Agriculture, Forestry & Economic Development- House

You for being here with us and showing your of participation and for being a part of the process. This morning we've got to bills we've got One that we're gonna run out of water representative will rage will are you prepared. And you got into the table in and out and is your self for the record. Yes Sir thank you Mr chairman Committee Senate bill two fifty one is the Department of Parks and here today bill this simply moves the Director of keep Arkansas beautiful out from under the secretary of the department of parks heritage and tourism and puts them under the state park director with that I ask any questions. Members are there any questions. Appreciate a good vote. Is there anyone in the audience that would like to speak for the bill. Against the bill. Seeing none are you prepared to close for your bill. I have a motion do pass all in favor. Any opposed. Congratulations your bill is passed thank you Committee thank you chair. before we move on to the next bill I know there are some that are here to speak for against this bill if you have not taken the opportunity there is a sign up sheet out. If you want to speak I have a sign up sheet would you just raise your hand will bring it to you either for or against and we'll call you in order. Just raise your hand and they'll of give you an opportunity to sign your name up just put your name and with your for or against. All right the next bill we're going to hear is representative backs bill it's a House bill. Fifteen forty nine. Representative back when you're ready to introduce yourself for the record. Representative Rick Beck from district representing district forty three and would you have your guest introduce himself for the record this. Judge John eight Morgan I'm a practicing attorney at Turner Michael just presented that health there you go I'm the I'm making more gonna practicing attorney invade your county Arkansas mainly focusing in the oil and gas industry thank you it's good to have you here representative back you're recognized to present your bill. Thank you Mr chairman thank you committee today this is really just a of almost forty comically bill. Of. In nineteen seventy eight there was an act that was called the Arkansas minimum royalty act in this case the statue which will be talking about today with the original intention of this was to protect the royalty owners the royalty owners in Arkansas. So what what this does is in this bill actually work quite well until two thousand nineteen until. Some bad actors got into the the deal and started to change things and that's what we have to do some clarification on this bill so I'm going to kind of walk you through the bill just a little bit the person I want to talk about is a minimum. Of the first day we changes we added minimum realty as I said I have talked to the original legislator senator who wrote this and they said this isn't this was a minimal it's supposed to be the floor this is the minimum that a rule to interest on or could get and that was what it was supposed to be well that didn't get codified into law so really what this does is it says that it's a minimal role to solve that's the first part of it. As I said earlier it works fine all the way until two thousand nineteen the next section is hard to see but it's like the next line you'll see that we struck the word net all right so that makes what lives net proceeds now it's just proceeds and then later on in the bill to the actual page five at the bottom if you if you want to go look at it it basically defines what those proceeds are it says that if the amount received I'm just summarizing here little bit it says amount received at arm's length are not affiliated transaction what that basically means is. If you're the producer you can't pull the gas out of the well and sell it to somebody who you own eighty percent interest and for price and then sell for a higher price later when you're computing my role to what my role to learn realty interest owners would be what you're gonna do is you're going to have an arm's length sale so you sold the gas was actually sold into the market at that point so to make sure that everyone is treated fairly. Now jumping back up to the release the top of sex based on the first page it once again just clarifies some things that happen in this bill this bill is the statute is currently being used to say that we don't. Do not honor signed agreed upon leases with individual royalty owners it's saying that the first one eighth is. That and that's what you get done matter what contract we signed with it doesn't matter what contracted Arkansas willing gas commission has come up with for you and that was agreed upon in two thousand six and last that work fine although until two thousand it doesn't matter about those we're gonna just do it the way we think is best so what it actually says in that section is it says that this section does not prevent royalty interest owners from being paid in excess of those in excess of the one eighth realty the overall one eight minimum royalty in conformance with appropriate lease agreement or a contract creating rule tease so that's really all it does it says that when you. This is the minimal it says when you sell the gas you got to sell the gas is somebody that that you can't sell to yourself I guess I guess you could do that but you can sell some into that you have more than ten percent interest in and then it says that. No confusion here this is the minimum and if you have a lace that's in excess of this you should be paid for that and without a maternal over to Nathan over here he can do a lot much better job of X. explains some of the details of this. Mr back has asked me to come and talk of of kind of what's occurring in the fable shale as a lot of you know the fate bill shale encompasses Van Buren County White County Cleburne County Faulkner County Conway County that that play essentially started in two thousand four and two thousand five we're rule T. owners entered into leases with different oil and gas companies a lot of that will and gas companies that are currently operating or not the same ones who were operating in two thousand four and two thousand five they have bought leases they bought interest I think that the. One thing to consider when we look at this bill and it fifteen seventy two three oh five the Arkansas minimum royalty act is the in Arkansas we have force pulling we essentially it Arkansas set up the in in the Jeffersonian system obviously six hundred forty acres to a section when pulling gas producers lease three hundred and twenty one acres they can both go in from the Arkansas on gas Commission do what's called integration all the people that are essentially unreleased they can force them to either. Signed essentially come under the Arkansas and gassed Commission uniformly or they can they can lease with other companies so. It's not actually the Arkansas landowners and mineral owners they're forced to to sign leases they're forced to enter into these contracts even if they don't want production even if they don't want to sign a lease they are forced to because we are forced pooling State. you know that. To clarify one thing I think I think Mr back said this this statute fifteen seventy two three oh five was introduced in nineteen seventy eight I believe it's actually nineteen eighty seven. About it so for my understanding from nineteen eighty seven until two thousand nineteen this statute really didn't have any any any issues everybody uniformly treated it the same in two thousand nineteen some bad actors and their interpretation of the statute had had changed how they pay a royalty owners now the way they pay royalty owners it's not gonna affect all rule T. owners and a lot of it has to do with post production costs in it in all these individual leases they address post production costs a majority them. Address post production costs a lot of the leases in two thousand four two thousand five allow for the operator in the lease hole in the lease holders to take post production costs but the individuals who signed leases later like two thousand seventy thousand eighty thousand ninety thousand ten they have specific role to provisions. Let's say in there it's in in in these in these leases are a binding contract between the the lessor and lessee there filed in in the county records in the counties in the fate bill shall and they specifically do not