Agriculture, Forestry & Economic Development- House
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Bills discussed (2)
| Bill | Title | Sponsor | Status |
|---|---|---|---|
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HB1656
Act 1024
· 6 mentions in chapter, agenda, transcript
Matched: “HB1656 Beck TO AMEND THE LAW REGARDING OIL AND GAS PRODUCTION AND…”
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TO AMEND THE LAW REGARDING OIL AND GAS PRODUCTION AND CONSERVATION. | Beck | Notification that HB1656 is now Act 1024 |
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HB1657
Act 709
· 1 mention in transcript
Matched: “…simply miscalculated or calculated the leases incorrectly. HB 1657 clarifies this. Another difference is this bill is endorsed…”
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TO AMEND THE ARKANSAS WOOD ENERGY PRODUCTS AND FOREST MAINTENANCE INCOME TAX CREDIT. | Beck | Notification that HB1657 is now Act 709 |
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Representative Roger D. Lynch
Unverified
0:13
All right, everybody find a seat. So Come on. Char sees a quorum. Those wishing to speak far or against
the bill needed to make sure you're signed in. There's a sign-in sheet on the outside if you haven't already
Speaker 7
0:38
signed. Representative Beck Hang on a second. Go chair.
Representative Kendra Moore
Unverified
0:44
I do want to make a mention and recognize a group iceland Foods is headquartered in my district, House District 61, and they're in-depth leadership classes here with 8 farmers and 2 regional rice managers, so let's give them a round of applause and thank them. Rents back you recognized to present your bill.
Representative Roger D. Lynch
Unverified
1:04
Please introduce yourself for the committee. Thank you, Mr. Chair, uh, Rick Beck District 43.
Representative Rick Beck
Unverified
1:15
You know, guys, it is true we are a lot scarier from looking from this position down here, so anyway, I, I'll try to be brief. I think we have a lot of people that I want wanna give their input on this and so HB 1656 is about honoring the existing contracts, not about changing them. It clarifies the law following industry practices used in Texas, Oklahoma, and Louisiana. It protects royalty owners property rights.
It improves transparency concerning the deductions or expenses that are that are taken out against the royalties. I've talked to several, several of you concerning this bill, and I'd like to clear up a couple of questions. The first question that I received from a few people is easy and it's, this is not about oil, this is not about Brian. This is about natural gas. The section of the coal that we're changing is natural gas, not oil, not brine. it.
The second question is a bit harder. But it's a good, it's a, it's a legitimate question. You filed this bill twice before and it failed. What's different. Well, first of all, I guess I just have to tell you the first two failures are on me. I simply underestimated the the pushback that I would get from the other side. I also sought help for some individuals that I think really weren't.
Best heart as far as getting this thing passed, so the first two things are on me now, so what's different? Well, I did, as I said, I drafted the 1st 2 bills. HB 1656. It's what I would call a compromise bill. It was drafted by lawyers, get this, representing both producers and royalty both sides of this equation. compromise.
HB 1656 codifies the Arkansas court's decision between the oil and gas commission, the flywheel, uh, I think, I think they're an LLC, um, and, and Flywell LSA concerning integrated leases and that decision flywell was instructed. To go back and recalculate the post production expenses all the way back to 8 to May of 2019. The May of 2019 date is important today because you're probably gonna hear from a lot
of royalty owners. They're going to make statements that sound similar to this. Something has changed in most of those cases the change occurred around the first months of 2019. Shortly after Flywheel purchased the Fayetteville Shell assets. When Flywheel uh a royalty owner told me that when they asked Flywheel about the changes in the the lower pay fly will told or said that the law prevented them from paying the leases as they were written.
And that's when the previous owner had simply miscalculated or calculated the leases incorrectly. HB 1657 clarifies this. Another difference is this bill is endorsed by the Association of Counties and the county judges Association. Now, I wanna thank the the royalty owners of the Fatville Shell for inviting me to attend and speak at their organizational meetings.
Meetings were held in Claiborne County, Conway County, Van Buren, and White. Counties. It was a great way for me to get to talk to and get input. But there were over, I, I would say between 16 and 1800 royalty owners that showed up after hours that Talk about that something is wrong, something has changed. It
didn't take long only after a meeting or two, I started to develop a common thing. And the common thing was simple pay our leases the way they're written and provide the transparency and expenses that are taken out of our royalty check. HB 1656 does that. And with that, I'll. Try to answer your questions. Committee, any questions?
Representative Roger D. Lynch
Unverified
6:01
Say no. Thank you committee. Alright? Those wishing to speak against Rodney Baker. Please recognize yourself for the committee.
Senator Dave Wallace
Unverified
6:38
I'm Rodney Baker. I am executive director of the Arkansas Independent Producers and Royalty Owners Association APR. Uh, I have with me today, um, Bob Honey, who's attorney from Fort Smith and the oil and gas, uh, area, and he's gonna help us explain some of the history and other aspects of this industry. Um, Mr. Chairman, we appreciate the opportunity to be here today. Um, This issue is in its 3rd session now and the previous two
sessions, it obviously has failed, um, during that time, Well, before we get to that, let me explain April to you just a little bit. APR is association represents uh Oil and gas producers and royalty owners, uh. We represent owners uh operators statewide. Not only in the Fayetteville Shell but also also in our coma and in South Arkansas in. All production
Our board has 12 members on it, 3 from each of those production areas. And in, in pretty much not exclusively is every company just in that area. We have a company or two that have crossed into two areas, but for the most part today, everybody is in one area of production, so, uh, a pretty balanced representation of the oil and gas industry in Arkansas, um. Our board met on this issue right after it was introduced prior to that, we were
approached by Mr. Beck, uh, for input into his bill, and we asked, you know, see the bill. There was no bill that he was ready for us to see. So we invited him to come speak to our board, and he spoke to the board and um again no. Bill to look at, uh, no specific language asked of us are, uh, at that point, we were just told it was going to be about transparency and it's gonna be about paying the contracts away, uh, he thinks they ought to be paid. So I bring that up simply
to say that if there was a compromise, it wasn't with April in our members across the state. But we reviewed that, um, when later on when the bill was introduced, we called our board in. We had An analysis done by another prominent oil and gas attorney here in the state. There were concerns that were shared across our membership and across the state about what the bill does. First of all, we see it as unconstitutional relative to changing contracts.
It also creates a greater burden on reporting, that's the transparency that Mr. Beck referred to. It also increases some liability for Uh, operators, nonworking interest uh or working interest operators in, in the, uh, in the play. Uh, and a few other things, frankly, they're in there. We don't see why they're in there, but I'm not gonna try to explain those. I'm gonna have legal counsel later come in and explain that with more detail. In previous sessions when we
were discussing this bill, there were a number of lawsuits pending, uh, since the last session and as late as a few weeks ago, these suits have in federal court have now been settled. And going back to the first one that Mr. Honey handled uh on up to the more recent ones that were just settled. And, uh, they were all settled that the law is correct in the interpretation in the way it's being paid, but again, we'll let, I'll let somebody else explain that in better detail. Um
Like I said, you know, There, this is not a compromise bill from our standpoint in the previous two sessions, we have said if you don't like the 85 law, which was put in place. Four producers now the Fayetteville Shell wasn't here then. This was over in the Aracoma. It was put in place, uh, for producers to address problems that they've had and it's been in place. It does a couple of things. One of them to set the minimum 18 at a net. It also blends payments so that uh
all the payments in that production area are um. Distributed equally are the same as opposed to one company may be getting a better price than the other and having that out there. That was desired at that time. We have Repeatedly said that the way to address this law if you don't like it. is to repeal it. And we've offered that the last two sessions. Candidly, we said that we don't support that because it causes a lot of change and a lot of
expense for our companies, but that's the way to do it and we would not oppose that. That has never been pursued. So that has been out there we've been agreeable to that and uh for some reason that's not acceptable, uh, I would just point that out to you for, you know, sake of history and that option is still there. You don't have to, uh, pass this bill if you don't like the '85 law, you
can repeal the '85 law and that would um Change the structure to basically an open market type structure in my words. With that I'm gonna close, uh, but before I ask Mr. Honey to express our discuss the history of the industry and, and these issues, uh, there are a lot of people here today. And they're on both sides of this issue. Uh, there are a lot of people here, uh, from the shell area that are opposed to this bill with the chairman's permission, I'd like for them to be allowed to raise their hands to show who
they are. Mr. Chairman, is that permissible? Y'all raise your hands if you're here against the bill, OK. Just uh wanna say that you know there's two sides to this issue, it's not all uh uh industry and, and uh and uh uh mineral owners, uh, there's more aspects to this with that, I'm going to stop. I'm gonna let um Mr. Honey. Uh, comment on how we've gotten
to this point and we'll have others that will be testifying later, Mr. Chairman, cover, cover other points in the law in more detail. Would
Speaker 33
12:58
you identify yourself, please, for the committee. Uh, it would be my pleasure. Uh, good morning. My name is Bob Honey. I'm a partner in the, uh, Fort Smith law firm of Harden, Jessson, and Terry. Uh, I'm, I'll be very brief. I'm here just to provide some historical context. Uh, the reason being I, I was around in the room, so to
speak, when Act 272 of 1985 was drafted and negotiated and passed and have, have some historical knowledge of Act 272. I was also involved. Well, was counsel for XTO in the Whisenhunt case, the case that, that interpreted the, uh, Act 272, the net requirement of Act 272 to actually mean net, um, starting with Act 272, prior to 1985, all royalty owners were paid in accordance with their leases. That was the way it was done. Um
The Reason Act 272 came about was because royalty owners were not happy with being paid in accordance with their own leases. Act 272 was a response to royalty owner complaints. Uh, the reason royalty owners were unhappy was because there'd be two neighbors who were leased to different companies, and they would be getting checks for different amounts or in some cases one person would get a check and another person wouldn't get a check at all. There were several reasons for that, but the, but the bottom line was royalty owners were
unhappy because their neighbor would get a check for one amount, they get a check for a different amount. The legislative response to that from your predecessors 40 years ago, was Act 272 of 1985. And what Act 272 of 1985 said was, we're gonna treat everybody the same. Whatever your lease says, whoever your lease to, everybody gets the same check for the same amount every month. Um, The Whether that's right or wrong,
that was the, the solution to the problem. Um, the effect of it was to take money from one royalty owner's pocket and put it in another royalty owner's pocket. It didn't, it wasn't a, a, a. Something that put money in the industry's pocket, it was neutral to the industry with the exception of adding a pretty significant accounting burden, uh, but In response to the royalty owner complaints about My neighbor's getting more money than I am.
The legislature said everybody gets the same. So what Act 272 of 1985 did, will say, We're not going to pay people in accordance with their lease. We're going to pay people. Across the board the same, no matter what their lease says. Fast forward to 2015, 2017, uh. The, uh, Whisenhunt versus XTO case. That case was a situation where Whisenhunt was a royalty owner.
They were leased XTO. The whiz and Hunt lease had language that said, you cannot take deductions. It's a gross lease. But it also had a provision that said this lease is subject to and governed by all applicable laws, rules, and regulations. The question presented in that case was, well, Act 272 says net. And so does that control. Net or does the lease language that says gross control.
And Judge Moody held in in subsequent federal judges have have also held that it is properly interpreted as net, that the statute controls and the statute says net. And so even though your lease says gross. Because of Act 272 of 1985, you're going to be paid net. And you're also going to be paid on a blended basis. In other words, even though you're lessee XTO sold for $3 and Seco sold for 250, you're not gonna be paid $3. You're gonna be paid
275. Um, here we are today. There's You know, uh, well, uh, I'm sure other people will talk about the The move from Seco to flywheel and the change that occurred at that point and They can discuss with you what was, what was going on there. But, um, from my perspective, the, the perceived evil here. It is not something that the industry is doing wrong. It's something your predecessors did
40 years ago when they adopted Act 272 of 1985 because that act requires, and even with this proposed amendment would still require that royalty owners not be paid in accordance with their leases. If you really want to cure the perceived evil, uh, Royalty owners not being paid in accordance with their leases, the solution is to go back to the status quo that existed in prior to 1985. Repeal Act 272. Um
Speaker 38
18:00
I knew it. That's, uh, the historical context and that's what I was asked to talk about. uh, happy to answer any questions if anyone has them. Committee, any
Representative Matthew J. Shepherd
Unverified
18:21
questions? You're recognized. My own. OK. Thank you. Thank you, Mr. Chairman. But I do have a, a few questions and maybe at some point the sponsor
will be able to, to come back to the table and, and
answer as well. I just, um, as I was looking through this. Um I guess one question just to make sure I understand this. Under this blended system. There's a statutory 1/8 royalty that is, it's a net net proceeds. So is it, am I correct that If the lease provides for a greater royalty that's a gross royalty.
The 18 is paid on a net basis, but then the balance of the royalty is paid on, uh, a gross basis, is that correct? For example,
Speaker 33
19:12
if a lease had a 3/16 royalty. 18 would be paid into the royalty pool on a net basis, and the other one's 16th would be paid. Directly in accordance with the lease, the whoever the lessee is would be solely responsible for paying that. We call it excess royalty on a gross basis as per the lease the net of the process
Representative Matthew J. Shepherd
Unverified
19:34
without net of expenses and the net of expenses on the 18 is just on the pro rata share of that 1/8 interest.
Speaker 49
19:41
Is that right? Yeah, it's it's. Yeah, I, I mean, they're not, they're not, they can't just load up that 8th interest with all
Representative Matthew J. Shepherd
Unverified
19:48
the expenses that they otherwise can't net out of the, out of the balance of
the interest, OK. So then the, uh, of concern and I've, I think I've probably been clear about this for the last. 6 years, 4 years is I do have a concern about anything that
might happen that would, uh, impact the, the oil industry and specifically because in South Arkansas we have for about 105 years of experience in the oil industry and, um, I know the sponsors indicated that that this bill is not intended to impact the oil industry and, and again the sponsor can come back and, and answer these questions as well, but as I look at this and as I was. as looking back at it while um the sponsor is presenting.
It looks like that I guess it's um. Possibly 1572305, but, but more specifically 1572325. Would, would that also potentially impact the oil industry, not in regard to royalty payments, but in regard to other types of reporting requirements and accounting for expenses. Depends on how, how the courts would ultimately interpret this
Speaker 33
21:08
proposed act, um, yes, I, in my opinion, yes, it could be interpreted broadly to apply to oil, um, I think you can make the opposite argument, um, because Act 272 was crafted to, you know, exclude oil. Now whether that, this proposed amendment would alter that, I
Speaker 54
21:22
don't know. Well, I, I guess that that would be one of the questions that,
Representative Matthew J. Shepherd
Unverified
21:28
that in particular I would have because when it looks, it looks as if 1572325, it certainly does address the 18, but the way it's
drafted, uh, as far as the, the subsection within which the 1/8 is addressed. There are then other subsections that that apparently are not qualified to just apply to gas. And so, I, I That would be one concern and like I said, the sponsor maybe can address that when
he closes or comes back to the table. Thank you. think, Mr. Chairman, I've got a question and, and
Representative Lane Jean
Unverified
22:09
that there were 6 cases through the years beginning in 2000. 16 to A couple of them, 3 of them this year, um. They were all ruled in favor. Of the producers. What, what's different on this bill
than what was challenged in court. Uh Well, I, as I
Speaker 33
22:31
understand the bill, it's. The intent is to address the perceived evil of those court
decisions to, you know, the court decisions echo and confirm that net means net. And as I understand the purpose of the bill, it's to, to amend the act to say no, and that doesn't mean net, it means whatever the lease says, or that's the intent of the bill. Um, I don't agree that's what it says, but that's the intent of the bill, as I understand it. If, if,
Representative Lane Jean
Unverified
22:59
and it's just an opinion. If we pass this bill, will, will you think it'll hold up to a court challenge. OK. Thank you.
