House committee approves bill to require royalty transparency, clarify "net proceeds" for natural gas
2025-03-12 | Arkansas
The Arkansas House Committee on Agriculture, Forestry & Economic Development voted to advance HB 16 56 on a recorded voice vote after more than two hours of testimony from landowners, county judges, industry groups and attorneys.<br><br>Representative Rick Beck, R-District 43, who sponsored the bill, said HB 16 56 "is about honoring the existing contracts, not about changing them," and described the measure as a compromise drafted with input from both producers and royalty owners. The text would define how the statute governing the "first one-eighth" royalty is applied and require greater transparency on post-production deductions that appear on royalty statements.<br><br>The bill's supporters — including multiple county judges and leaders of newly formed royalty-owner groups in the Fayetteville Shale — described cases where royalty checks for small landowners shrank or disappeared after operators changed or consolidated. "The lack of transparency — pure and simple," said Douglas House, a retired Army lawyer and royalty owner who testified, calling for itemized accounting of deductions. Steve Smith, president of the Royalty Owners Association of Fayetteville Shale, told the committee the practice at issue "has gained Flywheel millions of dollars for their out-of-state owner at the expense of thousands" of Arkansas royalty owners.<br><br>Industry witnesses and attorneys urged caution. Rodney Baker, executive director of the Arkansas Independent Producers and Royalty Owners Association (April), said April's review found the proposal could be unconstitutional as applied to existing contracts and would increase reporting burdens and potential liabilities for operators. Oil-and-gas attorney Alan Perkins told lawmakers the statute at issue — commonly called Act 272 of 1985 — was intentionally complex and that retroactive changes to contract obligations raise legal risk.<br><br>Flywheel Energy's Jeremy Fitzpatrick, vice president of land, legal and business development, said Flywheel set its accounting practices after reviewing federal and state law and that courts have examined the company's approach. "We are following the statute," Fitzpatrick said, and he noted that the company and others have prevailed in some federal cases.<br><br>Attorneys who backed the bill argued the Arkansas Court of Appeals has treated the relevant statutory language as ambiguous and that clarifying legislation would direct state and federal courts toward a single, state-law interpretation. Nathan Morgan, an attorney who spoke for supporters, showed a royalty statement in which he said the owner's gross proceeds were $12,669.42, total deductions $6,035.94 and the owner's check $6,418.27 — an example supporters used to illustrate the scale of contested deductions.<br><br>Several witnesses warned that heavy new reporting requirements could raise operating costs for producers and accelerate the plugging of marginal wells. Griffin Hannah of Hannah Oil and Gas said itemizing every deduction to a per-well level could require additional staff and software. "It would take double the staff, depending on how this is written," Hannah said.<br><br>Committee members asked about the bill's geographic scope and possible unintended consequences. Representative Ken Sheppard and others pressed whether language beyond the royalty definition — for example, reporting rules — could be read to apply statewide, including to older oil-producing regions such as the Arkoma Basin and to oil as well as gas. Supporters said the bill was drafted to address the Fayetteville Shale situation and to define "net proceeds" for natural gas; opponents said ambiguity in the draft could create broader impacts.<br><br>After debate the committee voted to advance the bill. The roll call recorded votes for a subset of members: 12 yes, 5 no; the motion carried and the bill was reported from committee.<br><br>Why it matters: HB 16 56 seeks to settle a high-profile dispute in the Fayetteville Shale between royalty owners and some operators over whether post-production costs may be deducted from the statutorily blended "first one-eighth" royalty. Supporters say the bill would restore payments to lease terms and require transparency; opponents warn of contract-impairment claims, added administrative burden and the risk of reducing production on marginal wells.<br><br>Next steps: HB 16 56 advances to the full House for further consideration. If passed, opponents indicated they expect litigation over retroactive application; supporters said the bill includes provisions intended to clarify application going forward.