allow for post production costs for dehydration compression things like that and essentially. Some individuals are interpreting the Arkansas minimum royalty act not as a shield to protect royalty owners they're they're they're treating it like a sword even if a lease says you cannot take post production costs and take that out of my rule T.. They are still taking it out of the realty on the first one ACT. And so my understanding is they're using that statute to do that and this is been going on since two thousand nineteen and that's what Mr back it's represent back is trying to prevent going forward. So to to put it in in simple terms the the best way I can do it I I know that there's a lot of and I imagine other people are going to come testify they're gonna say this is really complicated we can't do this and you know I think the thing to remember is there wasn't a problem until two thousand nineteen. And I think if you look at our recent history the most it's not going to kill the industry it's not gonna hurt the industry and some pulling gas producers are doing this correctly if you look at the most prolific time probably it at least the recent history in Arkansas and gas is going to be the fate bill shall from two thousand five till probably two thousand twelve. In this statute was was in place and it was not applied the way it is being applied to now and we didn't have any issues the royalty owners get paid pursuant to their lease their binding contract said put it in simple terms and this is. I'm I'm a try to put it is simple simple terms as I can. If an individual has a lease that does not allow post production costs and say it's a twenty percent lease. And. Date they entered in this place they have a twenty percent lease with no promotion no post production costs the the operator can't take the hydration they can't take compression The way that by some of these individuals that is paint being paid now if there is ten thousand dollars allocated to that individual for production. And they have a twenty percent lease. Outside of conservation severance taxes which will be charged. It is pretty obvious math that that realty owner on ten thousand dollars if they have a twenty percent lease they would get two thousand dollars. Pretty simple math. Well that's not what's occurring. Because the rule T. they're breaking up the rule T. into two different parts essentially the call to realty interested in excess interest the royalty interest is the first one eight twelve and a half percent. The excess is the seven and a half percent on top of that. Most all of the the producers are paying the excess rule T. in conformity with the lease there's no there's there's no disagreement on the terms the lease because they're paying access royalty correctly. However on the first one eight. They're saying that your cardless of what the lease says they get to pay eight one eight net. And so is how that works out is. If for the first twelve and a half percent the royalty owners should receive you know one thousand two hundred fifty dollars for that twelve and a half percent. It is what's occurring is they're taking deductions for those things specifically excluded in the lease for dehydration compression at Satcher marketing and instead of getting paid twelve thousand five hundred you know the difference in the deductions it the the rate does very but I mean it it's usually around thirty percent forty percent something like that so at thirty at thirty percent and centers even one thousand two hundred fifty dollars for that twelve the first one eight to twelve and a half percent these rules the owners or receive an eight hundred seventy five dollars. And so the producers are keeping this three hundred fifty dollars they're just keep it even though the contract says they can't and my understanding is they're using this statute to do that. And so I'm. I think that. I think that that that kind of clarifies what's occurring If anybody has any questions. Regarding what I've said all right members are there any questions representative Beatty as. I guess my my question is this this sounds like and an issue that's probably been adjudicated before the courts I did a quick search on here so it goes back what twenty sixteen with Exxon and wise and hunt in the Eastern District ruling there is that is that's what is leading to the S. and are there more current cases in Arkansas where courts have decided this issue so what I would say I mean obviously there is a wise and I decision I think that that's a little bit different than this because it wasn't it wasn't applied uniformly it is being applied uniformly now there are current cases the Arkansas aghast Commission I believe did does have a lawsuit with flowers will they won that lawsuit however I believe that's been appealed there also some some pending federal lawsuits in regard to this statute. Okay thank you is there any other questions. Senate can I can can I make one more comment certainly okay. I I mean I I think the I think the question That that always that I always think of when it when it comes to this statute and that in the course of conduct is. Why would. The lease holders not want to honor their lease with the realty owners I mean they signed a contract everybody is bound by why why would they not want. Why would they not want to honor those leases. And I think that's the question you gotta ask yourself is why. They're getting the gas they're getting paid for why not give the royalty on or what their date. Representative Betty you're recognized just to follow up on your comments there Are they blatantly disregarding the lease are are they interpreting the the language in the lease agreement differently than your interpreting that lease agreement my understanding is that they are uniformly interpreting the first one eight. Uniformly in complete disregard for the lease language. That did and to clarify that this seven and a half percent above if it's a twenty percent lease they're paying that correctly so they will be taking deductions on the first twelve and a half in on the next seven hat they will not. Any other questions from the committee. Represent hawk thank you Mr so what this bill is and I'm I'm trying to dumb it down for some of us with this bill the one eight what we're saying is that the deduction that you just talk about that can be applied to the the the landowners or the mineral right owners they are guaranteed the one eight with this bill correct that's correct and and then the deductions well it if if they if they were see if if they have a lease that allows for deductions then they will get deductions from the one eight for post production costs you know I think I think at the end there's an order and it says. On page five it's four if mineral interest within the drilling unit is covered by lease them out as calculated according to the terms of the lease the one eight is just a minimum royalty the you know when. We have a lot of unsophisticated mineral owners and so the state of Arkansas is recognized that when somebody leases those minerals have value and is protecting them to say Hey the lowest realty that will be acceptable state of Arkansas is one eight. It other questions from the committee. All right we have several people signed up to speak I will go for and against and what I would ask you when you speak to be succinct and to the point and try not to repeat over and over what we've heard. Okay first one signed up is Rodney Baker and it's against. Mr Baker would you recognize yourself for the record. And your guest thanks Sir. Thank you Mr chairman I'm Robbie Baker and I'm the executive director for the Arkansas independent producers and royalty owners I pro we are Association and state represents all against industry have done so since about two thousand eight this is a an industry that's actually over a hundred years old in Arkansas started with the. Gassen west Arkansas all in south Arkansas and then more recently has been a mission today the fate bill shall in the last couple decades also have with me today Mister Alan Perkins he is with the PPG M. R. law firm Allen is well known all yes attorney here in Arkansas having done work in all those production areas. Sir would you recognize yourself for the record please thank you Mr chairman my name is Alan Perkins I'm an attorney at PPG of our law firm here in Little Rock I've practiced for thirty two years and primarily in the oil and gas natural resources