Representative Roger D. Lynch
Unverified
23:11
All right, committee members, anyone? Any other
Representative Tracy Steele
Unverified
23:22
questions? Representative Steele? Thank you, Mr. Chairman, uh, Representative Shepherd asked most of my questions, um. But uh uh Mr. Honey, you made reference to Act 272, uh, and everybody. was treated the same based on their lease. What would happen if those
leases over the years as the leases have changed. How, how would that affect everybody being treated the same, bear in
Speaker 33
23:49
mind, prior to the enactment of Act 272 of 1985, everyone was paid in accordance with the terms of their leases. All right. And uh as far as amendments to leases if you went back to everybody gets paid in accordance with the terms of their leases, then if the lease is amended, then obviously the, you get paid differently.
If you stay with the, the, the concept of Act 272 of a, a statute that overrides the lease, then the, the lease amendment would be. Irrelevant. The statute would control.
Speaker 70
24:31
In my opinion. committee, any other questions?
Representative Matthew J. Shepherd
Unverified
24:45
Thank you. To follow up. You get it. I'll try again. Representative Jean asked about your opinion as to if we were to pass this legislation, would it stand up in court? You said you didn't believe it would, specifically, what are the concerns that, uh, that you have with regard to this legislation.
Speaker 33
25:16
I, I personally have two concerns with it. The first is, is a constitutional concern about impairment of contract, the idea that you can't after a contractual arrangement has been made. The legislature can't come along and retroactively. Alter that contractual arrangement. Um. The other concern I have, I don't know if anyone shares it, is, is whether this is an unlawful tax. Because this act, as I read it,
would force industry to pay royalty owners something more. Than what they're obligated to pay under the lease. Uh aside, aside from adding a significant administrative accounting burden to the industry. And that that troubles me as well as to whether it would pass constitutional muster. Um, from a perspective of uh illegal taxation. Or or maybe, maybe it's not unconstitutional. It's, there are procedural requirements that the tax is going to be imposed
that are not being Satisfied All right. Representative Wayne,
Representative Carlton Wing
Unverified
26:29
Thank you, Mr. Chair. Um, so we're, we're hearing that the 1985 Act 272 treated everybody the same. Are there different companies. Applying this in different ways. Uh, yeah, to my
Speaker 33
26:44
knowledge, there have been instances in which
some of the industry members, I mean, they, they would have to explain it. I think primarily it's because of the accounting burden that goes with um. Um Doing You could either do it on the net basis, or you could You know, do it on a gross basis. It's a much easier from an accounting administrative standpoint to just say, I know I can do it that, but I'm just gonna do it gross and make that business decision that, you know, that's really my money,
but it's gonna cost me more to deal with the administrative aspects of it than to Linda pay it on a gross, so I'm just gonna do gross. So, but yes, you're, you're absolutely correct that, that there have been instances in which some members of the industry have made a business decision to pay more than what
Speaker 79
27:40
the statute would require them to pay. And the corollary might also be true that some are paying less, not, not to my knowledge. I have never heard of that.
OK It just seems like that's kind of
Representative Carlton Wing
Unverified
27:55
seems to be the core question of why we're here and why this issue keeps coming up is that there's a, a different companies are defining things a little bit differently. That's, there's
Speaker 35
28:07
lots of Contain. Um, There are lots of lawyers out
Speaker 33
28:13
there who are very anxious to file class action lawsuits. They have filed a lot of class action
lawsuits. They've lost one. Now what you are suggesting is, is a factual allegation. You, you are not complying with the statute. You are paying less than what the statute requires. There's not been one case in all the years since Act 272, where that's been proven. Now I know these royalty owners think that's true. But Uh, you know, To my knowledge, representing industry, that's never happened, and Despite all these years of litigation and very good lawyers
pursuing class actions. Nobody's ever found any proof of it.
Representative Carlton Wing
Unverified
28:56
OK, thank you very much for for your answer. All
Representative Marcus E. Richmond
Unverified
29:03
right. Representative Richmond. Thank you, Mr. Chair. Uh, at the beginning of the testimony, a statement was made, and I don't care who answers this. Rodney, you can. I was told in either one of you, but it was that. Go ahead and repeal this law. Why, why would it be advantageous to repeal the law instead of trying to amend this law. Could you give me some
insight as to what Or why you would consider that. Uh, I'll give
Speaker 33
29:31
you the, my perspective on it. Uh, it's a, it's a very complex act as you can tell. If you read Act 272, it goes on for pages and it just, I mean, you got to make about 12 runs through it before you, you feel like you're halfway understand what it says. And you start making these, you think, well, I'll do this. Well, no, that doesn't accomplish what you think it
does. It, it doesn't. It's far more complicated than that. I, I don't know if you could draft something that would achieve the The stated purpose of the proposed act. Um, You know, Why, why not, why, why repeal it rather than amend it. It's too complicated. Um, and, well, it depends on how you amend it too. Um, depending on
how you amend it, you may add a massive accounting administrative burden to industry, and the net effect of that would be that wells that, you know, the royalty owners may not like to check they're getting, but they're getting a check. If you add an administrative burden to industry, another layer of costs, and industry says that well is not economic, I'm plugging it and you go from a check you're not happy with to no check at all. So, those are my, my two cents' worth of my opinion on why you don't amend it.
Senator Dave Wallace
Unverified
30:58
Mr. Rissman, I'm not, I'm not an attorney, you know that very well. Uh, but as we've looked at this and had it reviewed by attorneys, the really the gorilla in the room on this is It would be unconstitutional to try to change contracts, amend it to change our contracts are treated. These are private contracts. That's the way we're signed. They've been adjudicated. Part of the problem here, uh. That Mr. Honey historically has talked about in relation to Mr.
Wing's question, there have been companies, still are, that'll pay growth because They decided to either it's uh economically better for them to do that, or they got started that way and it continued and that was the case, uh, with Swinn, which was one of the large players uh in the Fayetteville Shell. They paid the contracts, you know. Or gross, or excuse me, net, but they paid. Gross for a lot of years they've sold, remember when they were here. Gas prices were really high.
Uh, Drilling was going on as fast as they could get new leases and and new rigs into the field and it was a boom. Boom time. Well, prices have gone down. It's like any other commodity. It's like cattle. If sooner or later cattle prices are going to go down and when they do your margins of profitability are going to go down. Well, during the time that Swin soul, who by the way is no longer in
business, but they sold that the company that came in. Had team lawyers look at what's legal and set their books up based on what was legal. That's also a time, and this is my, my perspective. It's also a time when due to low prices, we were switching from a boom industry to uh uh industry that's managing those assets that are out there that have been developed. They have the desire to add to those assets, but again price has been the, the overriding factor.
You'll hear about uh percent of my, my cost is a greater percent this time. Well, when gas is $8 in cost is $1 you know, you're paying 15%. When it goes to $2 or below $2 that dollar cost becomes 50%. You're talking about a relatively fixed price like feed for cattle. Compared to a, a, a variable price. Uh, like price of cattle at the Stockyard. It's a commodity and it trades up and down and it affects
ratios when you look at it from that perspective. Uh, the fact that it's win and some other companies have paid. By um uh gross amounts that they chose to do that. It was not illegal for them to do that. It also does not change the terms of the contract. About that, I know. We like what we get used to. But uh in this case, a lot of things have changed and it's a very complicated issue as y'all are hearing here today, but it's, it's not, it's not
Speaker 92
34:04
anything that's illegal, it's mostly a market function. Thank you. Thank you, Mr. Chair.
Representative Matthew J. Shepherd
Unverified
34:13
Representative Shepard. Thank you, Mr. Chairman. And so, so basically, I mean this is just the classic case that in the oil industry, there's always the tension between working interest owners and the operator, uh, that there's concern that an operator can operate you to death, right? That they can create expenses that they can have so much expense that it cuts into the, to the, uh, to the net uh
proceeds, uh, but to go back to uh what Representative Richmond asked about. I think he was asking about. about repealing it or maybe representative wing. So If the the statutory royalty does, it does provide a benefit to those royalty owners in the unit, correct? Because They do re royalty owners are going to receive revenue that if they were held to the terms of their lease, depending on
whether gas was sold, they may not receive revenue. I mean, that's what ultimately led to the, to the statutory royalty in the first place. Am I correct about that?
Speaker 33
35:18
Uh Uh, it depends on your perspective. I, you know, yes, back in the, in the 80s, there were circumstances in which royalty owner, a royalty owner would get a check in another royalty owner wouldn't, to a great extent, if not totally at this point in time, that's Situation doesn't exist anymore.
Representative Matthew J. Shepherd
Unverified
35:37
Is that because of the consolidation of production part
Speaker 33
35:41
of its consolidation, part of it, uh, well, part of this consolidation, part of it is that working interest owners would elect not to sell, hoping for, you know, better prices down the road. That doesn't happen anymore. Just or very rarely happens. And then pipelines. It used to be that everybody built their own pipeline and if they didn't want to let you have the pipeline, then you didn't have a way to sell your gas. That doesn't exist anymore. So
Largely, if not, uh, largely that circumstance doesn't exist anymore. So does
Representative Matthew J. Shepherd
Unverified
36:12
that, does that, does that, uh, It almost seems like that may lead towards the idea of, of full
repeal if the, if the issues that ultimately led to this no longer exist and if, if it was repealed, I guess that could lead to litigation as well, uh, from the standpoint of there were contractual relationships entered into when the law was different, um, but on the other hand, a repeal
would then go back to just the whatever lease is negotiated, yes. All right, thank you, gentlemen. Thank you. Isn't it exciting with two lawyers get to talking.
Speaker 103
37:11
All right. Speaking for Douglas House. The guy
Speaker 106
37:18
that won't shut up. Yeah. If you introduce yourself for
Speaker 107
37:22
the committee. My name is Douglas House. I'm a retired US Army lawyer. I, uh, was a member of this house for 8 years and uh it's good to see so many friends and new friends that I haven't met before. Um, I'm here to represent, uh, Just a little background I probably am the lawyer that has
had the largest royalty interest in the state of Arkansas when it comes to gas. When I was on active duty, I negotiated the gas leases for Fort Chaffee, which was at that time, 72,000 acres. And of course there were other lawyers involved Bureau of Land Management, Department of Defense, but, uh, my job actually was to keep them from drilling on Fort Chaffee and we managed to keep that going for about 7 or 8 years and finally, uh, somebody at the White House called and said, lease it, so we did. Um My mother and dad will be 90
this year. They have a little farm and have a, a 22 acres and they have interest. On about a 100 acres, uh, gas interest. Uh, my wife is uh 50% owner along with her deceased brother's estate of a family farm corporation of 600 acres in White County. So beginning to understand a little bit about what's going on in some internal knowledge. Mom and dad get a little royalty check, 65% of which is eaten up with deductions, 65%.
Now here's my biggest problem with that is the lack of transparency. There are, we understand what taxes are that that's a legitimate item that comes off the, off the top. Uh, we have something called fuel cost, what are fuel costs? Well, you try to get a hold of flywheel and get somebody to answer your question, to give you some semblance of explanation of these other charges that appeared on the, uh, uh, 1099 this year, you can't find anybody. Nobody will
talk to you. Lack of transparency, pure and simple. They don't want to explain what these charges are. If they're legitimate, they're legitimate. We understand the law. But they're hiding behind something. Dad, and I'm speaking on behalf of Dad, claims that they've tripled the charge both by flywheel charging it, the company that actually does the reporting and the accounting function adds it in and the company that actually sends the check, which is diversified, you
heard mention about the accounting process and all that farmed out. Those same charges are added on each 3 times. I can't swear to that, but that's what he says. He's a math wizard. I'm not. But, uh, the transparency aspect is a real problem when you can't get a hold of anybody to say, what does this mean? Where did this come from? How do you justify it? How do you account for it? And they won't talk to you. That's all I have to say if this bill goes any further to help that particular interest.
I would ask y'all to pass it. Thank you, Mr. Chairman. Unless there are any questions, any questions? Thank
Representative Roger D. Lynch
Unverified
40:35
you, Mr. Chairman. Thank you, committee. All right.
Speaker 109
40:45
have a Bob H here. No OK. Steve Roberts.
Representative Roger D. Lynch
Unverified
41:05
Speaking for or against. Introduce yourself to
Steve Roberts
Unverified
41:10
the committee and you're recognized. Uh, my name is Steve Roberts, and uh thank you for allowing me to be
Speaker 115
41:16
here. I'm a royalty owner in Cleburne County. Uh, simply here, um, to ask your support for this, um. been a royalty owner and have seen uh revenues dropped tremendously, uh, over the past few years with the changes of the companies and ownerships and so forth and, uh, you'll hear
later from people a lot smarter than me, uh, but the opinions are, the details of that, but I'm this here representing uh some neighbors, uh, relatives, other royalty owners around me. That we're not be able to be here today because nobody would pay their expenses to come down here and be paid for the day to sit here, but, um, I, uh, this affects me as a royalty owner and every royalty owner here in the state of Arkansas for natural gas.
It also affects the revenue of counties, uh, you take Cleburne County, White County, uh, Conway County, Van Buren County that are represented, uh, you'll hear probably that they, uh, income has also diminished, uh, uh, and something that they're trying to affect. So this affects the citizens of those counties. It also affects the citizens of the whole state of Arkansas because of the fact, uh, the state of Arkansas. receives royalties, uh, the Game
and Fish commission, the Forestry Commission, and I'm sure there's other agencies uh that receive royalties too for the whole state, which affects every citizen in the state. Also, it affects, uh, The every citizen that, uh, is opposed to this that lives in the state of Arkansas. So I would, uh, just ask that you, uh, support this bill committee, any questions? Marcus.
Representative Marcus E. Richmond
Unverified
43:07
Thank you, Mr. Chair. Just If you would, you may or
may not have an answer to this, but, uh, you've heard. Previous testimony talking about the fact that the prices have come down on this commodity and therefore the fact that you, you're making less money due to the prices coming down, that that increases the percentage of cost. You with me so far on this? I am. Is that
Factual in your opinion, or is that something that is not,
Speaker 115
43:42
I think it would be factual on um. The way I understand it, it would be factual on new wells that are drilled, uh, you have existing wells out there. Uh, I don't know that your cost, uh, is fluctuating that much on those and, and I know revenue has come down because of the fact that, you know, the price for, uh, uh unit has probably dropped, but I just, uh, request that we, uh,
That if this can be fixed and everyone can get their fair share. Uh, and, uh, we know what those expenses are, uh, that are being taken out of our royalty payments, uh, some transparency there, uh, I just think that would help. And, uh, I'd like to see this fixed for the future because I heard a term. Uh, in the last 3 or 4 months, uh, positioning us hopefully for the future, which was drill baby drill, and, uh, I hope
Steve Roberts
Unverified
44:38
that, uh, we will be able to reap the
benefits of that. Thank you, sir. Representative Cozart.
Representative Bruce Cozart
Unverified
44:54
Mr. Chairman, I think to be fair, after the next presentation from someone to speak against, I would like to limit, I make a motion to limit the testimony to 3 minutes each to be able to get everyone heard at a time frame that we have allowed to us today. That's a proper motion committee.
