Editor’s note: Chris Acker is a geological engineer who grew up in Venezuela’s oil fields and worked there for Exxon.

Some 25 years ago, he bought land near Montrose, Pa., and subsequently retired there. His property sits atop one of Marcellus shale’s most prolific areas in Susquehanna County. He has a Cabot Oil & Gas well about 200 yards from his front porch. Here’s his commentary on possible solutions to the royalty payment overcharge fees, recently published in Marcellus Drilling News.

The royalty issue is no doubt contentious. My comments come from the perspective of an energy economist with some contract law added to the mix.

GAS ROYALTY BROUHAHA: Marcellus gas landowner Chris Acker offers a “fix” to head off future excessive postproduction royalty deductions.

I tend to go with the Pennsylvania lessor receiving a specified minimum percentage. [The industry’s] argument — that wet-gas production would be uneconomical if postproduction deductions weren’t allowed — doesn’t hold economic water.

For more on this controversy, click on Fight intensifies over shorted Marcellus shale gas royalties.

The landowner doesn’t exist who would give away resources to keep a third-party financially solvent. In some instances, large deductions, legitimate or not, take royalties close to zero. It would be like a logging company clear-cutting your forest and paying nothing for the raw material since it would result in financial losses due to a weak market.

If an energy company cannot pay a reasonable minimum Pennsylvania royalty, process the product and generate a profit, then it needs to curtail drilling and production. This is exactly what has occurred elsewhere in the United States and worldwide. Eventually, reduced supply will lead to higher prices to the point where production makes economic sense.

So, yes, rigs would “go down.” And no, the Shell cracker wouldn’t go away.

The Marcellus resource is massive on a world scale. It’s a world-class source of raw material for the petrochemical industry, demonstrating some of the lowest feedstock costs anywhere on the planet.

What to do now
Many leaseholders agreed to “standard” postproduction deductions. Unfortunately, some companies, in particular Chesapeake Energy, did everything possible to inflate these deductions to their benefit, and to the landowner’s detriment. Allowing unlimited “postproduction” deductions is a sign of a bad contract.

Contracts must stand and be adhered to by all parties. If anything is close to sacrosanct in the commercial world, it’s the validity of an executed agreement. Legislators should not establish a dangerous precedent of retroactively invalidating contracts. The solution might be to pass legislation that provides that new contracts pay a minimum of x%, if any deduction provisions exist in a lease.

With all the information available today, any landowner entering a new agreement should know to seek competent legal advice. No lawyer now would likely allow for a postproduction clause, making the whole exercise moot.

Current leaseholders with exorbitant deductions are in a bad way. As much as I’d like to see a retroactive solution via the magic wand of legislative hindsight, this isn’t a good idea in a broader legal sense.

One avenue could be to provide for an examination of deductions via a nonbiased independent audit to make sure they’re legitimate. Or, the industry could confront the problem and come up with proposals that could include accounting transparency.

Even these simple-sounding ideas are fraught with complications. Sadly, the non-answer to this whole avoidable mess is that convoluted litigation will continue for years, and affected landowners may never receive their fair due.

It’s disheartening that a few bad industry apples generate so much negative publicity. It certainly provides ammunition for the anti-everything zealots. Long-said, wise advice still holds: Anything said to you by a company representative isn’t worth the paper it’s not written down on. Don’t sign anything without review by competent legal counsel!