and energy law area and taught only guess what the law school here in Little Rock for several years. Thank you okay procedure Mr chairman of I also we have a number of our members that are here today including a number of people from the production area that works in the industry if it be permissible shall and would like to show you how many people are you're interested in on this bill so everyone one here with the approach if you would those of you from production areas. Thank you. Mr chairman we of. Right to a little bit surprised to be here today this similar bill December bill this is hard to years ago that is what will in committee at least twice and failed to come out of committee since that time we've heard nothing about an effort to make a change we're well aware of the lawsuits that are are going on and have been waiting for those to the to settle to see what that ruling was going to be and so um money this week we found out this bill been introduced and we have tried rack to get here with your representation for our membership and I appreciate what they've done we asked Mr bargains to review the bill and give us a his opinion of the bill that was presented to the I. pro board of directors yesterday morning and the board of directors did vote to oppose House Bill fifteen forty nine we believe that there are numerous problems with the bill and what it attempts and also in its construction of. What have been said about the law previously the law was passed some almost four decades ago and to protect mineral interest owners to be sure that they were paid regularly be sure that they were paid consistently are fairly of law deviation at that time a lot of problems that were addressed by that legislation and here we are four decades later looking to see if this can be interpreted are reinterpreted perhaps of differently what has been If this bill passes and I'll just make a general comment if it passes it will throw very complicated system in the in the chaos there's gonna be a lot of questions will be a lot of expense it could also lead because of those questions and expense to the ways of Mr delays in payments being made until some of those things are sorted out. It is complicated there are a lot of intended consequences this bill there are a lot of unintended consequences that we see in this bill and with that I would like to ask Mister Perkins he would to share his analysis of the bill and I believe he has a hand out if we could get that passed out Mr I believe it is that you're okay places members. It It is at this time yes okay this this one here is referring to members. Thank you Mr chairman I appreciate the the the ability to be here and speak with you today so. I have two goals today if you'll give me the time to do so first I want to tell the the committee a little bit of the history behind why do we have this fairly complicated statutory framework to begin with and then what does this proposed legislation due to that so I'm gonna start with the history of in Arkansas. Natural gas drilling and production units are typically a governmental section six hundred forty acres more or less most of the time in every section. You will have typically dozens to hundreds of individual mineral owners and when a ruling of production unit is going to be developed and they're going to drill for natural gas all of these owners have to somehow cooperate and it typically is it's human nature of those dozens or hundreds don't all agree about everything they leased to different companies with different lease forms in different provisions and so in that instance the Arkansas oil and gas commission through the process that we call integration has a proceeding and administer an administrative proceeding and a hearing and then they they bring together all of those parties who have leased the mineral owners which we call working interest owners and and notice goes out to the royalty owners as well they bring them in and have a hearing and at the end of the oil and gas commission names one of those working interest owners to be the operator of the unit from that point forward that operator is the one working interest owner that has the authority to drill wells and produce gas in the unit. but all of the working interest owners the other parties that have taken leases for mineral owners have the right nevertheless to sell their own share of the gas that's produced from the unit and I'll come back to that in a minute. When the the bill that that I'm sorry the Act the statute that's that's attempting to be amended here today was. We've heard a couple of different dates it was actually ACT two seventy two of nineteen eighty five it went into effect on March sixth of nineteen eighty five and so there was a problem that existed at that time in a unit where you had different working interest owners with different leases that could each to sell their own gas separately in a given month one working interest owner might say I'm not going to sell my share of gas this month and the operator or one of the other working interest owners then would pick up that share and they would sell more than their share of gas in that month so what happens to the royalty owners the royalty owners that were that had leases with the working interest owner that didn't sell its gas they didn't get a check that month and so when they went to the coffee shop and talk to their neighbor who lived next door in leased with the guy that sold the gas he says I didn't get a check this month and the other guys really happy and he says well I got a much bigger check than usual this month and and then in other months at the coffee shop they're looking at their pay stubs together once as well I I got paid on the basis of three dollars in MCF on my gas this month what did you get will my my a working interest owner sold my gas for four dollars and MCS so now the the guy that made less that Montes I'm happy so there was this huge uproar from royalty owners to the legislature and the legislature really fashioned after what had been done in Oklahoma before that largely. past this act act two seventy two of nineteen eighty five that created this system to ensure that every royalty owners every month got paid on a uniform basis for the first one eight. and that's that's what we're dealing with today so I want to if you will the take a look at the diagram the the handout that I made I just want to walk through kind of explain how that works so that the first page here it's just it's just a nice little pie chart and this is I made up these numbers is just an example so in this example the operator owns seventy percent of all the oil and gas leases in this section working interest owner a owns ten percent and working interest owner be owns twenty percent. If you flip the page behind that The operator is seventy percent of the acreage is made up of seventy individual leases with different mineral owners working interest owner a has ten leases and working interest owner B. has twenty leases. The operator doesn't have the lease is. From working interest owner a or working interest owner B. as a know what they say doesn't know what the terms are. And the same the reverse would be true working interest owner a doesn't know what the leases that the operator has taken say in that so what what happens when gas is sold so if you'll flip over to the next page of this one with the eros just a a depiction that each one of these working interest owners the operator plus operator working interest owner a and B. they also sell their ended individually their share of the gas. And. All way I've never seen it we're at every operator every working interest owner in the unit gets exactly the same sales price for their gas over a month period they might be close they might not be close it depends on how good their their marketing is and their their clout in the in the overall market so then what happens to those sales proceeds if you'll flip over to the next page. What the statute requires is that each one the operator plus working in a in working interest owner B. has to take out of their sales proceeds on a net basis that's what the statute says one eight of all that money and think of it is being poured over into this blended royalty bucket and so working interest owner a sends one eight of all of its proceeds over to the bucket so does working interest owner B. the operator who's holding the bucket also puts in it's one eight and when that