Representative Roger D. Lynch
Unverified
45:13
All in favor say ay opposed? All right. Speaking against Alan Perkins. Introduce yourself uh for the committee and you are recognized to proceed. Thank you, Mr. Chairman. My name
Alan Perkins
Unverified
45:45
is Alan Perkins, um, I'm the founding member of a law firm, PPGMR Law here in
Speaker 126
45:49
Little Rock. I've practiced oil and gas law for about 30 years, um, and taught oil and gas laws and adjunct professor at the UALR School of Law, uh, and I believe there are a couple of handouts, two-page handouts, uh, that are going around now that I will refer to during my presentation, if it pleases the chair. I want to follow up on a couple of things, um, that have already
been mentioned and I won't, uh, dwell on them. Uh, there's been a mention of lawsuits, um, Uh There have been 4 lawsuits, or I'm sorry, 6 lawsuits in federal court since 2016, each decided in favor of the industry, as was previously said. The first was in 2016 of uh a little over 2 years before flywheel purchased its interest here. Um, this is not a new issue. Uh, overall.
The 4 of those 6 lawsuits, uh, I was the defending lawyer, uh, that prevailed, um, there's also, we, we need to be fair to mention, um, a state court case. It's quite different. So the oil and gas commission took up the question on its own about whether the deductions could be taken from the 1st 1/8 portion of leases for integrated owners, integrated owners are Owners who have been what we call force pooled in the
industry through an application before the Arkansas Oil and Gas Commission, they have been forced to take up on a lease, uh, they didn't have any choice in it, didn't have any choice in the terms, uh, the, the terms were, uh, dictated by the Arkansas Oil and Gas Commission and the commission, um, in interpreting its own lease form that it created, uh, determined that it did not allow. Uh, except for limited things, taxes, fees, and what they
called true third party costs, which were primarily transportation costs, uh, we're the only, uh, were the only expenses that could be deducted. Um, they, they prevailed, uh, well, the commission made that determination. That was appealed to circuit court. The circuit court agreed with the commission and the court of appeals agreed with the commission. That's final. The Supreme Court refused to hear the case. That I, I mentioned that and explain it because it's quite different than all of the
lawsuits in federal court, the 6 cases there were all privately negotiated leases. They were not on commission lease forms and um the, the federal court in at least 4 of those cases now has decided that the, the Arkansas decision applied only to integrated leases, it did not apply to private leases where the statute still prevailed, so I wanted to just make mention of that. If, uh, if you all have those
two handouts, um, I wanna point out a couple of things. One, we've heard a lot and we'll continue to hear a lot if you, if you have this one that's just 3 tables. These are very Very simple, just sort of uh representative hypothetical situations that demonstrate, uh, that when you have a highly volatile commodity. And the price changes drastically, sometimes from month to month, year to year,
um, that, but expenses remain relatively, uh, level. In fact, uh, you don't have to take my word for it. So there was a, a study that was contracted for by the Arkansas Assessment Coordination department. It's called Recommendations for Improvement of Arkansas's oil and gas assessed valuations dated June 25, 2018. that was conducted under contract by a company called Resource Technologies Corporation. Uh, the industry had nothing to
do with this. This was completely, um, engaged by the Arkansas assessment coordination department. Um, it went through all aspects of natural gas and oil and how much they, um, their, their profits are, what their expenses are within that report, there is a page, uh, dedicated to expenses of natural gas production based on Southwestern Energy, which at the time had about 70% of the state. s natural gas production. They
looked at, they investigated a three-year period, uh, 2014, 2015, and 2016. During that period of time, the the postproduction cost per MCF, which is 1000 cubic feet of gas. That's the, that's, it's sort of like a barrel of oil. That's how we gauge uh gas production varied only from 87 cents an MCF to 92 cents an MCF and that didn't include transportation costs, so there would have been
a little bit more on top of that. Uh, so the, uh, although the, the, the price of natural gas over those three periods changed from a low of $1.80 in 2016 to 386 in 2014. So even though there was more than 100% shift in the value of natural gas. The expenses. Hardly changed at all. A few cents. Fast forward to today, um, this,
this illustration that I've put together for you, um, it, I have just made, uh, some very simple math calculations based on three hypothetical prices, uh, the first at $1.80 in MCF, the second at $5 an MCF and the third at $10 in MCF. We could all only pray for $10 again. Um, it's happened before. It has been up as high as $9 in the last couple of years for a very brief period of time.
But you can see the dramatic impact that that has in terms of the relationship between the postproduction expenses and the value of the gas. So I have included here as expenses, um, roughly the average of what it is today for flywheel, which is about 99 cents, uh, for dehydrating, treating, and compression and about 10 cents for transportation for a total of $1.09. Again, not that different than what it was.
For Seo about 10 years ago, uh, but prices have gone up some since that time. So if you look at this uh at $1.80 that same $1.09 expense per MCF, uh, is equals 60.6% of the gross sales price, but at $5 an MCF it only equals 21.8% and at 10, only 10.9%, so the, the percentage uh drastically varies, but it's all based on
the price of that commodity, um, like, uh, Mr. Baker said. You know, if you're, if you're selling, uh, rice, for example, um, and it, and that the, the price of rice goes down 50% in a given year. You don't get to go back to your fertilizer supplier and your feed cellar or your seed seller and say, hey, I need a break on my expenses because the price has gone down. That's not how it works. You're, your expenses are relatively fixed no
matter what the sales price is. Now, um, If you would, if you would take a look at this, um, this example, so the, these are 4 very simple, um, pie charts and, and, uh, almost cartoon drawings, but I'm hope it will help me explain to you how this blending process, which is created solely by statute works. So in, in, in the box that has a number one below it, um, it
simply shows an example, um, in every natural gas drilling. unit in Arkansas, they're usually about 640 acres a section. You may, you frequently have multiple lessees companies that have taken oil and gas leases from different landowners within that 640 acre unit. The one that has taken the majority of those, uh, almost always becomes the operator of that unit. So in this example,
the operator owns 70% of the leases and then you have working interest owner A that owns 10% and working interest owner B that owns 20%. The operator, however, is the one party that does all the drilling that builds the pipeline to get the gas out of the unit to a uh compressor facility and ultimately to the pipeline. Uh, but each one of those leasehold owners are working interest owners is entitled to
sell their share of the gas. So even though operator owns 70% and it's physically producing all of the gas, working interest owner A, uh, can contract to sell its 10% share of that to whomever it wants to sell it to downstream somewhere in the old days, as Mr. Honey uh told you. before Act 272. Each one of these parties, the operator and the two working interest owners would be uh
responsible for selling their own gas and paying their own royalty owners. There was no blending. The operator had nothing to do with paying someone else's royalty owners. But uh The, the problem was in in a given month working on interest owner B might decide not to sell any gas at all, or the operator may have been a bully, and there were some back then, particularly a company called TXO, not XTO is a different one,
TXO Texas Oil and Gas, um, would had a reputation for being a bully and not letting other companies use its pipelines when it was advantageous and and that sort of thing. And so in a given month, the, um, the operators, uh, royalty owners would Maybe the operator sold all the gas in a given month. The other two didn't get to sell any. So at the coffee shop on Monday morning, um, Farmer Brown, who, who had a lease with the
operator, he was real chipper. Um, he got a lease that was twice as, uh, a royalty payment that was twice as big as usual, but the royalty owners from A and B were mad because they didn't get a check this month. And so that's what led to this idea that for the 1st 1/8 and in 1985, virtually every oil and gas lease in the Arcoma Basin was a 1/8 royalty lease and virtually every lease was net proceeds lease.
The those um higher royalty rates and more um negotiating power by landowners didn't really come in until later in time. And so it was perfectly logical that the legislature to fix this problem said, OK, for this 1st 1/8 at least, we're gonna make sure everybody's treated the same and so everybody has to take the 1st 1/8, if, if you look, go on down to number 2, you'll see that in a, in a month
where they're all selling gas, each one of them sells their own share. And then if you'll flip it over, um, you'll see, uh, my little cartoon of a bucket. each one of them is required by the statute to place 18, the 1st 1/8 of their proceeds, net proceeds into this bucket. The operators in charge of the bucket. And in the last slide, um, the operator is required then to pay out to every royalty owner in the unit, whether the operator
has a lease with them or not, doesn't matter. Equally their pro rata share of that blended bucket of 11 8 royalty. Now there are a lot of things that happened in that blending. Um, the, the operator might sell its gas for $3 an MCF working interest owner A might sell their gas for $2 an MCFor interest owner B might have gotten a really good contract and sold theirs for 4, in a
given month. But what everyone gets paid is the weighted average of all of that out of this blending process which was strictly, um, a product. of statute. So, um, there are winners and losers in that, um, the, the, the royalty owners who's working interest owner was the best at marketing. Um, they got hurt by that because they had to give over some of their good price to the other royalty owners, um,
and all of them had net proceeds taken, but it's a huge accounting process. So there are essentially two payments if they have a what we call an excess Roy. something over 18, the operator pays out the 1st 18, the other owners have to pay the excess, uh, whatever the difference is between 1/8 and what their lease says, and that's done in a separate payment from their own leaseholder.
Now let's, let's talk about um the bill itself. So again, the 1572305, I printed it out, um, from Westlaw. It's 11 pages, really tiny single space type, um, and this, this new bill 15 or 1656. Uh, seems relatively short and, and relatively easy to understand, but you can't really understand it unless you superimpose it on that long
complicated bill, and it does a lot of different things. Um, first of all, uh, I'm, I'm absolutely convinced that passing 1656, uh, the law would be unconstitutional as applied to existing leases. So that the law in Arkansas is, and I'm quoting from Arkansas Supreme Court cases. The law in effect at the time a contract is made forms a part of the contract as if it had been expressed in the contract.
In the court of appeals, put it another way, a statutory provision relating to the subject matter of a contract by operation of laws enters into and becomes part of the contract. So this entire complicated blending process in 1572305, including the net proceeds provision. Is part of every contract that was entered in oil and gas lease contract entered into after March of 1985. Um, that, that is just black letter law.
Both the US and the Arkansas Constitution have um constitutional provisions that uh prevent a legislature from passing a law to impair the obligation of contracts in the US Constitution Article 1, Section 10. I'm leaving out extraneous words. It says no state shall pass any law impairing the obligation of contracts. And in Arkansas Constitution Article 2, section 17. No law impairing the obligation of contracts shall ever be passed, so.
Whether it's good, bad, or indifferent, uh, the law that this legislature passed in 1985 as a part of every one of the existing natural gas contracts that are in existence today. We have 6 federal court decisions that say the industry is paying them exactly like the like the statute requires. If you change that obligation now by a subsequent act, you're going to, uh, change the
obligations under those existing contracts and as fast as we could get a case in federal court, they will strike it down, I promise you. Uh, that's, that's the first part, uh, again. you should just repeal the act. That at least would, would eliminate all of the administrative burdens of this
double paying over and paying out on behalf of another party. Um, I, I'll, I'm, I'm getting the signal to It does create an expensive, uh, and, and huge administrative burden, the idea of having to include an, uh, an itemized accounting, which is not defined uh right now, the, the royalty
statements are very detailed, but they are in categories. If, if they were to, my idea of an itemized accounting, I have to do that on my legal bills sometimes and attach invoices for charges and things of that nature. If you were to apply that. Concept to a royalty statement, it would be hundreds of pages and then dozens of other pages explaining how you get to the actual impact on that one person's statement from those expenses. It's not an easy task.
Representative Roger D. Lynch
Unverified
1:03:57
Um, the, the. We need to have time for questions. You ready for questions?
Representative Marcus E. Richmond
Unverified
1:04:07
I'm ready. Marcus Thank you, Mr. Chair. Uh, again, I heard the Suggestion
that if we're going to do anything, repeal the act, but why is it that amending the law. would interfere with the contract and therefore be unconstitutional, but repealing the law. would not Affect the contracts. Therefore, would not be unconstitutional.
Speaker 126
1:04:28
Can you? I'm not a lawyer. Can you help me out a little bit? It's a legitimate question, and it's a difficult one to answer actually. Uh, but Here's the reason is if you repealed the act, this entire blending process would be gone. There would be no place to, for the operator to deduct expenses from someone else's contract, um, the administrative burden would be gone. Um, there would
be no process left for that to happen. Um, whereas if you require them to blend it and then sort of unblend it and make up for Uh, for things that you don't think are right, um, you've, you've taken away any benefit of it and increased the, the, um, the
Speaker 128
1:05:14
impact on it from an expense standpoint. Follow up You reckon Again It seems to me that repealing The law
Representative Marcus E. Richmond
Unverified
1:05:31
Still has an impact upon the existing contract. Would it not? It would. So therefore, if amending the law is unconstitutional because the impact on the contract, how is repealing the law acceptable? Well, I'm
Speaker 130
1:05:46
not advocating that we repeal it. Uh, but if
Speaker 126
1:05:51
you wanted to get, get rid of this process, that would be the way to do it. Uh, then there would be no justification for the net
deductions anymore. All right, thank you, sir. Thank you, Mr. Chair. Representative Brown.
Speaker 132
1:06:07
Thank you, Mr. Chair. And before I ask my question, uh, I'm hearing a lot
Speaker 133
1:06:12
of chatter and chuckles and comments from the audience and perhaps they don't realize that it echoes up here and I'm having a lot of trouble hearing the presenter, so I don't know, maybe the chair could ask the audience to please keep the commentary to a minimum. Y'all hear that? I appreciate you cooperate. Thank you. U. uh, Mr. Perkins on this court of appeals case regarding the, uh,
the integrated owners. Um My understanding is the oil and gas commission had traditionally allowed as a deduction. From the 18 taxes assessments and third-party expense. Can you explain to me, obviously tax is a self-explanatory, but when they use the term assessments and third party expenses, like what exactly are we talking about there?
Speaker 126
1:06:53
What is included in that they're referring to as assessments, those are conservation fees, uh, that are charged by the oil and gas commission, uh, that they get a
small fee on all natural gas production that helps fund the oil and gas commission. The true third party expenses. to my knowledge that the only thing they've ever mentioned and that I think their understanding is that those are third party transportation charges. So you, you're selling the gas to someone, but then to get it to that purchaser, it has to go through an interstate pipeline and you get charged for that transportation by a third party unaffiliated, uh, with the operator or seller.
follow up, Mr. Chair. Thank you, Mr. Chair, uh, Mr. Perkins,
Speaker 133
1:07:40
if the bill had language in it that said something effective, like, for example, for leases entered into on and after January 1st, 26. Would that resolve the constitutional issues that you brought up, it would resolve the constitutional issues. Thank you, Mr. Burke. Thank you, Mr. Chair. All right, committee, any other questions?
Representative Matthew J. Shepherd
Unverified
1:08:06
Thank you, Mr. Chairman. Uh, Mr. Perkins, going back to the question I asked earlier, uh, with regard to this bill, I know the intent is that it only applies to gas, but, uh. Would, would the provisions of this aside from the royalty provisions, some of the reporting requirements and some of the other definitions, um, with those potentially apply to the oil industry as well. Um, have you taken a look at that? I, I have
Speaker 126
1:08:32
taken a look at it, uh, Representative Shepherd, uh,
I do think that at least some people would argue that it does. And it's a tossup, given the language as it is right now, whether it would be restricted to natural gas. production units. Thank you Committing any other questions? Uh, thank you, sir. Thank you, Mr. Chair. I think
Representative Roger D. Lynch
Unverified
1:08:58
at this time Representative Beck, I'd like to bring the county judges forward, please. Remember y'all have 3 minutes.
So y'all probably need to pick a spokesman. need to introduce yourself for the record, please.
