items are deemed nontaxable by the IRS: Inheritances, gifts and bequests. Cash rebates on items you purchase from a retailer, manufacturer or dealer. Alimony payments (for divorce decrees finalized after 2018)How long can a royalties last? ›
The length of ownership for a song copyright depends on whether the song was copyrighted before or after 1978. If a song was copyrighted in or after 1978, the copyright is valid for the life of the author plus 70 years.Are royalties paid monthly? ›
Franchise royalties are usually collected by your franchisor on a monthly basis. Like marketing fees, these fees are based on a percentage of your revenue.Can you sell royalties? ›
Recording artists also have the option to monetize their royalty-based assets and sell any portion of their producer royalties. This allows artists to creatively leverage earnings out of previous hits and high earning titles to fund upcoming projects or personal financial obligations.