happens all of that gets blended. And what the statute requires if you'll flip over the one last pages in the operator takes that that consolidated aggregated blended bucket full of money from all three three of the working interest owners and is instructed by the statute to pay it out uniformly to each one of the royalty owners in the unit in proportion to the number of acres of minerals that they own in the unit. Because there there couple reasons in nineteen eighty five most all oil and gas leases were one eighth royalty and most all oil and gas leases were on a net proceeds basis in other words they explicitly allowed for deduction of post production expenses and so in order to maintain this process as uniform the legislature said that's the manner in which you will pay out this one eighth blended royalty to all of the royalty owners in the unit it will be on a net basis and that way now when farmer green and farmer Jones go to the coffee shop for at least the first one eight number one they'll get a check every single month the statute requires it number two the sales price that they will see on that check for the gas will be the same and because it is a blended between whatever operate the operator sells his gas for and working interest owner a and working interest owner B. when you put it all together and then divided evenly that sales price is then blended so if you know if you had equal thirds and one sold the gas for five one sold for four one sold it for three the average that is for and that's the price they would see on their royalty payments the. So that that is the the reason behind this very complicated statutory scheme because you you can imagine the accounting involved to do this process so there there are about five thousand plus active wells in the Fayetteville shale every month every owner of every lease and every one of those wells is sending one eighth of the proceeds from that will for their share to the operator who has to then blended together and pay it out to all the royalty owners in the unit including many royalty owners that do not have a lease with the operator so this is this first one eight it is not really a lease royalty in the traditional sense it is a statutory royalty and it's based on a procedure and a program that the legislature put into place it's not something that the company's dreamed up to try to take deductions from leases where they weren't allowed to and in and the operator is paying many people who the operator doesn't have a lease with at all because that's what the statute requires. Now If the the. The royalty on or the the let's the stern of the bill then that that's been presented here today H. B. fifteen forty nine and I'm I'm not here to. To lobby or or argue for policy I'm I'm just wanted to give you the background and now I'm going to have to give you my analysis of what this language does and frankly even if you favor what representative back is trying to do here this bill doesn't achieve that but it has other technical problems and I'd like to point out to you so the the very first change that he has which is actually in in subsection a three of the the statute He is made this change one eighth of all gas sold on or after the first day of the calendar month next ensuing after March sixth nineteen eighty five which was the effective date of the act for many such unit shall be considered he inserted minimum royalty gas to be paid to the royalty owners that that statement is now nonsensical. Because this provision in the statute is talking about gas is not talking about royalty and that's what it the legislature said one eight of all the gas sold for purposes of this statute we're going to call it royalty gas it's it has nothing to do with the I mean has something to do with what comes after but this is not about the sale this is not about the payment that statement is about the gas and so when he changes it to say minimum royalty gas to be paid to the royalty owner doesn't make any sense they're not paying gas to the royalty owners and now he's put in the word minimum well that that throws the entire system into flux the operator and all the other parties that sell gas have to know that one eight is the part of the gas we're talking about it doesn't fluctuate it can't be that for this operator is something more than an eight cents this operator it's just an eight it has to be exactly one eight so this changes is just nonsensical and and doesn't make any sense. goes on and then he is inserted this this language this section does not prevent any royalty owner from being paid in excess. Minimum. In conformance with the provisions of the appropriate lease agreement or contract creating the royalty. That's. Okay as far as it goes but that's already the law you heard Mr Morgan tell you about twenty percent leases and how on the access their paid according to the lease this this insertion of language actually creates questions because if it's supposed to change something we can't figure out what it is because that's what the law is now. If you go on down into the section that he talked about where they've strict and all of the language that that defines proceeds is as. as to to be defined by the lease later and other were they struck all of the language that that makes it a net proceeds calculation I struck revenue realize your royalty monies from gas sales computed at the mouth of the well less all lawful deductions including but not limited to all federal and state taxes levied upon the production or. and and then it so now it just says one eighth of the proceeds received. and I'll come back to well so then at the end they've they've added a definition of the word proceeds of proceeds there to alternative definitions under this bill the first is the actual amount received for the sale of gas in an arms length and non affiliated transaction less federal and state taxes and assessments levied upon the production. So this would only apply to on leased mineral owners because the second part of the the definition I'll come to in a moment says if the has it have a lease you paid according to the lease so is this would this would include royalty owners who have been integrated in that oil and gas commission procedure and assign the royalty rate and so forth but don't actually have a lease at all That's that's well and good but some but many and in fact I would say the majority of gas in the vehicle shall anyway is sold to an affiliate so companies because of the way gases marketed and the required the licensing requirements of the federal energy regulatory commission on marketing they have a separate subsidiary that is set up to do the marketing of gas and the way that has to work is that subsidiary has to take ownership of the gas before it sold into the pipeline so most sales are to an affiliate and this language only gives you one choice what to do if it's not sold to an affiliate so there's a a huge proportion of the gas sales that are simply left out of the definition all together second if the mineral interest within the drilling unit is covered by at least the amount is calculated according to the terms of the lease. That sounds that sounds good if you don't understand how it works in this process so if you remember. how we how I describe the the sales happens the operator is selling its gas separately working interest owner a is selling its gas separately and working interest owner be is selling its gas separately all of that money gets mixed together in the one eighth royalty bucket but the operator doesn't know what the leases of working interest owner a has say because they don't have those leases and the same with working interest owner B. so if. Two two problems are going to occur. let's take working interest owner B. he's got twenty leases let's say ten of them allow deductions and ten of them do not. When he sells that gas under this definition he can deduct. Expenses from half of them but not the other half and of those proceeds as defined that way would go into the one eighth blended bucket but now you have a mixture right you have ten that had deductions taken in ten that didn't but they're mixed together now. And when the operator has to pay out on those it has no idea. What working interest owner be put in the bucket whether it was from a lease that allowed deductions or whether it was from a lease that didn't allow deductions in the end all of those get blended together and paid out on uniform basis