Jimmy Hart
Unverified
1:09:33
My name is Jimmy Hart. I'm the Conway County Judge. I'm
Speaker 150
1:09:40
Eric Crosby. I'm Claiborne County Judge. I'm Dale James. I'm the Van Buren County Judge. And I'm Lisa Brown, the White County
Speaker 152
1:09:46
judge. All right. One of you is recognized to proceed.
Speaker 153
1:09:53
OK, I'll start off. I'm Dale James Van Buren County Judge. Uh, we hear a lot of talk about changing contracts. I'd like to point out the bill on page 2 lines 26 through 32, expressly discussed going back and honoring those original contracts. I'd also like to point out to these, to you as the committee, and first of all, thank you for letting us be able to be here and giving us your time.
Regardless of any confusion or any noise that's going to be presented today and you have a lot to work through as a committee. I understand that. What was not unconstitutional from 1985 to 2019 should not be unconstitutional to go back to today. Uh Our people in our counties are telling us with a very loud voice. This is our gas. This should be a very good
cooperative effort between the, the owners of the gas and the people who can extract, produce and sell that gas. The royalties that are being paid are very, very minimal, so minimal to the point you need to understand that there are several months that most of our royalty owners do not receive a check. They do not get the benefit of reusing that land that has that pad on it. They can't run cattle. They, it's tied up.
But now the royalties are so minimal that there. At in some regards insulting. All we're asking is for transparency, accountability and, and fairness in this bill, it provides a very good Uh, articulate synopsis of that. All right. Next. You've got 3 minutes.
Speaker 156
1:12:01
Judge Hart, I'm gonna echo what Judge James basically said we call it fair and equitable. We talk about transparency. Uh You know, I'm gonna bring it up. I'm gonna flash back to this. How many or can I, Mr. Chairman, am I allowed to do this? I mean, I mean royalty owners here today. OK. And I'm assuming uh the other group is here. I actually, I actually are employees. You're looking at true owners with a property interests and royalties. I want to make sure that point's made. Uh
You know it's an example I'm, I'm like some of these other guys. I've got an 88 year old mother. She got a little lease and uh of course, you know, and this is what I continue to come back to. How in the world do you take a bona fide contract recorded in a circuit clerk's office in every county of this state back in the day when the gas companies come in and lease land for $25 an acre up to $2500 an acre, how are those things all of a sudden or one sided lease or a contract
that's good for the, uh, operator or the producer and not good for the royalty owner. That'd be my first question I'd ask when I look at this thing I look at this check uh. Uh, gathering fuel, those are some of the cost on this thing and uh my question is, Who's the beneficiary of all that. What's your dealing with is a. There's already a $1 taken off
these gas leases when these people get these royalty checks, dollar comes right off the top. But when you look at what makes that up, the beneficiary of the, of the fuel cost, the gaing cost. is a subsidiary of the very producers we're talking about. So I mean that's got to be taken into consideration and of course, and, uh, you know, these people just want to be the royalty owners of the Fayetteville Shell. Want to be treated fairly. That's all they're asking for, you know, because these folks out here, these guys out here,
ladies, they work for these people, they sure do. But it comes down to one thing and they're good people, by the way, OK? But these folks right here, they're property
Speaker 159
1:14:24
rights owners, and I think you need to take that into consideration. N OK. That, uh, that's all we're not asking for anything that's not
duly deserved. We're just asking for transparency and the proof of where all these deductions are actually going. And I'll yield my time back. Ma'am. I too am here
Speaker 151
1:14:48
in support of the bill, I have several landowners
Speaker 152
1:14:53
in Wyatt County that are a royalty owners and they Or like the rest of us, we don't understand why we can't get the transparency. And that's all we're asking for if everything's the way it's
supposed to be, and we can see that, then we can accept that, but we would like to be able to make that determination. And I do understand that some of that is burdensome. But it's also a burdensome to us landowners that, as Judge James said, you know, we don't get to use our property where the gas pad is located. And I would just respectfully ask you to take this into consideration and support this bill if you can. Thank you.
Speaker 153
1:15:41
I'd like to close by saying that there's not one royalty owner or one county judge here today that expects any more than any royalty owner has agreed to within the release, but every penny that is theirs should be theirs and should go to them and should circulate in the economy within the Fayetteville Shell and within the state of Arkansas. It doesn't need to all be funneled to Oklahoma City. Thank you. Committee, any questions?
Representative Roger D. Lynch
Unverified
1:16:13
Saying no, thank you. Thank you
So if I call one of your names it's because we didn't have you grouped on my sheet, OK? Dale Jones. James Dale James. That was you, OK. Nathan Huffman. Nathan Hutmaster. Not here. So
Unknown speaker
1:16:51
Steve Smith. Uh, OK, we'll bring him up. Huffmaster. OK. All right. Now when I say your name, I need
Speaker 171
1:17:24
to know if you're for or against. Are you for or against?
Steve Smith
Unverified
1:17:32
Steve Smith for. Uh, thank you, gentlemen and Mr. Chairman, uh, my name is Steve Smith. I'm president of the Royalty Owners Association of the Fayetteville Shell. Um Representing thousands of royalty property owners across, across Arkansas. Uh, royalty owners for the Fayetteville Shell is a recently organized association. Um In Of royalty owners in January and
February, uh, we held 5 town hall meetings, uh, attended by approximately 1500, uh, royalty owners to hear their concerns and stories and start our association. Most of our folks could not be here today, uh, unlike our opponents employees who have been paid to be here, they are home working, feeding the cows, or working at their, at their job. Until 2019, owners of royalty property in Fayetteville Shell play were paid according to the terms of the contract signed when they leased their minerals.
In 2019, a new operator flywheel Energy bought out Southwestern Energy, the company that first began leasing minerals and producing natural gas in the Fayetteville shale. Flywheel soon began began charging deductions against royalties contrary to the terms of many leases. Flywheel claimed that they believed that this was legal using a novel interpretation and application of Arkansas law that had not been applied by any previous operator in Arkansas and which is not consistent with industry practice, including in their home state of Oklahoma.
I guess you could say they uh jumped the line consistent with the sooner nickname. This practice has gained flywheel millions of dollars for their out of state owner at the expense of thousands of owners of royalty property. They've been challenged in Arkansas courts and lost to the Arkansas Oil and Gas Commission, which defended leases assigned to the property owners who didn't, didn't enter into lease agreements before their section was integrated. Royalty property owners who signed leases was substantially identical terms in the same section are still being charged the deductions that
continue to enrich flywheel. Let me say that again, owners who. chose not to lease directly who were integrated by the oil and gas commission are being paid correctly while neighbors in the same section who chose to lease directly in many cases paying the lawyers to review their lease or not. An attempt at a class action lawsuit to require flywheel to honor all the leases that they purchased failed when a single federal judge from New Jersey decided that his judgment was superior to the Arkansas Court of Appeals in applying Arkansas law. It appears that flywheels
adopted a business model is based on the fact that individual property royalty owners, unlike the Arkansas Oil and Gas Commission do not have the resources and time and treasure to take them on in state court, and they are shielded from a class action that would allow individual royalty owners to Combine their claims and sue and win under Arkansas law. You can judge for yourselves if this ethically challenged business model is appropriate in Arkansas where most of us believe that a deal is a deal. After employing the model for a while, they bought out the remaining two
operators in the play, XTOXon in 2022 and Meritt Energy in 2025. They are royalty, they are doing the same thing to the Exxon royalty owners and we'll soon do the same to royalty owners in the territory now operated by Mary. Yeah. Your 30 minutes are up. You
Representative Roger D. Lynch
Unverified
1:20:52
have a closing comment? pardon. Would you like to have do your closing comments and
Steve Smith
Unverified
1:21:00
we'll ask questions, I'm, I'm done, um. Merit has been in this area for several years, and today, this
day have not resorted to flywheels tactics. This bill will fix the language in Arkansas law that flywheel and its sister companies are manipulating to their advantage to rationalize short-changing thousands of Arkansas, Arkansans by millions of dollars, dollars. It is modeled after law in their home state of Oklahoma and is acceptable to Arkansas operators with pay royalties according to the terms of their leases. Committee, any questions? Any questions, Representative Cooper? Yes, sir.
Representative Roger D. Lynch
Unverified
1:21:29
Thank you for being here. Thank you for your testimony. I think it's
Representative Cameron Cooper
Unverified
1:21:38
important for the committee to hear again what you mentioned on the integrated leaseholders being in a better position than those leaseholders who negotiated their contracts in good faith. Could you, could you repeat what you said on that point?
Steve Smith
Unverified
1:21:53
Integrated leaseholders are paid according to their lease. The people that signed leases in the
Representative Cameron Cooper
Unverified
1:22:09
same section are not paid according to their lease. You. And that was a result of the, the court case that was filed on behalf of those leaseholders by the oil and gas commission.
Speaker 171
1:22:20
Is that correct? And was upheld by the Arkansas Court of Appeals. Which was ignored by the federal judge. Thank you.
Speaker 42
1:22:25
All right. Commit, any other questions? Thank you, sir. Randy Zu
Representative Roger D. Lynch
Unverified
1:22:49
Making against I, I wish it would
Speaker 186
1:22:59
be because you helped me. Mr. Chairman, members of the committee, thank you very much. I'm Randy Zook with the state Chamber of Commerce. I appreciate the opportunity to speak. I will be brief and give you change on your 3 minutes. Um, a lot of the conversation seems to be focused on the downside of, of the Impact of market forces and in
natural resources like natural gas. I want to point out though, some, some, just some data that
Speaker 185
1:23:25
I got from the flywheel, uh, people about the economic impact of that company and that play, the Fayetteville play on Arkansas. In 2024, severance tax was
Speaker 186
1:23:34
paid in the amount of $9 million. Frankly, a big disappointment from those of us who were involved back when the federal play uh came about and we were setting the, the, the severance tax, but I'll get to the reason
for it in just a minute. The conservation tax is $2.3 million. The Advilorum tax they paid last year was 15.2 million. And the sales and use tax was almost 850,000 total taxes paid by the company in 2024. In the play, $27,414,000 royalty payments $56,800,000. Salaries and wages 22 million
196,000. Total royal payroll, royalties and tax impact of the company on the state of Arkansas's economy last year, $106.4 million. With a gas price, which was a year, a year ago today, the gas, the natural gas price was $2 per MCF. Today,
Speaker 185
1:24:40
it's 4:21. It's more than doubled in the last 12 months. So all of these things that are driven by price are gonna go up dramatically as
Speaker 186
1:24:53
these higher prices, uh, work their way through the production system and the, and the accounting systems. You read every day how much the, the demand for natural gas in the United States is
Speaker 185
1:25:05
going to increase over the next. Foreseeable future for electrical generation purposes, we will probably double the amount of gas we consume within the next 5, I wouldn't be surprised if we doubled it within the next 5, but it will certainly double within the next 10 years. Uh, natural gas is being sold on the open market through LNG
liquefied natural gas ports and uh shipping points up and down the Gulf Coast at record levels, we are becoming, we are now the, the world's largest supplier of natural gas. That market has nowhere to go but up and the price has nowhere to go, but uh. I think if Arkansas sets itself apart from the rest of the natural gas producing states. With this uh negative approach to these royalty payments, uh, we will, we will
Take a step backwards in the, the production efforts and the development efforts of a precious natural resource that we need to be exporting to its fullest possible extent. That's the basis of my comments. It really is about the economic development impact, and it's pretty clear to see that the price is the driver of this conversation, any questions? Representative Jean. Thank you, Mr. Chairman.
Representative Lane Jean
Unverified
1:26:27
And really, I may need to ask somebody in the industry. Since the height and I have disposal well that's off my property. When, when all these wells were being drilled and it was hot in the fatal shell. Many people don't know that the disposal of salt water came to South Arkansas and trucks would roll in by my farm night and day. They're not rolling anymore, right? Um, and you may not know this, and I may need to ask somebody
what is the volume of the MCF? How is that maintained? Has it dropped? Uh, and you probably don't know that. I probably need to ask somebody in
Speaker 191
1:27:08
I don't, I didn't even play that role. I didn't even play Billy Bob Thornton's role on TV, so I, I'm not a land
Speaker 184
1:27:14
man and I don't have a Jerry Jones Jerry Jones, certainly not. OK, uh. My hunch is those whales. Have a half life and they always do and they have to be re-drilled
Speaker 195
1:27:24
and reworked. OK, I, I just didn't know if you'd had that information.
Thank you. All right. Representative Steele. Thank
Speaker 198
1:27:34
you, Mr. Chair. Uh, Randy, tell me just in a few seconds, why are you
Speaker 186
1:27:42
to see Arkansas take a step backwards and, and the, the uh promotion and development of an incredibly favorable set of circumstances and our overall economic development outlook. We are a very attractive state right now for a whole host of reasons. This is one of them. This is one of the reasons that
uh you've got the 30 Senate Bill 307 in front of you. This is one of the opportunities, this is, uh, This would just be a major step backwards in, in the development of a, a very valuable resource, uh, that looks a lot like
Speaker 185
1:28:15
lithium. 8 or 9 years ago. Thank you, sir. Any other
Representative Roger D. Lynch
Unverified
1:28:23
questions? Not thank you, Brandon. Thank you. I appreciate it. All right. Speaking far.
Shelton, Everett Shelton. Speaking far The be. Would you, yes, would you come to the table, please, ma'am,
if you would introduce yourself for the committee.
I think this might get on. It's,
Speaker 204
1:29:07
it's own and you have 3 minutes. I'm Pam Shelton. I live in Van Buren County. And we started negotiating contracts back in 2005. Those contracts are now being violated. I question why the oil and gas companies would commit so much time and so much money. To negotiate contracts with the landowners, if they were no good.
And I worked with an attorney in developing our contract, somebody that people who are familiar with the history of oil and gas in the state of Arkansas are probably familiar with. It's Lonnie Turner. And Lonnie Turner knew the, the oil and gas loss as well as anyone, he wrote the original manual on negotiating lending. Contracts. Now they've changed it. I negotiated contracts for Levi Strauss. The UAW with the Teamsters, General Motors, and on and on and on. National contracts.
If a company next to us negotiated a contract with the UAW for one amount of pay. And we had negotiate a different one. You don't do DEI and make it equitable for all of them. You stick to the contract that you negotiated and this is not happening. If the if the law was established in 1985, then the oil and gas companies should have been negotiating with us. In good faith to apply to whatever maybe was negotiated in
1985. Is there anything in that law that says you cannot negotiate for more. I got a 38 contract. Other people got an 8th. Now they're taking me back and saying that I'm gonna have to pay, you get paid an 8th. And it's at the whalehead. It was no cost involved. But now you want to make it equitable for everyone. So it's gonna be DER. Is that what we're doing? We're taking it back to 1985, what we
negotiated in 2005, 2006, 2007. 2008. We have property in 3 different sections. We have 3 different contracts. So you're all gonna take it back to the one that we negotiated a 15 acres that we weren't very wise about what we were doing. And then we got smart, fool us once, shame on you fool us twice, shame on us. Since I've done some negotiation 40/40 year period of time with major companies on international level, much larger than what we're talking about with 5
counties that we have here. What you have done is you have violated legal contracts. And try to make it equitable. The only one that makes the who makes money out of this and comes out better is flywheel now because our contracts were honored all the way up until the time that flywheel took it over. OK. Ma'am, you're ready for questions? Ready. Maybe
Speaker 138
1:32:11
anyone have a question? Thank you. Got one.
Ma'am, got one. If I, I think
Representative Lane Jean
Unverified
1:32:23
you may have misspoke. Did you get a 3/16 or 3/8. 38. It was nearly 20%. Well
Representative Lane Jean
Unverified
1:32:39
contract. Well, I need to get you started to negotiate for me. Well, do you
Speaker 202
1:32:44
know Lonnie Turner? Did you know Lonnie? He's pretty sharp dude.
