ONE REASON observers have cheered the country’s recent natural gas boom is that people in economically depressed regions that were once dependent on coal would benefit from the extraction of a cleaner fossil fuel from right below their feet. Energy companies would create jobs, and landowners would get royalty payments.
Yet an investigation by Abrahm Lustgarten at the nonprofit news organization ProPublica suggests that the benefits to the locals might not be so rich. ProPublica’s report — involving landowners in northern Pennsylvania and Chesapeake Energy, which has invested heavily in unconventional natural gas production — focused on an extreme case. Nevertheless, it mapped out how energy companies can use complex and arbitrary accounting schemes to minimize the amount of royalties they must remit.
A contract between a drilling company and a landowner delineates the amount the landowner will receive, including the royalties (usually a percentage of the gas’s sale price) he or she will be owed, and the deductions the operator may make for gathering and marketing costs, which includes purifying and transporting the gas.
The ProPublica article contended that, because of these deductions, many landowners’ royalty checks amount to next to nothing.
Drilling companies oversee the sophisticated and expensive equipment that calculates the marketing and gathering costs. Because many contracts don’t authorize a landowner to inspect a company’s books, it is often difficult, if not impossible, to check the calculations, and high legal fees discourage landowners from going to court.
The country is still figuring out how to deal with its new bounty of natural gas. The debate often revolves around whether extracting the fuel is environmentally dangerous and what rules make sense to mitigate ecological risks. Both of these are important. But ProPublica’s investigation demonstrates that the discussion must be broader as states develop regulations. Energy companies are in the position to take advantage of landowners, and money is an incentive.
At the least, state governments should make it easier for landowners who think they are being underpaid to challenge the drillers with whom they have contracted. Nearly all pipelines within state lines are unregulated, meaning few states know how much oil and gas is being produced and transported in particular places at particular times. Some states, such as Oklahoma and Texas, are already on the ball. Others, such as Pennsylvania, need to catch up.
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