because that's what the statute requires and even if you wanted to do what Mr back seems to want to do this won't work and it and it can't it's it's virtually impossible the amount of the administration that would be required to alter the accounting systems on five thousand wells and years of title work that it would take to then incorporate all of the information from other working interest owners leases that you don't even have would be a nightmare for years before it could be all straightened out and so that that concludes my remarks and I'd be quite happy to take any questions. Thank thank you chairman thank you members do you have any questions representative Beatty. Just a. Follow up and and and recognizing that you're an expert in this area and What language would you recommend in this bill or in a bill that would address the concerns that led to this bill being drafted as and as an expert. At that. Frankly representative Beatty the the the statute is so complex that if if the ultimate goal is for every royalty honor to be paid for all of its royalty pursuant strictly to its lease we should just do away with the statute altogether numbers why transfer part of the royalty to another party and then make them pay part of it and you pay part of it it's a giant expensive administrative nightmare just to get back to what you're lease would do on its own without the statute and it is you know that's I mean that's my short answer it would take much more and we would still be uncertain if it worked until some court tested it if we tried to just monkey with the language that's here and keep this process just to get us back to where we would be without it. Follow that's that that was kind of the same conclusion I have it from listening and hearing all sides so your recommendation would be to scrap back to seventy two all together and and really go more with the language that's in the lease agreements have been negotiated between the the operators and the mineral owners. If if the again I'm couched in the language of your question if that is the goal yes I think that is the best way for everyone to achieve that and I'm like I said not really here to testify about policy or economics others are going to do that I think there are some economic because we're with you would be changing horses in the middle of the stream there are other impacts of doing that but that's that's not what I'm here I'm I'm here to try to tell you what I know about the law and this act. I appreciate your answer thank you thank you a representative more you're recognized. Thank you Mr chairman the previous testimony said that the statute worked well until twenty nineteen and then the issues began is one of the issues how all the different parties are interpreting the term that in the policy. That that's definitely one of the issues and know that very issue is in front as Mr Morgan testified of several courts right now to make that determination yes that that is an issue. Representative hockey recognized thank you Mr chairman and this kind of piggy backs off represent representative more it seems to me like this is all being done because of what happened two thousand nineteen off one case are there any other cases to your knowledge that you know people haven't played nice together because I mean just seems like this is just what we're working off one instance and it doesn't it doesn't seem like it's been that big of a problem amongst people are maybe I'm just miss misunderstanding you know of any other instances there there are no first of all there are no. The way that the law in Arkansas Works if it's in Arkansas law the final word on what of an Arkansas law means is the Arkansas Supreme Court we don't have any decisions from the Arkansas Supreme Court about what this means there is one case on appeal. Actually in the court of appeals but it might get moved to the Supreme Court right now there are multiple lawsuits in federal court over this issue right now and that federal judges indicated that he may refer that question to the Arkansas Supreme Court for an answer. Thank you members are there any questions for the gentleman. Thank you for your testimony thank you Mr chairman. Now thank you Mr. To speak of for the bill and and I apologize I can't read but I know it starts with the J. and your. For forgive me if he got right down there and clear that up for me. Least another start with the J.. Introduce yourself for the record please. My name is judge jim Hart I'm calling county judge Amendment twenty third year thank you up I'm here today speak for this bill because. We talk about the complexities of everything. But on a Monday mostly sample in Fayetteville shale roll the owners are real a lot of small overly owners lost more farmers you know you gotta face this fact these role these these minerals are property property rights. Nobody held a gun anybody's head when the sun started. And what's amazing to me how watch this baby be born. When he started out we leased a we lease land for twenty five dollars an acre. And one eighth net lease. As we got further on we got to a hundred dollars maker nineteen hundred dollars maker we got into twenty I guess twenty seventeen twenty eighteen land lease for twenty five hundred dollars maker. People's fate bill shall roll the owners that is why they don't want anything they don't deserve but I'll give an example prior to twenty we talk about twenty nineteen twenty nineteen most thoroughly owner I know that having net checks they took over half their check you think about that as legislators a business partner of the employee how would you like to get your paycheck and you get it and they still haven't got taken out deductions. A. Change some it's got a little bit better not a lot better because base last time I done my my if I'm real comfortable okay. One ace twelve and a half percent when I look at deduction I don't mind share this my dating all placed with this last year and is rolled out and I was trying to take care of all these based some of his business but when I got the ten ninety nine from flowers will they took twenty percent in the ducks out of his check how do you take twenty percent deduct out of check. You don't have one twelve and a half percent of the cost of that check you got to realize this what we all deal with. Nobody held a gun to anybody said. Everybody was agreeable only's laces y'all are the ones created not buyer. Not to roll the owners you all the ones that took it did have a standard liege you all the ones that took at least lamp and twenty five dollars maker to twenty five hundred maker you're going to lease land for one eight one seven one six two twenty percent twenty five percent judge could I could I ask you to direct your comments to us I'm so sorry I apologize that's okay People play there shall they just will be treated like they should be treated as real commonsense real sample is not complicated you know anybody can set out of twelve right education I'm with my faith of. You know and I will say this and and Mister Moore is exactly right to sign people have the lease is now are not the same people that have them to begin with but the last time I checked in a court of law you sign a lease lease and binding contract I ask of service of retired circuit judge of the dice and I don't know much about contract law to the judge so I don't know evidently not. when you get in this situation though you know this when I bought these these and these role is they bought these mineral enters the Babel taken operate they assume the asset we also assume responsibility liability daughter was contracts. Thank you members do you have any questions for the judge yes representative Cooper. Judge thank you for being here. We're talking about twenty percent deductions I've seen that myself memoir County runs shall play got a lot of royalty owners some of them were seen in twenty three twenty four percent with all from those checks so correct would you agree that's not state and federal income tax being withheld with that that does not include state federal income tax rates and all which agrees merchandising fees transport fees etcetera I guess yes but I mean my question is this I will say it again. I look at you. These folks these producers are get ninety seven eight percent but if you take the net net of the deductions. Are not get ninety seven ACT center get ninety percent in prior to this to twenty twenty two I know for a fact they were taking