And he worked real close with me on it. We, we went back and forth negotiating what our contract would be, not just what he thought it should be. We went back and forth, we wore our fax machines out and then I went to Ozark and I sit there for a half a day talking with Lonnie. Thank you, ma'am. And the oil gas companies when they came up and they said what this is what we'll do and I said, this is what I'll do. And they said, I'm crazy. And they said you can get all this money doing this and I said, sir, if I was interested in making money, I wouldn't have moved back to my home state of
Representative Roger D. Lynch
Unverified
1:33:23
Arkansas. Thank you. Yeah, it is. Uh, Mike, yeah. Mark Callan Mike Callan speaking
against. Good morning, committee. Thank you for the opportunity to speak.
Mike Callan
Unverified
1:33:44
My name is Mike Callan. Uh, I'm an employee of Stevens Production Company. Uh, we used to own and operate about 1000
Speaker 219
1:33:55
wells in the Arcoma Basin, uh, full disclosure, we no longer do, uh, but we still own royalties and our own royalties personally and again full disclosure, I am a lawyer, but I gave up practicing the black art about 16 years ago, so, uh, that what I have to say will be very brief, um, you know. We hear a lot about We want the oil and gas companies to follow the contracts. The plain and simple way to do that is to eliminate the fix of not following the
contracts that the legislature in its infinite wisdom back then in, in 1985, passed Act 272. You get rid of Act 272, there's nothing left to follow, but the plain wording of the contracts,
Mike Callan
Unverified
1:34:38
uh, what we're gonna see if you continue to increase
Speaker 219
1:34:42
the burdens on the wells either. through administrative cost or whatever the wells will be plugged sooner rather than later. That's why we got out of the Arcomba Basin, to be very
frank with you, we sold to a company that was better situated to handle marginal wells, which is what we have and this bill, uh, beyond being, in my opinion, unconstitutional, will facilitate the, uh, expedited, uh, plugging of a a lot of marginal natural gas wells, particularly in the Arcoma Basin. And that that's all I have today, but, and thank you for the opportunity and I'm happy to answer any questions. Committee, any questions?
Speaker 142
1:35:26
Matthew. Thank you, Mr. Chairman. You brought up a, uh, the
Representative Matthew J. Shepherd
Unverified
1:35:33
point that Oil and gas companies have to make decisions on what wells are gonna produce and that, that ultimately they can plug and abandoned wells, um. Can, can you describe, uh, really for the benefit of the committee, what does that look like? What happens to the leases at the,
at that point, um, if a well is plugged and abandoned.
Speaker 219
1:36:00
and abandoned if there is not another well
Mike Callan
Unverified
1:36:04
in the section holding the production.
Representative Matthew J. Shepherd
Unverified
1:36:09
it follow up. Oh, yes. So, um, if, if, uh, To that point. If there's not another well holding it. I mean, you could have, you could have. Reduced production. You could plug an abandoned wells, operate, uh, a, a smaller
number of wells but still hold the leases, which ultimately would, would result in, uh, reduced royalties to everybody. That, that is
Speaker 219
1:36:37
correct and that's what we saw, uh, as Wells became marginal, meaning that the income from them was getting to the point it wasn't going to cover the expenses you have to make a business decision at that point in time to plug and abandon those wells, thus reducing the production, eliminating the royalty payments, and reducing severance taxes.
Representative Marcus E. Richmond
Unverified
1:36:58
OK, thank you. Representative Richmond. Thank you, Mr. Chair. uh. I would
like to just get your perspective on this as well since you said the same thing's been said before, and I'm trying to understand how is it possible to violate a contract if you amend the law, but it's not violating the contract if you repeal the law. I, you know, in my opinion on
Speaker 227
1:37:24
that, it it it it's a question, you know, it could be
Speaker 219
1:37:30
interpreted as, as, as being unconstitutional to repeal the law. However, what it does is it goes back to and puts everybody back in the position they were in following the specific wording of their oil and gas leases that were entered into prior to the enactment of the 1985 law. Thank you, sir. Thank you, Mr. Chair. Representative Wayne, thank you, Mr.
Representative Carlton Wing
Unverified
1:37:54
Chair. When we talk about what you said is that uh if we, if we pass
this, it's gonna jeopardize the industry to the point that they're gonna have to start plugging wells and that would have a deleterious effect on the entire industry. I did I summarize that fairly
Mike Callan
Unverified
1:38:12
well. Yes, not so much a deleterious effect on the industry which it would have, but on individual wells as you gauge the production
Representative Carlton Wing
Unverified
1:38:19
from those wells. OK, so, and so I guess then my question would be is, I keep hearing one company mentioned are the Other companies who are not charging the same types of, of
fees or that we're hearing about, are they profitable? I
Speaker 219
1:38:36
cannot speak to other companies. I, I can tell you what Steven's production company did up until November of 2021, which when we exited the Arcoma Basin. OK. Thank you, sir. All right. Thank you, sir. Thank you.
Representative Roger D. Lynch
Unverified
1:39:05
Donna Hallam speaking for. Yes, it's Donna Hallam here. Miss Hallam, if you would introduce yourself for the record, and then you have 3 minutes. Thank you.
Donna Hallam
Unverified
1:39:33
Mhm. My name is Donna Hallam. I'm a royalty owner in the Fayetteville Shell area in
Speaker 239
1:39:38
Conway County. I'm here in support of HB 1656. I'm a little bit different than a lot of people in here. I get paid 20% and a gross. Royalty every month from a different producer. The only deductions I have taken out are for severance tax. My lease, which was, it's been since the early 2000s. I've never had a problem.
And I get paid exactly what my lease states. I do have a small, very small amount of land with flywheel. I haven't received a check in. A year. I receive a complete statement. From the producer. Every deduction, every well is listed separately. Everything is detailed. I don't feel like I'm getting
cheated or anything because I can see exactly. I think a lot of the problem with flywheel and some of the others is that they don't, they give you no information. You don't know what those deductions are. You don't know what they've spent the money on. We understand as royalty owners gas prices. We probably most everybody in here watches the prices on a daily, or at least a weekly basis. So we understand
that gas prices go up and down, and our checks will reflect that. However, The suspicion that by not having the transparency. Well, you create suspicion, you think something's going on. March 6, 1985. Act 272. That was 40 years ago. I think I can understand they probably didn't have computers a lot. Now we have computers. I
don't understand what the big deal is to pay per lease. You put it in a computer program, it spits out what you're supposed to have, not based on what everybody else is doing. I would ask that you support. The people in the Fayetteville Shell. Support the people that you represent. And support HB 1656.
Representative Roger D. Lynch
Unverified
1:42:16
Thank you. Committee, any questions? Saying no, thank you, man. Mr. Griffin
Speaker 203
1:42:33
H. Griffin speaking again. If you would introduce yourself to the committee for the record,
Representative Roger D. Lynch
Unverified
1:42:47
and you have 3 minutes. Thank you.
Speaker 242
1:42:50
Uh, my name is Griffin Hannah with Hanna Oil and Gas Company. We're based out in Fort Smith, Arkansas. We, uh,
Speaker 243
1:42:56
operate around 350 gas wells, uh, from Sebastian County all the way to Pope County in Arkansas. Uh, we are in opposition to this bill. Um There's Numerous reasons why were against it, but the one that is most notable, Mr. Callan mentioned, uh, just, you'd be accelerating the uh plugging time on most of these wells, uh,
our company operates a majority of uh marginal wells, unfortunately, and that'd be wells that make about 25 MCF a day or less, the administrative burden of having to do an itemized breakdown would be costly. Uh, it would require, I was, I talked to our accounting department, they said it would take double the staff, uh, depending on how this is written. There's a lot of ambiguous language of how this amendment has been drafted and the concerning thing is if we have to itemize every breakdown, it would be a very
costly to administer that. It require more direction from our pumpers uh to talk with the accountants of how everything is broken down. It would be, it would take a lot of effort and time. Um, I think Mr. Callan did a great job, uh, just explaining the,
Speaker 242
1:44:04
the cons to it, but if anyone has any questions, be happy to ask. Her answer. Representative Cozart. So
Representative Bruce Cozart
Unverified
1:44:19
You're saying it's hard to break that down. Um, You know what it is and you know how it is, so how's
Speaker 243
1:44:30
that hard to report that. So there's over, I'd say, uh, 10,000 items on maybe an area uh charge expense and when it's shown on a jib or a royalty statement just that breakdown is more generalized, having to break that detail down could be, uh, as some have mentioned, hundreds of pages of detail, our software, the way
it's set up as rudimentary as it sounds, it is set up to. to capture all that as one item as opposed to it being broken down. It would require more software. It would require just more paper. Uh, it would require just more communication between the field to the office. OK, so I'm, I'm pretty ignorant
Representative Bruce Cozart
Unverified
1:45:06
on well, so you have to help me here. So are all these wells grouped together and when you're doing all of this, so that's mean you'd have to break every one of them out of that, uh, About is that what I'm hearing?
Speaker 243
1:45:22
So I'm not an accountant, but I'll tell you that there are instances where charges are grouped together and there's instances where they are not. And the concern is that this is an itemized breakdown of every charge. It could be extremely cumbersome of how it is broken out and what is shown to the royalty owners. I'm all for transparency, but I believe the amount of detail that is shown is adequate based on what the leases do say. OK, I, you know, I'm a
Representative Bruce Cozart
Unverified
1:45:48
building contractor and I have to itemize everything out when I when I
turned a bill into someone, I show every item. Now, that is one single source that's doing that so I, I see if you group everything together I understand breaking things apart does get more complicated, but if it was a single source well or something like that, I could see that that would be easy to do when it's 350 wells,
Speaker 243
1:46:10
and we're talking about tens of thousands of royalty owners in detail that's broken out, it becomes a lot more burdensome. Administratively, that's what I needed the answer for. Thank you. All right. Representative Richmond.
Representative Marcus E. Richmond
Unverified
1:46:27
Thank you, Mr. Chair, on you made a statement that, uh, Fulfilling some of these requests that the your customers I don't know how to describe them, but the individuals, the royalty owners have drive up the cost and that would expedite the the plugging of some of these wells because it just wouldn't be profitable. On this now As I understand it, I would think that your company did some analysis before they purchased this, the shell. Over Fayetteville Shell, is that correct? Not Fayetteville Shale,
we're the Arcoma Basin. OK, so which company are you with? Hanna Oil and Gas Company. All right. Do you have somebody that, that speaks to the customers or, or the royalty owners that answers questions for them. Yes, I'm one of them, OK. Alright, well, I thought you were somebody else, so I apologize for bringing this up, but anyway, I don't think it would cost that much to put some ink on paper, but, you know, it's your business. Representative Cooper.
Representative Cameron Cooper
Unverified
1:47:33
You mentioned thousands of pages. Uh, are you exaggerating? Are there literally thousands of fees that You're extracting From these royalty payments to make sense to me, sure, I understand that, uh, talking
Speaker 243
1:47:45
to one of our lead, uh, accountants in our department, they said they're over 10,000 items just on the area expense that are coded from our software system, having to break that down to a per well of I, I, I won't be able to go into
the specifics of it, but to be able to have a pumper say that well, uh, this would be coded specifically to this well as opposed to it being uh expense to 2 or 3 wells. We just, we don't have that technology or that software to have it broken down to that level without the pumper having to call that accountant and say it needs to be broken down at that level. And if we have to multiply that times 350 wells. It, it, it can become very cumbersome. Uh, uh, maybe not your company,
Representative Cameron Cooper
Unverified
1:48:36
but I, I know that some other producers have access to AI. So I think that
Speaker 197
1:48:41
would probably take care of that issue.
Representative Lane Jean
Unverified
1:48:46
All right. Representative Jane. Thank you, Mr. Chairman. You operate the Arcoa Basin, is that what it is? How
Representative Lane Jean
Unverified
1:48:56
350 in Arkansas, uh, how many of those do you consider marginal wells. Unfortunately, probably
Speaker 254
1:49:01
about, um, I'd say. Probably 3.
Do y'all pay anything gross or y'all pay
Speaker 243
1:49:10
a net on the middle. So mature basin Arcoma basin, most of our production occurred prior to 1985 and uh the wells that we have drilled subsequent to that, uh, overwhelming majority would be net proceeds. So the effect of this being kind of the gross first net side doesn't affect uh us handle oil and gas as much. I'm more concerned about the windfall of additional uh just itemized deducts and just what
Representative Lane Jean
Unverified
1:49:38
does to our company. So your, your problem is with,
with the additional, uh, paperwork and, and record keeping and all that and employees and communication and people do y'all over there? 52. OK. Uh, do you think this legislation will affect y'all that you may lose employees? I think it will lead to us
Speaker 243
1:49:56
needing to hire more employees and we can't afford that today. And will any marginal wells being
Representative Lane Jean
Unverified
1:50:02
Japer or being plugged in and abandoned. If you increase the expense, yes, it will
Speaker 243
1:50:10
accelerate the plugging process. Uh, we plug about 8 to 10 wells a year, uh, but we do try and acquire wells as well, um, but yeah, by this measure and how this bill is written, it would lead to wells getting plugged quicker. Uh, it would just, it would have a negative effect to us as an operator. OK. Thank you,
Representative Carlton Wing
Unverified
1:50:30
Mr. Chairman. Representative Wayne. Thank you, Mr. Chair. Uh, you mentioned the, uh, The data to uh that
there's a lot of data points for you to, uh, receive to be able to send out in terms of a receipt, for
instance, and I get that 10,000, that would be, uh, that would be quite cumbersome to even read, but you have the access to be able to use that data to collect the fees. Is that correct? That would be correct. And so is there a way to at least provide greater detail. Dan is currently being provided so that it can alleviate the concerns of the, uh, royalty owners here who are just saying they, they don't know, see like in government, we couldn't operate like that. And we wouldn't want to either. We want
to be very transparent, but with this, you could see how it could create a kind of a shroud of mystery in that it's just a generalized statement that doesn't have any backing to it and so the company, you obviously know because you're charging based on that, the people who are paying would like to see. And, and at least a
Speaker 242
1:51:32
similar fashion. Our, our software, it's not uh it's not capable of breaking everything down the way
Speaker 243
1:51:36
that uh I believe this bill is asking it to be broken down to only because it requires a
pumper and an actual accountant to be discussing back and forth how things would be coded. Again, I'm not an accountant, so I can't go into the very specific deducts of which one would fall in that camp
Speaker 242
1:51:55
of needing that discussion, but it's my understanding it'd be very difficult for an AI-driven software to do, what would, was asked there or just the software that we currently have in place.
Representative Roger D. Lynch
Unverified
1:52:29
Y'all saw me speaking to these two gentlemen right here. That's because they know more than I do.
Representative Cameron Cooper
Unverified
1:52:45
Yeah right. Yeah Representative Cooper. Uh, Mr. Chair, I'd like to make a motion, um, Since the attorney, Mr. Perkins had about 10
minutes to speak against the bill. I'd like to make a motion that an attorney for the bill be allowed to speak for 10 minutes? Uh, it's a proper motion could be you've heard the motion all
Representative Roger D. Lynch
Unverified
1:53:01
in favor say aye, opposed. Mr. Anthony. Nathan Morgan. Sorry you introduce yourself for the committee. You have 10 minutes. Yes sir. Uh Chairman, committee, my name's
Speaker 268
1:53:22
Nathan Morgan. I'm an attorney in Clinton, Arkansas, um, which is in the heart of the Fayetteville Shield. I practice oil and gas law, uh, prior to
moving to Clinton. I worked for Chesapeake Energy, which was a producer in the Fayetteville Shell, so I've kind of, kind of been on both sides. There is some handouts that I have given you or, or Mr. Beck prepared. Are those available? Not,
Speaker 269
1:53:41
I don't like those, not those. And, and if I may approach, I believe I need a copy of the
Speaker 268
1:53:52
lease so I can walk through it with them. That's fine.
If, if just not to to waste uh the committee's time. I'm gonna go ahead and start talking. Um, so you have in front of you 3, pieces of paper. One of them is an actual oil and gas lease. It's what we call a gross proceeds lease. And then there is two royalty statements which are royalty statements from gross proceeds leases. So just, just for clarification, I, I don't believe anybody who has opposed the bill, um, disagrees that they are, uh, the, the 5 wheel energy specifically. is not following the terms of
the lease, uh, they're reading of, uh, Of the law, specifically 1572305 says that they disregard the lease on the 1st 18, the 1st 12.5%., I think everybody's in agreement that, that that's their stance. So I think it's helpful, helpful for, for the committee. I, I know some of you, uh, especially the ones from South Arkansas are familiar with royalty statements, understand how it's paid. Some of you who are not in oil and gas producing counties, it's kind of foreign. So I wanted to
show you an example of what this looks like in the real world. Um, first off, if we can and and due to time constraints, I'm going to go over this faster than I, ideally would like to, but it, I think it's just the, the time constraint. So if we look at this lease, so if everybody will, will look at the oil and gas lease, we'll start there. The oil and gas lease as you can see is negotiated on the 15th day of August 2006. So that is after, um, The, the.
Uh, Act 272 of 1985 was enacted. And if you look at this oil and gas lease, uh, the, the part that, that matters is essentially that this is a, this is a gas lease. It's in the Fayetteville Shale, so, so it's not oil, but if you look at page 5, there's exhibit A, which is an addendum, OK? And it's what I would, uh, ask that you look at is Uh Paragraph 2 B and paragraph. D
So paragraph 2B says to pay less or for gas or what whatsoever nature of kind with all its constitutes produced and sold or used off the lease premises or using the manufacturing of products there from 20% of the gross proceeds received by lessee for the gas sold, use off the premises or in the manufacturing of products therefrom, but in no event, more than 20% of the a amount received by lessee said payments to be made monthly and then D, it sets out what expenses are Cloud
So an in number D it says Lee shall not deduct any costs or expenses from such gross proceeds except less source pro rata share of any severance taxes that may become payable out of lesser share of gross production, OK? So this is a lease that was negotiated in good faith between a landowner in Van Buren County and oil and gas company after this act it was done, OK? So if we look at the royalty statements, um, the actual, there's two royalty statements. One of them is a 10-page royalty
statement, and one of them is a 3-page royalty statement. And if we look at the royalty statements, the 10-page royalty statement is actually the royalty statement that correlates directly with, for this lease. Um, It's a little bit more complicated. It's 10 pages, so I'm gonna use another royalty statement just because it's a lot simpler. There's a lot less wells, and I think it'll be for time restraints, I think it'll be easier for the committee to understand. So if we look at the, the royalty statement that is 3 pages. Um,
this rolls these royalty statement starts with the Lion 8H136, and it's a White County well. Does everybody, does everybody see this royalty statement?
Speaker 275
1:58:43
OK. So if we're looking at interest types we see EXR and RI. OK? So, and then next to that, tax or deduction code. So we have CVSV, CV, FL, GT S V T R. Does everybody see that? OK, so we know that this is a gross proceeds lease, uh,
because the way that the deductions are occurring. No, there is no, there
Speaker 268
1:59:10
is no disagreement on the actual terms of the lease. Everybody agrees that this lease does not allow deductions. Because the EXR, so CB,
Speaker 275
1:59:19
that severance tax, the SB Uh, excuse me, the CV is conservation tax. The SB is severance tax. OK? You don't see
Speaker 268
1:59:29
any other deductions whatsoever on that royalty, on the excess royalty.
So that's that's uh on and above 12.5%. This is actually a 3/16 royalty. So that's on 6.25% of the royalty, OK? Then the RI, that's the 1st 18, that's 12.5%. So if we look at that, uh, they're taking fuel costs, which fuel costs is, is not defined. They're taking gathering and then the TR is transport. t ation So none of those Under the RI except for CV and SB are allowed under the lease.
I think Flywheel, if, if Mr. Perkins was, was in here, he would agree that, that the lease does not allow
Speaker 275
2:00:13
that, that they are taking those based on statute. So is what that looks like in real life for a royalty owner is if you will flip back to the last page, page
Speaker 268
2:00:29
3. So this check total, if you, there's a box at the bottom, this check total is $1,263.34.
The deductions on this that are not, not allowed by the lease is $570. And 23 cents, the owner's taxes is $22.98. And the owner's net is $670.13. If we look at the year to date, because this, this check is from December of 2024. The owner's gross.
Money is $12,669.42. The deductions is $6,035.94. The owner's taxes is $215.21 6. And the owner is, it, it gets a check for their, for their royalties for that year that total $6,418.27. They got $6000 taken from their check, from their money, from their gas, that, that their lease does not allow. And so when you see all these royalty owners here and you hear about,
you know, the 2000 people that have been at these meetings, that's what they're upset about, that they're not being treated fairly. And I know there's been some talk about South Arkansas. Um, the intention of this bill is not to affect South Arkansas oil production. Um, firstly, because our intention is for it to only apply to gas. Secondly, South Arkansas has, has producers who abide by their leases. In the Arcoma Basin has producers that abide by their
leases. And the Fayetteville Shell, except for Flywheel and energy has producers who abide by their leases. I'd like to discuss for a second. Some of the, some of the things that, that flywheel has brought up. Um In regard to the unconstitutionality. We believe that, that. The legislature has a right to amend. This statute
That it doesn't run afoul of, of the Arkansas Constitution, um, if that was the case, then in 1985 when this prior act was enacted, how would it not have been unconstitutional. It's the same thing. Um, I would like to address, uh, maybe embarrassing some of these federal court cases, um, that Mr. Perkins referred to, there were 6 federal court cases, uh, I was an attorney on 3 of them, and Mr. Perkins is correct that
that he won, uh, all of, all the majority of those cases were decided by one federal judge. Uh, that federal judge used the, what's called the Erie doctrine, um, to circumvent the Court of Appeals, the Arkansas Court of Appeals, which is a panel, uh, to circumvent that ruling and rule in favor of flywheel, um, on those cases, so our stance is that the highest Court in Arkansas who has heard. The case is the Arkansas Court of Appeals.
And the Arkansas Court of Appeals has ruled The Arkansas 1572305 is as,
Speaker 275
2:03:56
as it defines net proceeds in that statute is ambiguous. The Supreme Court has not heard this case.
Speaker 268
2:04:03
That is the law of the land as it, as it stands for the state of Arkansas. So the intention of this bill is to define net proceeds, and that's what we do through this
bill, and we think it is a fair interpretation. Up until 2019, the definition that is in here is how it is how royalties were paid to all landowners. I didn't draft this bill by myself. I drafted it with other oil and gas attorneys. I, I drafted it with attorneys from, uh, the Arcoma base. So, We're not trying to disrupt flywheels. Business All we're asking for is that if
a company comes to Arkansas, and they want to produce our minerals that they do so morally, that they do so, that they do so, uh, by protecting the asset and protecting the royalty owners and honoring the contracts. They bought these contracts. It was eyes wide open. They were bona fide purchasers. They bought this litigation, and now they're whining about it, Mr. Morgan, are you ready for questions? Sure, let's
Speaker 129
2:05:13
do it. I can get fired up. I apologize.
Representative Matthew J. Shepherd
Unverified
2:05:23
All right, Committee, any questions? Representative Shepherd. Thank you for your, for your testimony.
So it seems from what we've heard today that. There's basically two issues. One is A concern about transparency, I think that's some of what the witnesses have spoken to is transparency with regard to, uh, the expenses and then secondly is this issue related to the 1/8 royalty that. That was in statute. And I do, and, and, uh, I think myself and
Representative Jean has have expressed concern about does the bill cover all oil and gas in the state of Arkansas. I know the royalty provision. On its face does not, but there are other requirements as, as far as reporting and other things that are in the bill that seem to. cover oil and gas production all over the state. So I'd like for you to address that and then secondly, is this a Fayetteville Shell issue or is this an issue that exists in the Fayetteville Shell and the
Arcoma Basin, uh, and wherever else natural gas may be produced in Arkansas. OK, so just
Speaker 268
2:06:31
to make sure I understand your question. One of them is, you want me to address whether. Our interpretation of the bill in the, in the, in the drafting of the bill was that it only affects gas, um. And as far as the transparency, I, I mean, I, I believe I heard the the I, I can't remember what he was for Hannah O, but he said that, you know, it's hard for their
accounting when a pumper goes out and works on a well, um. You know, to attribute that to a certain well, well, I mean all of those rules that needs to be a tribute to. That's where all these costs come from. So I mean that needs to be transparent. If an owner is charged with costs. It needs to be transparent. I know like as an attorney, I live my life 6 minutes at a time. I mean, these are, these are these individuals gas, and so I think, I think that I think the purpose of the transparency is, and I, and I'm
not necessarily referring to you because I understand you understand the industry and you know what you're looking at. But I think the goal would be for somebody of reasonable intelligence to be able to look at a royalty statement, discern it and know what costs have been charged to them. Well, and,
Representative Matthew J. Shepherd
Unverified
2:07:44
and that, and that is, I mean that's, that's part of my question, and I think that's what, what, uh, the representative Hannah
Woy was speaking to you're, you're the concern is what is being provided to the royalty owner, correct, not what's otherwise
available because there are, there is information that can be, that's available either through the oil and gas commission or by contacting the operator directly. Uh, I mean, so
Speaker 268
2:08:08
the total well production would be available, um, on the Arkansas and Gas Commission's website, obviously, uh, I think that. I think probably in your part of the world, uh, uh, the producers might be more transparent. I think a lot of that stuff is not available and only becomes available in a lawsuit. Well, and that, and I guess that's my
Representative Matthew J. Shepherd
Unverified
2:08:28
concern and in my my question about is this a fateetteville Shell issue or is this also an issue in the Acoma
Speaker 268
2:08:35
Basin. Our intent is for it to be, uh, well, the Arcoma Basin, um. I think that that most landowners in the Acoma Basin would say from, from what I have heard that things are being reported properly and they understand the royalty statements and there's not an issue. I think the transparency is related to the Fayetteville Shell. The proceed, the net proceeds is not in our coma basin issue as of right now,
because any, any lease in the Arcoma Basin, that is a gross proceeds lease is being paid
Representative Matthew J. Shepherd
Unverified
2:09:07
gross proceeds and I guess that's where, where that's the why I'm asking the question. are we jeopardizing, are we? Uh, potentially disrupting, setting aside the Fayetville Shell issue. I understand that, but we've heard from someone from the Arcoma Basin, they've been producing natural gas for for well beyond 85. South Arkansas has been producing oil
and and gas for many years, it seems to me that there's elements of this bill that potentially whether anybody
in those other places wants it or not is gonna put some additional obligations out there. I, I
Speaker 287
2:09:42
think that, I think that the good operators are already doing this. Like I said, that's
Speaker 274
2:09:47
why we got input from a producer in the Arcoma Basin to make sure it would not run afoul of them and, and they approved
Speaker 142
2:09:54
it. And, and the final question, if I may.
Representative Matthew J. Shepherd
Unverified
2:09:57
Mr. Cowan, I believe, brought up the concern about plugging and
abandoning wells, and I'm assuming you were in here and heard his response. Do you agree with what he was saying that if, if operating expenses if there's a change in operating expense either in, uh, or, or for that matter, I guess in what is allowed to be netted out or in additional obligations that that could affect their, uh, Production and that they would have the opportunity to that they could plug and abandon certain wells and depending on
whether all wells are plugged and abandoned or whether there are some that
hold production that that could have an impact on ultimately what is produced in the Fayetteville Shell. So, uh, let me, let me
Speaker 268
2:10:47
understand and your, let me make sure I understand your question. So you're asking me the burden of the additional accounting or the burden of paying it based on the 18 net. It actually I think applies to
Representative Matthew J. Shepherd
Unverified
2:11:04
both. I'm not, I'm not commenting on whether 11 should be proper or not, but I do know, uh, just for my, for my dealings in the oil industry, particularly on, on marginal wells if there are additional expenses, whether it's imposed in in the on the operator side or an adjustment in what the royalty is that that sometimes their decisions made to plug and abandon the well. And that might allow the lease
to revert back and could be released, but there also is the possibility that it could just result in a reduction of the number of wells that the leases could continue to be held by production and that ultimately. The, the royalty owners ultimately end up receiving less because of the lack of the, the decrease in production. So my response to
Speaker 268
2:11:57
that would be that the majority of your operators who are good operators who are prudent operators, they're already doing this. So it's not gonna affect their
bottom line whatsoever. An operator who wants to, to, what I, I consider stealing once to steal people's money, uh, from their, from their royalties, sure, they're they're gas wells might produce a little bit longer, but the royalty owner isn't gonna receive much of the benefit of that. The, the operator is going to receive the benefit of that. And at the end of the day, we would just prefer not to have in my area. We would have, we would rather have producers who are cognizant of the landowner's rights and take that
seriously and who produce, uh, produce the, the gas play ethically. Alright, Representative
Representative Carlton Wing
Unverified
2:12:46
Wayne. Thank you, Mr. Chair. I've got two questions. One is about transparency. I was wondering if you could comment on something that someone earlier had said with regards to these fees being charged that they were being charged by uh I'm paraphrasing, so I forgive me if I've gotten this wrong. Um, being charged by companies via subsidiaries of the same ownership group.
And then those fees then are vague enough it almost implying that there's some kind of vertical uh control over the entire industry. Are, are you able to speak to any of that?
Speaker 268
2:13:19
Well, I think, I think maybe it's what they're referring to is the Fayetteville Shield has developed. There used to be Chesapeake Energy. There used to be BP, BHP, um, Southwestern Energy, a different number XTO, a different number of players, those have all been consolidated for the most part to flywheel energy and theirs. subsidiaries, which is, um.
Uh, uh, uh, Van Buren Energy and I believe Razorback, something Razorback, that's merit, that's a new one. so they own all the leases. And they're the operator. So is what this amounts to in the Fayetteville Shale is a windfall for them, is what it is. It's a, it's their interpretation is, is a windfall. There is no extra expenses for them on this blended rate because they're the ones who sell the gas. Mhm And so the subsidiaries are they they bought other companies, um, in different entities, I imagine
Speaker 274
2:14:16
for, for some type of um financing issue, but I, I can't speak to,
Representative Carlton Wing
Unverified
2:14:23
to why they exactly did that. OK, uh, then my
other question was, it, it does seem like this entire issue. Revolves around
Speaker 268
2:14:33
one company. I think, I think that that as of right now, It does involve one company, but I do think that. I think that if, if this legislation doesn't pass and the
problem is not fixed, I think that
Speaker 291
2:14:48
other companies will come in and start doing the same thing to Arkansas landowners. And
Representative Carlton Wing
Unverified
2:14:54
then, so is it really getting down to that we're one company at this point,
it could be others who could try to go the same method. Are they just kind of pushing the legality of the definition of net proceeds. Is that really kind of the core issue? They're pushing the leg out. They're saying their definition
Speaker 268
2:15:19
of their definition of, of net proceeds in 305 is what they're pushing and what the state case with the federal or with the Arkansas Oil and Gas Commission was about. And what the federal cases were about and, and one thing that we have a huge issue with right now is that if a mineral owner brings a case and they stay in state court, the mineral owner will win. We feel like that the State court will rule that flywheel has to, uh, pay them
based on their lease because they've said that they've said that, um, 305 is ambiguous. However, in federal court, flywheel will win. And so we have an issue with two different jurisdictions and not the same result which nobody ever likes. There needs to be one result, and we feel like that this bill will rectify that because The Court of Appeals said that net proceeds is ambiguous. This defines net proceeds and essentially fixes 305, the net proceeds portion of 305. Thank you very much.