over fifty percent of roti owners check. Amendment problem we've got you know not say the hard to tell day motor factor local radio station with an interview you know server stacks with collected more severance tax this past year we've ever collected and yes prosecute cases up sure yes but when you look at this sign and I go way back I like I said I what's that baby be born. Conway County we took more of receiving of some of the what I call five percent money off top we never collected or three hundred fifty five thousand dollars this past year twenty twenty to with collected nine hundred and seven thousand dollars. And the volume that production is nothing like what it was intently and toilet. So there's a there's a problem there's an accountability problem there is a and I think that you know we've got to figure out what this is but what we're what we're depending on I hear this well the legislature say that's what we play a role the honors last time I checked this one Chatham. You know them leases guide what we play a role the owners we didn't create multiple leases we didn't create multiple. The ducks we didn't create the one eight one seven one six twenty percent the industry data and industry needs to figure out how to fix it. And be accountable for. Represent Cooper do you have fallen yeah. So something else of an imac made aware of as it you know as you mentioned you know ten twelve years ago fifteen years ago when these leases were signed it was by X. Y. company and then you know it's so it's so in some instances been solved the police have been sold or three times or four five right so as each each but I've been made aware of each time these leases are sold as the new company deduct even more fees and so that what that role the owner gets is even even less so I have you seen that happen as well. What I have seen it is that same block of. Somebody buys it next time we know skews my friends almost be real country when we change names most time like we change underwear okay. And that's that to me that's problematic because a problem what is how do you keep up with all the stuff. Thank you members are there anyone else questions for the judge. Thank you for your testimony thank you Sir. Okay testimony was for the next one is Randy Zook and he speak against the bill. Please identify yourself for the record. Thank you Mr chairman more members of the committee thank you for the opportunity to speak on this bill I'm Randi's a president Arkansas state chamber of commerce and associated industries of Arkansas and in that role represent a myriad of companies and interest across the state frankly this is one the most complex ones that we've ever. considered and thought about but it I DO want to caution the committee in my my point of view on this is is not technical like the details of the bill my concern over the bill is is the effect that this can have on the overall business climate in Arkansas the business climate in the state is one of the key elements considered by investors and companies and businesses that are looking for new markets new opportunities opportunities to grow opportunities to invest their capital and that capital investment in the resulting job creation is one of the primary things that you as a body of focus on on many many issues because that's those are the things that drive or hinder economic growth in the state and that economic growth is one. H. the opportunity for increased. Enjoyment of life if you will and the ability to support families and everything else in our in our economy it appears this bill and and this proposal would have a destructive effect on major contracts involving literally billions of dollars worth of assets that have been purchased and are being managed in I thank I'm convinced would discourage investors from around the country considering similar types of investments in Arkansas it would hinder the free flow of capital because of the change in terms of these contracts that have occurred these companies have invested billions of dollars literally to manage existing supplies not to exploit and and drill further because we know that basically the the country is on a path to discourage of fossil fuel exploitation and use that's another argument in another conversation for another day but suffice it to say that the playable shale is a is basically a declining source of gas and a declining source of of our economic activity and the company knew that on the front end and bought these contracts in these wells in this production with the the understanding the effect of this bill would be to increase costs and and managing those wells in those that follow of gas and sale of products. Read whatever you call it the increased cost would would result in the same thing and that would be the earlier capping of these wells that are declining in production added costs mean lower revenues means lower profit off of the sale of the product and it would encourage your result in accelerated capping of these wells in the event of which all the royalties would cease all the severance tax flow would end on these closed wells this would become a lose lose proposition for royalty owners as well as the company's I guess the the point I would like to make is that is to emphasize the fact that this matter is under consideration in the courts it's working its way through the court of appeals ultimately will likely get to the Supreme Court it looks to be premature to enact this bill and interfere with that process it will be resolved sooner than later as a result we urge you to vote against the bill and hope for hope you'll consider those issues be happy to take any questions on anything it's not technical thank you Mr the membership does anyone have any questions. Thank you very much. Okay Mr second spoken against it there is no one signed up to speak for his or anyone in the audience that wishes to speak for it didn't have a chance to sign up. Okay Mr Fitzpatrick I believe you speak against it. Go to the in the table identify yourself for the record please. Yes Sir thank you Mister chairman my name is Jeremy Fitzpatrick vice president global energy. Committee members thank you for limited time to speak to you I'll try not to reiterate and repeat what you've already heard nothing Mr Perkins did a great job of outlining the history of the act and the reasons why the act was implemented at the request of royalty owners as you said they didn't like the disparate treatment of pricing in the timing of the checks that's the reason for blending it so we blended the statute tells us very plainly to do it on a net basis in which costs are pulled out so we do it that way. The issue as you guys know is that our predecessor didn't necessarily do it that way all the time. But the suggestion that everybody did it another way and then fly will the bad actor showed up and started doing it differently is not true that is false and all you have to do is read the Whisenhunt case to know that because that case came out of two thousand sixteen the originated in two thousand thirteen and fourteen in the heyday of this play when XTO was paying the royalties the way that we're paying the royalties the way the federal judge says the statute says we should pay the royalties so I just wanted to clear that up that this didn't just happen in two thousand nineteen it's been happening for years it hasn't been happening uniformly that is absolutely correct so but the statute still says what it says and when we took over the asset hope you can appreciate which did spend billions on the asset and many millions on the implementation of the asset and the build out of the bill the management systems to operate and manage the assets so when we build those systems we look to the law in the state of Arkansas we read the statute we read the case law we consulted. Legal advisers and we. Implemented those systems on that basis that's what we did we didn't do anything nefarious week knowledge it it's a difference in this some people didn't get deductions and are now having those deductions. I it sounds like an injustice what I would say is that those are windfall payments in favor of the role team or the incorrect payments were in favor of the realty owner for many years that stopped when we took over we paid according to the statute which says shall and the purpose of the statute again was to get everybody a uniform blended net price so if you blend it that way and then selectively point