Representative Marcus E. Richmond
Unverified
2:16:21
Representative Richmond. Thank you, Mr. Chair, kind of going along with, uh, Representative Wink's first question. The,
the cost, I'll give examples that were handed to us, dehydrating, treating, compression costs, and then transportation costs. Is the company The producer, are they paying themselves. To do this. In other words, OK. Or are they paying a separate company that comes in and pays
dehydration and then transportation costs or are they doing all that and then reimbursing themselves for that cost. Um, well, that's some of the transparency issue.
Speaker 281
2:16:57
I mean, you tell me from the royalty statement, our, our people are,
Speaker 268
2:17:02
you, you, you don't know, uh, my understanding is that it's probably a subsidiary. All right, thank you. They have, they have some gathering companies. All right, any other questions? All right, I think
Speaker 267
2:17:11
we've wore you out. All right, I appreciate the committee's time. Thank you. All right.
Representative Cameron Cooper
Unverified
2:17:22
All right, we're gonna take. Representative Cooper, you have a motion. Uh, Mr. Chair, since we gave the attorneys equal time, I make a motion to return to 3 minutes of testimony per individual. That's a
Representative Roger D. Lynch
Unverified
2:17:40
proper motion. All those in favor say aye. Yeah, the polls. Thank you.
Speaker 297
2:17:58
All right. Speaking against Jeremy Fitzpatrick. If you would introduce yourself for the
Speaker 298
2:18:06
record. Yes, sir. Thank you Mr. Chair. You have 3 minutes. Uh, Jeremy Fitzpatrick, vice president of Land, Legal and Business Development with Flywheel. Um I wanted, I've been here a couple of times over the last 6 years on the same, uh, issue. Uh, I wanted to take the limited time I have to tell a brief story about how we came in. We came in here December 3rd, 2018 is when we closed on our deal with SIM. You've already heard from the lawyers.
That the wizen Hunt case was decided before we even existed as a company. So this idea that it's one company is just flat not true. Um, you can You can look at the facts and they're that way, um, in addition, there are a number of other parties have been named in those lawsuits. And all of them All of them, Judge Ridolsky found that we are following the statute. He didn't find one thing that we were doing incorrectly. Judge Ruowsky is a former solicitor general of the state of Arkansas. He's a highly educated lawyer, I think, uh,
his resume speaks for itself. He's one judge, he's 11 opinion for sure, but it's a strong one. He had a very detailed analysis that, uh, that the Eighth Circuit Court of Appeals is gonna take up. Um, but I just wanted to dispel the myth that somehow this is flywheel started of this and only flywheel is doing it. That's already been mentioned several times, and I want to remind the committee of that fact that that lawsuit with Whisenhunt and XTO existed before us, so clearly XTO is taking these deductions as to the 1st 1/8 interpreting the statute. When we came in here
and closed December 3, 2018. We spent almost $2 billion to buy this company. We wanted to prudently set up our systems, all of our accounting systems, so I engaged uh legal experts in Arkansas and nationally, and we looked at the law, we looked at the case law, we followed the statute, we set up our systems according to that. We have been sued over that. Mr. Morgan has uh led some of those attempts. There's discovery that has been had so all of this information that they tell you they don't have and they can't see, they've seen it.
It has been revealed and produced in all of these lawsuits years and years and years again. Swin was involved in lawsuits over royalty litigation. Some of the questions have concerned the affiliate relationship between the gatherer and the other companies in passing these costs through all of those have been tested in court. Um, some of them before we came here. So these royalty issues are not unique to flywheel. They're not unique to Arkansas. They're not unique to the Fayetteville Shield. These royalty class action lawsuits about missed payment, miss underpayment or
incorrectly paying royalties exist in every oil and gas basin in the United States. Every one of them. They were here before we got here. They're here now. We have prevailed on them. We're following this statute. Um I, I just, I don't know what else to say about the misrepresentation or the false allegations that people aren't getting information that that you guys have seen the check stub detail that Mr. Morgan provided. I think it's our chick stub. Are you ready? I am, sir. Any, uh, committee, any
Speaker 129
2:21:05
questions, Carlton? Thank you, Mr. Chair. Thank
Representative Carlton Wing
Unverified
2:21:08
you for coming up and clarifying what I, I, I,
what the legislative body many times is we attempt to solve problems. When problems come to us, we have to address them. And so this bill is a representation of some problems that have come to us. And so are there other companies that you are aware of that are interpreting net proceeds in the same way that your company is currently. I know in the past there have been and that probably what brought about uh previous legislation
back in 19. 85. But are there others that are doing the same thing. Um, there were until recently, um, it's now us because we've
Speaker 298
2:21:44
consolidated the basin. We own all of the Fayetteville Shell now. Um The distinction that should be made on to your point though, is why aren't other companies doing it? It's sort of unique to the basin. Um Most of the leases, the vast majority of the leases in this state are net proceeds leases. Mr. Hannah talked about that in the Arcoma Basin, Mr. Callan talked about that.
And so therefore when they passed the statute, I think it's understandable why why they made the everybody paid the same to the net in the uh in the Fayetteville Shale, all of these leases, including these, uh, yalty owners behind us that have signed leases. Um, they all signed after 1985. And we've talked about how the law in effect at the time is incorporated into those those contracts and that's the case, so we are following the contracts and that's been tested in in in court several times, um, the AOGC matter is a distinctly different matter.
A distinctly different for those owners and that uh that statute was not analyzed by the, the court of appeals, um, be affirmed based on a course of conduct and some. past practice of the commission, but that is different does not uh the law with respect to uh negotiated leases. All right, thank you. All right. Representative Richmond. Thank
Representative Marcus E. Richmond
Unverified
2:23:04
you, Mr. Chair. On the example that we were handed
earlier that has, uh, your, your statement on it on this that there was, uh, when you looked
at it for, uh, over the year. Close to 50%. Of the proceeds was taken then as expenses. Is
that accurate? Is that normal? it's normal in a low price
Speaker 304
2:23:24
environment that has been, has been discussed
Speaker 298
2:23:26
here today, the examples that Mr. Perkins went over. We gave you a low price environment. The cost, there's uh it's volumetric. That's why you, it's inappropriate to look at your check and say, here's my gross check and here's the percentage of cost because when the price is high, the percentage of cost is going to be much lower
because there's a fixed component, so when you go down to a buck 80&M you're gonna have a a much higher, 40, 50, 60% of of those costs are
Speaker 305
2:23:49
of the revenue would be eaten up by the cost. Alright, thank you. Thank you, Mr. Chair. All right. Committee, any other questions? Thank you for being brief. Thank you all.
Representative Roger D. Lynch
Unverified
2:24:15
Karl Hart speaking Carl, introduce yourself to the committee, and you have
Carl Hart
Unverified
2:24:21
3 minutes. Alright, my name is Carl Hart. I do own property in Van Buren County and in in Conway County with our family farms, but I've sit here and listen to all this litigation and all this talk and all these lawyers talk about this and that and I hear a lot of opinionated. Deals I've not heard a judge say nothing about anything but something I will say for sure. I bought a farm that already had a contract. I'd accept the contract.
But if everybody here that's in the Fayetteville Shell has a contract. If the company's not gonna legally Accept the contracts like what they're doing is the contract not null and void. That's what I asked, why are they not accepting the contracts for what he says he is. Uh, I don't know what's going on with all of that, but I do know with mine and you was talking about 50% my checks are just
like what. They've talked about 50% of it goes to somebody else. When the oil and gas started. That's all we could hear of out of swing and all that uh when we get infrastructure in all of our costs will go down. The cost has never went but one direction since I've been involved with this, and that's ever since it started its study went up. It's never got any better. And of course they want to talk about itemizing and all this other stuff with all of these
bills. I have worked. I am a master electrician with electronics degree worked in industry for big corporations in in all central Arkansas they talk about it would bankrupt them to keep all this information separate for all this stuff. I have been Around a lot of. Flywheels Text it on my well pad and every one of them have a laptop in their truck.
And there's nothing you can do with that laptop that can't be done with. Controlling cost of what everything is done if they don't have the software and stuff to do it, that's not my fault that's not their fault, that's their fault. That's just the way I look at it. Because the technology is there. So just
Speaker 138
2:26:45
Use it. Carl, you're ready for? Yes. Maybe anyone have a question. Thank you, Carl.
Representative Roger D. Lynch
Unverified
2:26:52
All right. We are going to hear. 2 more and then we're gonna have Mr. Beck close his bill. Michael Daley speaking against. Thank you, sir. Uh,
Speaker 312
2:27:19
is Michael Daley. I represent, um, well, I'm an
attorney at Daly and Woods law firm in Fort Smith. I've been practicing oil and gas law for 2 years since I got out of law school, um, and I'm here in that capacity. I, I do represent, um, a lot of non-operators, um, who are the owners of leases, but they're not necessarily operating any wells in the Fayetteville Shale or anywhere, um, they're investors and, and they've purchased packages of cases and so that's their interest, um. In any of these, um, in any of
these areas including the Fayetteville Shale or the Arcoma Basin. Um, you know, my Uh, request is that this bill, um, Uh, not proceed and my reason for opposing it is more textually and mechanically, it doesn't work, um, this amendment would create more problems for, especially non-operators, um, and even if it's solved problems for for royalty owners.
You're, you're still going to have a blending of various leases. Some of these leases if if I'm reading this bill correctly, some of these leases that might have net proceeds language are going to be blended with those with gross proceeds language. And the operator is still going to make an initial payment every single month. To royalty owners. For those royalty owners that have a uh a net proceeds lease because of the blending and the averaging, there's gonna be a
higher value that they would receive. For those with a gross proceeds lease. It'll be a lower value because it's blended with all of the other leases. What this eventually does it passes down that burden of recouping or, or, or paying that um that shortfall to those with the gross proceeds lease to a non-operating working interest owner. Um, this is even if they
had a gross proceeds lease, and they paid in all of the money, um, to the blended royalty pool because of that weighted averaging, the royalty owner might get a lesser initial pay. even though the lease owner paid all that it was contractually obligated to pay. So then it has to pay an additional amount to the leasehold owner within 30 days or risk a lawsuit. Even though it satisfied all of its obligations already. So that's a consequence of the way
this amendment is written. I don't know if that was an intended consequence, but it is a consequence. So from a legal perspective, I, I think it's fraught with a lot of problems, um, like those who are also against it have already testified and said today, but that was one additional one I wanted to bring up. And that's, that's all I have. Alright, committee, any questions? Saying none, thank you, sir. Thank you. So all I have
Representative Roger D. Lynch
Unverified
2:30:18
left on the list are people speaking for the
bill. Is there anyone in the audience that has a different story that they would like to tell. If we have a unique story, we'll invite one more person. Anybody want to stand up, got a hand up, come, come forward. Are you speaking for or again? Introduce yourself to the committee. You have 3 minutes. And
Speaker 316
2:31:02
I'm a retired air traffic controller, 27.5 years. When the fables she started, uh, I thought it'd be a great idea to start buying minerals. I'd inherited some from my family. And one of the first leases that I bought was in 2008. It was a sea coal lease. It was a 20% gross. And Seco started paying it on it in '08, and they honored that, paid me 20% for the next 11 years. Clay about it.
They quit paying 20% gross they only pay gross on the last 7.5%. They used an 85 statute in a whiz and hunt case that I don't think had anything to do with what I was doing. Um I've, I've heard everybody say Fayetville Shell, Falle Shell, North Arkansas. There's mineral owners all over the state. I know mineral owners that own minerals in the fyville Shell and Ozarks Siloam Springs. This affects. Mineral owners all over the state.
It's a huge amount of money. It's a small percentage of the leases, but it's a huge amount of money because they've spent a ton having all their folks here and their attorneys trying to defeat it and they've done it the last two sessions. Um The biggest problem I have. They talked about integrated leases. And an integrated lease is somebody that chose not to negotiate a lease. So I have a lease that is a 1/8 net where I mean 18 growths
where there are no deductions that come out of it. And merit is the operator and merit pays on that. They don't deduct anything out. It's just a 1/8. Flywheel just bought merit. So that lease is fixing not be honored anymore and they're gonna pay me a 1/8 net and start deducting. The same folks in the same section that were integrated. They may have got a 1/8 gross lease because the person that
negotiated my lease, negotiated a 1/8 gross. And so the way integration works is if you're not, if you chose not to lease. The oil and gas commission. Takes the best leases in the section, and that's what you get. And there's no deducts taken out. So now somebody that spent money on an attorney to negotiate a lease. Flywheel buys it. They start deducting on the 18.
But the person that didn't do anything that rode the coattails, they get the benefits of my lease and no deducts, and the reason that's the case is because the oil and gas commission had the money to take them to court and fight them for 5 years and win it. A small royalty owner didn't have that kind of money to take them in state court, um. That's, that's, that's about all I have to say. All right,
Speaker 318
2:33:58
any questions? So, thank you, sir. All right, we have one other man stand up.
Representative Roger D. Lynch
Unverified
2:34:10
I'll hear your testimony if you'd like to hear it come up. Would introduce yourself to part of the committee
Speaker 319
2:34:25
and you have 13 minutes, sir. Glendon Bryant. There I, uh I got royalty interest in Conway County, Arkansas. Now the lawyer there a while ago. Everybody works on percentage there so this bill does not affect anything there.
Like the lawyer a while ago was talking about. Now my leases I've got two different ones, but both of them are 20% and no cost. The Chesapeake paid that BHP Billington paid that. Merritt paid that. But like the guy just said. Flywell bought that out. It's already went down to net cause mine are gross. It's already went down to net.
And I know it's fixing to go to an 8th. And like they've been talking about. It's 49 to 50% cost that they're gonna hold out of my money and my lease says no cost, but that's what's fixing to happen to me. Now, I've talked to the Federal Trade Commission on this. Federal Trade Commission says our leases that are signed and notarized by both parties is legal and binding.
Representative Roger D. Lynch
Unverified
2:35:42
That's all I got to say. Thank you, sir. I
Speaker 322
2:35:50
assume you don't want any questions. You're good, I didn't think so. All right. Representative Beck,
Speaker 295
2:35:54
you're ready to clothes for your bill. You think you can do this in 3 minutes.
Representative Rick Beck
Unverified
2:36:12
Uh, I got it. I think I may be able to do that. It's just little old bill
doesn't do much of anything, right? Uh, well, this closing is I had it all nicely typed up and y'all really ruined that for me, so, but. I wanna say. First up, April. Right? One of the things, and I'm saying there was about 1800 people in all of these meetings. And one of the questions that was asked, you know, April, which stands for Arkansas individual.