two one provision in these contracts just want. And say what we want to honor that contract provision that says I don't get deductions we're but we're choosing to continue to ignore everybody else's other contract provisions including the absence of contract provisions requiring us to pay certain owners meaning we don't pay those owners but for the statute. So we want to talk about contracts in honoring our contract we can do that I'm not a proponent of repealing this act but if that's the goal. That's the way to get there then we can pay all of our royalty owners according to what their contract says the other operators can pay their contracts and then everybody will get paid according to their contract. Remember in nineteen eighty five when this started it was because they didn't want to be paid according to their contract they wanted to be paid uniformly so that's what I would like to say today I'll pause there and I'll be happy to answer any questions if you have any. Thank you for your testimony committee you have any questions. Thank you seven nine thank you. Again I ask Is there anyone to speak for the bill. Okay we have one more against it's Mr I believe it's day. Please go to the under the table indemnify yourself. Thank you chairman my name is Michael day I'm an attorney for Smith in fatal Arkansas I represent a company notice care energy LLC my my clients asking to come here just to voice my opposition to the bill and I'm not gonna rip Peter marks from the industry Mr fitz Patrick and Smith Mr Mr Perkins but we we would echo those remarks from my client care as well all right thank you I appreciate you being here a committee other any questions for the German. Seeing none I thank you for your time thank you chairman they see no one else signed up to speak for against the bill representative back are you record rate close. Thank you Mr. Thank you Mr chair I'm gonna lead they can speak next if something did you want to add some of the comes because I think you can probably clear up some of these other issues I want to talk more in general. It's over three years ago that I got a phone call from an individual that quite honestly I thought they didn't understand what was going on. They said. I have a lease it's a twenty five percent gross lease and they're not paying me that lease they had been playing me that ladies I referred to fly well and that they said they had been paying me that lease but they're no longer pay me that lease. Hi there be honest with you I I I thought the person didn't understand so I said okay let's may hello I need to see your lease to see what is because what that's crazy you can have a lease that was honored in two thousand six all the way to two thousand nineteen and then all of a sudden so we just is not affect your leasing more you do this this way hi well look at the lease he was right hello this checks he was right. That's what. Now. This individual didn't just suddenly come out as proof that you know something changed I understand that the flowers will organization is saying that they didn't do this they didn't change anything but. What changed. And there's if this is serving say that this is a you know this is just one thing or or something there are thousands of these guys out there that this is happening to. Something changed. I wish to construct things that maybe we didn't hear. You didn't hear flowers will L. L. C. CA. That they have tried to defend their position twice now Watson from the Arkansas willing gas commission and the commission said you're wrong pave the way you were paying before. They then appealed it to the Pulaski County circuit court circuit court once again said now you're wrong. Hey the leases they were paid from two thousand six to two thousand nineteen. Why are not being paid there now that that point they got appealed to the I think it's called Arkansas court of appeals been sitting there for over a year and a half now. Something changed. All right doling gas commission or the ones you heard earlier we talked about these people they're sort of forced Leister integrated and they're pushed into a pool with oil and gas commission other people go out there and try to be fair and make sure these guys are treated fair they're the ones that are in court right now trying to say you might agreements with us. Or the your predecessor company made a grievance with us and now they're thrown out the door district this is two thousand six these were agreed upon this is how we did it all right and they changed now. S. Mister Perkins and and has. I'd recognize it he's he's an expert on this but. My my position on that is this all right this is simple guys this was done from two thousand six to two thousand nineteen. Now. And then something changed maybe it was not a cause and effect maybe it was just a coincidence that the I think flowers will purchased the the southwest synergy thing in the late two thousand eighteen maybe it was just a coincidence that all of a sudden checks started coming in a lot lower than they were something changed. Hi there's no doubt about that. He didn't hear anybody really deny that this will maybe some people got a little bit different now a lot of people got a lot of different the people who have these gross leases got a lot different and that's fact. Now. There's some people indicating that they don't get a chance give much input on this and. I want to take you back three years after I went through all this the when I first found out that this place right I still didn't believe us that either something wrong you know computer glitch or something somewhere so the first person I went to was Andy Miller who represents fly well and I said you know any something's wrong here said Scott Scott leasing them in any kind of. And then. I then worked with April I spent weeks working with a problem weeks. No my request was sent. I said. The agreements that were made with Arkansas willing gas commission that stood from two thousand six to two thousand nineteen. Should be honored the way they work. Second a lease with an individual is a ways they should be paid accordingly and they had been. Something changed. Now. As I said I work for weeks and you know I looked at it and I I still remember I actually had a map have Andy and and and run it out to my house on the weekend to discuss in my request was always the same. Page releases pay what the oil and gas commission that was my request nothing more nothing less. The harder I worked at this the more I met I met of down here to our office. The more I worked with them this in the further the goal got away it's like almost at one point the am I talking to the right people because I'm making a fairly simple request here but I'm not getting. Any results back from. One day I was sitting in my house. We have is not present when the committee so meetings I had with a program. Yeah I'm looking out we all have those little you have the same meanings and all little windows up and. And it kind of came to me twenty little windows on my screen. In those twenty windows. We're producers executives CEOs and their legal counsel there were no role keys there's no one there representative realty I was trying to talk to a group trying to get remote the royalty interest owners a fair deal and these are the people that obviously have no interest a pro I don't know you you might. I don't well as much about you know they're the Arkansas producers and royalty organization I think that royalty owners are part of that is is is a little bit short I don't I have I'll be honest with you I want to work with them. I never met anyone that was representing world to answers only those representing the producers. Something tax. A lot of you have probably heard and earned her today and you fraud receive emails of about. Different things that how this disguise falling and all that I get it I understand. But this morning I get here early as I usually do and I'm I thank you know I'm gonna go back to that bill that by the way received the majority of votes the first time it was in committee but there were not eleven votes all right. I went back and look at that bill and I said I want to compare these two bills because what you heard today. I mean. I'd say to Mr Perkins time we could recording what he said. The last time displayed back again right the bills are not the same. I went back and I looked at I didn't have any of the state a lot of this stuff there's only one phrase that is a sign between these two bills and it says the minimum royalty interest. But this is a minimal right to that's only that's only prices common between the two. Later in the bill it did have a thing that said that basically it left that actually let let the term that proceeds internet have the thing letter on that said that. Basically just what I'd ask for. The government with holy gas commission for the integrated well should be followed and the laces should be paid according to the lease and I know I'm repeating myself the same as it had been from two thousand six the two thousand nineteen. That's what happened. Now you've heard that this guy's phone sought I'm gonna throw something out there now the and all at night. I don't believe this guy's fault I think is a good bill I didn't write this bill. As a matter of fact BLR didn't they they wrote the final drafts of but there's not a lot of input from a lot of people in the industry on this bill all right so that's it as a matter of fact if you look at the phrases I can go back and look through them okay yeah right. All right. The I'm reading from the findings of the oil and gas a public the public hearing that was held they did recognize and this is why I took it out of there it says the term net debt I mean directly from the from the findings the term net proceeds is undefined statues and encourage the open to one or more interpretation and is ambiguous hi we took that out of there that's what that's what took another this is still a gas commission. You heard about this not affiliated transaction almost drop down to another one of the findings that are in there it says the proceeds as defined is the actual amount received by the lessee for the sale of the gas at arm's length in and not affiliated transaction. Sets up for mayor if you look at the last page you'll you'll start to see some of that terminology there. That's already there no wonder thing about all this after. If there's truly something on this bill that's going to destroy. Destroy the Anderson you come heard that rights cause for the industry. Passes out here pass this bill out of there and I will give you my guarantee that I will listen to any one of these individuals who come to me and bring me something that says all right this part's gonna go because this is gonna yeah it's too much but what I won't do what I won't do I won't say that this shield that was built I will not accept any amendment to this thing that says this shield that was developed to protect mineral rights owners I won't let them say that it's this is not the floor this is the minimum it's not to say if you want to change it to gas or something fine got that this is not the mental hi I will also not stop and say that. If you have an agreement with us with all gas commission where the for the individual millwrights owner you are to honor that just like you did from two thousand sixteen two thousand nineteen I'm not trying to be Andres Bobby more than like today if there's a little twerk twerk that we need to change the like that I'll do it on the Senate side and get on but here's the situation when it comes out here's a knockout. They want. The group plans I would say what would they even come to talk to me they wouldn't come and talk to him because right now as you heard. Explained pretty simple terms they're getting additional funds. The gross leases that are out there are not being paid fully and as gross leases. All right that first. Twelve and a half percent is net and they're using this statute to do this is matter of fact well I had one individual talk to me and said that you don't think they questioned it and they said well you know they told me that was really the legislators that set this. So so you guys are thought would fall right where the fault that they came in in two thousand or whatever happened two thousand nineteen came in and that let's not fight so let's fix that right now let's do this right now. All open house Sturch. Right now the deal with them to to make sure there's not a little tweak or anything in there but I won't compromise on those issues. As I mentioned earlier you know there's a lot input here from a lot of people in the industry and in this bill hi person believe it is a good bill but I'm I'm willing to work with them. If you go by what you I'm C. kit that we go back they said last time that they want to work with me on this bill. I contacted them about a month or two after we got out session make up phone calls no return another call no time that I can work with you anywhere with anybody there when they went into this guy and you guys Losin our Kansas or Kansas with mineral rights or lose. I counties are Losin because. The severance and what a law school now and I don't know all the numbers with that but that's what's happening now pass it out here. You heard me say it I'm on record I work with them to try to make it right but you heard my my drop dead. Parameters by the way those are the ones that were actually in the bill that I initially ran last year. Our skinny two years ago with that I'll turn over tonight first off I would like to apologize to the Committee I misspoke when I said nineteen eighty seven instead of nineteen eighty five I think I was three years old and so you can forgive me for her for not remembering that a couple points I would like to address I believe Mr Perkins said that it was not administratively feasible for the oil and gas producer's With this statutory language and the lease language to administer the royalties based on these if if that were true then why were they able to do it up until two thousand nineteen you know you heard Mr Fiske fits Patrick stated The. CKO their predecessor in title the the one that at four I will energy purchase their assets from seco and he called it a windfall for royalty owners but apparently from two thousand five till two thousand nineteen they were actually able to administrative administrative this in administrative effectively so I don't see how that holds water secondly we heard from the chamber of commerce's as far as disrupting business in the state I I don't see how that is a factor I don't think any business will be district in the state is already told you from two thousand twelve five two thousand twelve whenever. I guess my interpretation of this act was followed correctly you know we didn't had business disruption we actually had probably the most prolific production we've had in in Arkansas at least as far as gas goes in oil and gas history so. And as far as businesses go. Producers we have different producers. Interpreting it different ways and is what is actually creating is unfair competition because the good actors are paying the royalty owners what they're supposed to be paying by the contract. And then the bad actors are not and so the bad actors are actually receiving more revenue and a better net profit because of those actions so that that creates instability in the market place any any creates where where essentially it's not an even playing field. I think if you look at look at this act and like I said you know I support obviously representative backs bill I think they should fix the problem going forward I have no I I've listened to the two people saying it won't worker they disagree with one one piece of language with one word here one where they're obviously you've heard representative back saying he's willing to work on that I think the the state of Arkansas has a real interest in protecting their mineral and there's I think that was the intention of the Arkansas minimum royalty act that it did was it was supposed to set up a bottom not to talk for rule T. owners and I think this amendment and if you pass this amendment. that will occur. Okay thank you man I have received several text messages from members stating they would like to hear from the oil and gas commission is there anyone in the audience representing the oil and gas commission. K. C.. A chairman of I think one of the reasons that do you the oil and gas is not going to speak on this is they are currently in litigation okay in the second circuit court over they are not thank you thank you that's why they're not here okay hearing that the. What's the wishes of the committee. Do I have a motion. I have a do pass okay proper motion all in favor. I I All opposed. The not the nose have it I'm sorry Senate backed your bill of sale. Thank you Mr thank you Committee thank you for your time. Those. We're journey.