Property and royalty owners, right? In those meetings. It was asked, does anyone ever heard of April. At 18 to 1600 people, no one ever raised their hands, so don't think that April is representing the royalty owners. I, I, I don't know the makeup of their board. I've, I've tried to work with them and. They don't seem to be interested in working. After I talked. And went to all the counties
with all the meetings, got everyone's input. The first place I went, the next place I went was the Andy Miller, and I said, I'm sure you've heard by now I'm running a bill. And I explained to him at that point I said I listened to a lot of the royalty owners, they want transparency. And they want the leases paid the way they're written. And that's what I'm trying to put together. A few days or later I was approached by Rodney at April
and basically the conversation went the same way I said talk to there. That His first response was, well, our members are going to think that they're being transparent and then I said. Then that means you don't have anything you want to input. And he said, no, no, no, no, no, no, no, no, no, he says, I wanna have a a meeting with the board and talk about it a week or so later we set up a meeting, uh, and I went to them. Now he's right in saying that I, I didn't have, I didn't give him a bill because I didn't have a bill at
that point. I was seeking ways to take care of this. The problem is simple. Pay the leases the way they should be paid, the way they're written. And be transparent. I actually in the meeting, I, I. Made the statement to them this would probably eliminate a lot of their issues. If the landowners are the royalty owners, the mineral owners knew and could see, hey, I am being this is in my lease and this is what I'm being charged. I think that they,
they, they would, OK, yeah, I can write that up, but you've seen case and case and case come up here and that's not. That's, that's not the case. People don't know. Now We talked a lot about 8272 Act 272. The first people that came up here talked about and they said, well, you know, really what that thing did was it kind of shared the cost against everybody, everybody you heard everybody kind of paid the same. It was equal to everybody. They also made the mistake that the
statement that it didn't help the producers. You know, it was really just distributing the cost, OK, good enough statement. The next person that came, not the next person, but, uh, uh. Uh, Mr. Perkins came up and he said, well, there were winners and losers. I didn't ever quite, I was wanting someone asking who the winners and who the losers were on that, but, but it didn't really get a chance to, to, to get that, so maybe there were winners and losers. Now I want to address another issue that a lot of, a lot of the members of this committee have
brought up. You can't amend this thing because it's against the constitution. It's gonna blow this whole thing up and everything's wrong, but you can kill it. You can do away with that 272. You can do away with it, but you can't amend it, you cannot amend that, guys. Now, what is that? Does that make any sense? Doesn't to me. Now, the other thing we heard is that Flywell said, well, you know, uh, everyone in. Pays the same way. Mhm
Well, my, if my memory serves me right, Flywell was the first person to adopt what they called and some people call it the new formula, right? The new formula that coincidentally tax expenses that would be paid by flywheel and ships them over to the royalty owners, so you know, nice formula there, but they were the ones that did it first and then they're right, some of the others did adopt them, and these are the people that they've paid and today they own those subsidiaries, so. that's that's, that's what's
going on here, guys. Alright, now You heard that you know this is gonna talk on it. This is gonna shut down some wells. Right? What the first statement is true. Right, that these costs that are being shared that are being taken away from some the the the gross royalty owners are being taken away from them going we don't know where we were told it didn't go to the producers. I don't know, maybe it just goes up into the thin air somewhere, right? But,
but we were told that that these costs were shared and the producers didn't get any of that, so how would that shut down a well. If the costs are truly just being distributed these extra costs that these these uh uh mineral rights owners are seeing right now are just being distributed. So amongst them, so that it's all paid equally then where's it going? How's that going to shut down the well? It would say that the wells are going to shut down anyway if that's the case. Now,
This bill I, I, I really think this bill is, is. I'm not a lawyer, but this bill. It's very clean. It's very simple. It codifies the laws. That The court decision made concerning integrated leases. Now That was in the courts for years upon years upon years, but the only gas commission, you know,
like a lot of of our agencies have a lot of lawyers. They can fight these things in courts for years and years and years. But the guys back here, the guys and gals back here. Well, you know, they don't have that kind of assets at their house. They don't have lawyers that can go on forever, I think, uh, it probably went on for about 5 years. It was, it was taken to the, uh, Plasky County court and and uh plastic court and they judged against Flywell. They appealed it and they, they lost again and they tried to
appeal it again to the Supreme Court Supreme Court, so we're not gonna hear it, push it back down saying pay the leases. All right. And now so the day, as I mentioned earlier, went back to 2019 when the problems were and and, and that demonstrates that that was the change. They're right, and I, I think the hats off to long they did mention it that Swin was paying differently. Alright, so, Before Flywheel entered this thing.
Everyone was paying that they're they're right, there were complaints about different things, but for the most part flywood was paying. I mean, everybody was paying the way they should be paid. I will change that. That's the new formula and that's what brought this all up. Now The software, the next part of the software, so the the first part of the software just codifies the state law. So this will give the federal law, the federal people, you know, something to look at this is what the state of Arkansas says,
and this is why we need to pass this guys. We need to change our statute. So the federal courts can look at it and say this is what Arkansas intended and then judge accordingly. Now The second part is very straightforward language. It just clarifies. That they're allowable deductions on the leases. Equitable taxes, assessments, and the charges specifically allocated in the terms of the lease.
That's pretty simple. I mean, you know, I had someone tell me one of the means and says, was this bill you're gonna do? I, we told him with when it was drafted, we tell them and they could come out and and look at and they said, are we gonna be able to read it? Well, you can read that. That's pretty simple. It's exactly what it's saying to do. It's simple, straightforward language. I won't go into this next part because it, I was gonna go a change occurred and the change did occur and I think everybody knows that now the curd would fly them bought out swin and decided to.
Um, use the act to Acts 272 to. To change the way they were paying royalties. Another thing that the bill does is it establishes ownership. Of the minerals. And it says that, you know, Arkansans are the mineral rights owners have the right that those are property, that's their property and they have the right to negotiate a contract to do to what. They, they, they accept, right? that that it's their laces, it's
not the state's right to go and say, you know what, yeah, you own that, but, you know, You don't really get to say anything about it because 12.5% of it, we're gonna pull back a, a, a, a net lace. And and said you can't get that money. That's what, that's what what we're talking about here now you can't have that money because that, you know, that's kind of sort of yours, maybe not all yours, because we're gonna take part of that. Alright, the next thing.
That we talk about it it probably in in this is a, a, a bit uh It it it establishes that the 18 net proceeds. Are the minimum. To protect royalty owners. That's the minimum you can pay. If a royalty owner negotiates a higher lease with you like you've heard some of these 20% gross leases are then then great for them. They they negotiated a higher lease. They should get it. It's theirs. It belongs to them.
The state shouldn't jump in here and do this. And change things. And then finally, if you haven't heard this enough yet, it's transparency, right? It, it, you know, Imagine, imagine that your next check that you get, I guess we don't really get checks anymore. We, we can go online and look at the stubs if we want to. The next check that you received was 40, maybe 50% less. And then you got there and it was some Deductions. And that was was taken out of your check.
You'd be like, what, what, what, what, what's these deductions, right? We've got to have transparency in this thing and that's what this bill says. Just I, I like, I, I can't remember who, who asked the question, but it was, it was, it's, it's spot on, right? You, you know what the charges are. Why can't you transfer that information to the person with the royalties. Why can't you tell them? This is where these are the, these were the actual charges that you had. Now Let's see what else I got here for you.
I, I, I. I don't think that this is gonna this is gonna cause wells to be shut down because I, I. Do think That there's money left in the Fayetteville shell. You know, and, and probably some things you should think about is this. Why is Flywheel in this super tight market, you know, where they have to get every. bit of expenses I can transfer
them over to the royalty owner so they can be profitable, right? Why are they buying assets in this thing? Why did they buy XDO out? Why did they buy merit out? I don't know. I, I mean, if you were in a very tight market and just barely making it through. Why would you double down on that investment and then double down again on that investment. The truth of the matter is, I think, or my opinion, I should say, is this. There is money to be made here.
And all Arkansans. are asking you This committee because they don't have a huge legal staff to back them up. What they're asking you guys to do, and the only thing that's keeping them from that is this. You're about, yes. Vote for Arkansas royalty owners and with that I truly appreciate the committee and I'd asked for a favorable vote. Thank you.
Representative Roger D. Lynch
Unverified
2:49:24
All right, what's the wishes of the committee right, we have a motion to pass. Any
Representative Lane Jean
Unverified
2:49:33
discussion? Representative Jean. Right. Sherman, let me just start off by saying, I'm a royalty owner. Been, been a royalty owner
all my life. romaine, oil and gas, now we're battling the, uh, lithium royalty. Personally, greedy. I've never
been paid what the stuff's worth, OK?
But, but What these things do, what we got to consider is these do bring jobs. And, and revenue into our communities, and there are things I've, I've, I've dealed with a lot of marginal wells over my time that've been shut down that I've owned. You know, when the cost is more than what you're bringing out, you shut it down. And, you know, when we go from, and the, and the 272.
was put there in 1985, uh, and it's been challenged. 6 times And, in federal court and it's upheld. Now, I'm not a, I'm not a, excuse me, Matthew, I'm not a lawyer lover. Uh, but there, there, I know, I know when you're getting beat every time, there's a reason why. And even their attorney says, we're not intending to hurt the South Arkansas oil field, oil and gas fields. We're not intending to
hurt the Arcoma Basin. And they're not the problem. But whatever we do here today may have some unintended consequences on these fields, and we've got to think about that. And for that reason, I'm a no vote on this. Thank you, Mr.
Representative Matthew J. Shepherd
Unverified
2:51:17
Chairman Representative Shepard. Thank you, Mr. Chairman, and I would just echo Representative Jean's comments, um, I feel a bit as if we're, uh, Not to too much unlike maybe
where the legislature was in the 1980s in considering how to address issues in the oil and gas field, and I am concerned, uh, and I think I've made that pretty clear throughout that my concern relates to making sure that, that, uh, the other areas of the state were oil and gas production has existed for decades. For in some cases 100 years of making sure that we don't inadvertently, uh,
Uh, turn over the apple cart in that regard as well and that is my primary concern, uh, you know, there's been a lot of litigation surrounding these things, uh, obviously, there's some issues that are specific to the Fayetteville Shell, uh, but because primarily of my concern about what could occur around the state in other areas where there are not those problems, um, I would be a no on this
Speaker 92
2:52:25
as well. Alright, committee, any other discussion?
Representative Cameron Cooper
Unverified
2:52:39
Representative Cooper, you can probably tell where I stand on this bill. I represent hundreds if not thousands of royalty owners in my district. My district lies right in the middle of the Fayetteville sale. If you look at the Constitution of the state of Arkansas, it says the right of property is before and higher than any constitutional sanction. Sanction here can be defined as permission. Which means our state constitution says that the right of property is a right that is higher than any other permission that's even granted by our constitution. But you know, the oil and gas
companies have been given every advantage in law over the years. The pipeline subsidiaries have the right of eminent domain. They can come across your property even if the landowner doesn't want it. They can force road easements on, on a property owner that doesn't want it. I've personally seen them not staying on the easements and trespassing on private land, just a a basic disrespect for property owners that they're supposed to be working with and partnering with. At what, at what point do we say enough or at what point do we
say too much? Now you may think I'm an anti-oil and gas guy by what I just said, and I'm not at all. I support the oil and gas industry. I want affordable fuel and affordable energy. The production of the Fayetteville Shale was a great thing. It lifted a lot of people out of poverty. Landowners paid off their farms. They remodeled their old farmhouses, bought new farm equipment. But now the terms of those contracts they signed 15 to 20 years ago are being reneged upon in the royalties are siphoned away.
I've heard The statement made, I think, multiple times today. How gas companies own the Fayetteville Shell. They don't own the Fayetteville Shale. That's owned by these property owners over here. They lease mineral rights to work with these property owners. You know, if landowners had just been treated right and been treated fairly, we wouldn't have been sitting in here for 3 hours today. We wouldn't have been in here today debating this issue. I've seen people who are supposed to be receiving a 1/8
royalty, not even receiving a 16 because up to 70%. Of their royalties are siphoned away through these fees. It's not morally right. It's not ethically right. We were elected by our constituents to work for them, to stand up for them, to speak for them. Let's work for them on this issue and try to get them some relief. These are people that These are strong people, farmers, ranchers, independent rural people, they don't ask for help very often, but they're asking for help today. They're asking for it now, so let's give them some relief.
For these reasons and many more, I'll be voting for this bill and I hope my colleagues
Representative Roger D. Lynch
Unverified
2:55:19
will join me. Our committee, any other discussion? Hearing a motion do pass all those in favor say aye. Opposed. eyes have it. Roll call Representative Jean. Representative Jean, no.
Speaker 337
2:55:43
Representative Shepard, Representative Shepherd, no. Representative Cozart. Representative Cozart. Representative McGee. Representative McGee, no. Representative Whittaker Representative Whittaker, yes. Representative McNair. Representative McNair. Representative McNair, yes. Representative. Representative Representative Richmond, Yes.
Representative Richmond, yes. Representative Wayne. Representative Way, yes. Representative Garner. Representative Gardner, yes. Representative Cooper Representative Cooper, yes. Representative Bro Representative Bro, yes. Representative Walker. Representative Walker, yes. Representative Brown. Representative Brown, no. Representative Kendra Moore. Representative Kendra Moore, yes. Representative Perrier.
Representative Perrier, yes, Representative Unger. Representative Unger, yes. Representative Steele. Representative Steele, no. Representative Jeremiah Moore. Representative Jeremiah Moore. The bill passes.
Unknown speaker
2:57:19
We're darned. All right, I'm gonna leave you
Agenda
REGULAR AGENDA
HB1656 Beck TO AMEND THE LAW REGARDING OIL AND GAS PRODUCTION AND CONSERVATION.
Documents
| Title | Type | Pages | Source |
|---|---|---|---|
| Agenda — AGRICULTURE, FORESTRY & ECONOMIC DEVELOPMENT- HOUSE, Mar 12, 2025 | Agenda | 1 | Official source ↗ |
Speakers
Representative Roger D. Lynch
Unverified
Speaker 7
Representative Kendra Moore
Unverified
Representative Rick Beck
Unverified
Senator Dave Wallace
Unverified
Speaker 33
Speaker 38
Representative Matthew J. Shepherd
Unverified
Speaker 49
Speaker 54
Representative Lane Jean
Unverified
Representative Tracy Steele
Unverified
Speaker 70
Representative Carlton Wing
Unverified
Speaker 79
Speaker 35
Representative Marcus E. Richmond
Unverified
Speaker 92
Speaker 103
Speaker 106
Speaker 107
Speaker 24
Speaker 109
Steve Roberts
Unverified
Speaker 115
Representative Bruce Cozart
Unverified
Alan Perkins
Unverified
Speaker 126
Speaker 128
Speaker 130
Speaker 132
Speaker 133
Jimmy Hart
Unverified
Speaker 150
Speaker 152
Speaker 153
Speaker 156
Speaker 159
Speaker 151
Speaker 171
Steve Smith
Unverified
Representative Cameron Cooper
Unverified
Speaker 42
Speaker 186
Speaker 185
Speaker 191
Speaker 184
Speaker 195
Speaker 198
Speaker 204
Speaker 138
Speaker 210
Speaker 202
Mike Callan
Unverified
Speaker 219
Speaker 142
Speaker 224
Speaker 81
Speaker 227
Donna Hallam
Unverified
Speaker 239
Speaker 203
Speaker 242
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Speaker 197
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Speaker 268
Speaker 269
Speaker 275
Speaker 129
Speaker 287
Speaker 274
Speaker 291
Speaker 281
Speaker 267
Speaker 297
Speaker 298
Speaker 304
Speaker 305
Carl Hart
Unverified
Speaker 311
Speaker 312
Speaker 316
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Speaker 319
Speaker 322
Speaker 295
Speaker 337