HOUSE BILL No. 5709 May 2, 2000, Introduced by Rep. DeVuyst and referred to the Committee on Conservation and Outdoor Recreation. A bill to amend 1994 PA 451, entitled "Natural resources and environmental protection act," by amending sections 61503b and 61503c (MCL 324.61503b and 324.61503c), section 61503b as added by 1999 PA 246 and section 61503c as added by 1999 PA 247. THE PEOPLE OF THE STATE OF MICHIGAN ENACT: 1 Sec. 61503b. (1) A person who enters into a gas lease as a 2 lessee afterthe effective date of this sectionMARCH 28, 2000 3 shall not deduct from the lessor's royalty any portion of post- 4 production costs unless the lease explicitly allows for the 5 deduction of postproduction costs. If a lease explicitly pro- 6 vides for the deduction of postproduction costs, the lessee may 7 only deduct postproduction costs for the following items:,8unless the lease explicitly and specifically provides for the9deduction of other items:06458'00 JCB 2 1 (a) The reasonable costs of removal of carbon dioxide (CO W ), 2 hydrogen sulfide (H W S), molecular nitrogen (N W ), or other con- 3 stituents, except water, the removal of which will enhance the 4 value of the gas for the benefit of the lessor and lessee. 5 (b) Transportation costs after the point of entry into any 6 of the following: 7 (i) An independent, nonaffiliated, third-party-owned pipe- 8 line system. 9 (ii) A pipeline system owned by a gas distribution company 10 or any subsidiary of the gas distribution company, which is regu- 11 lated by the Michigan public service commission. 12 (iii) An affiliated pipeline system, if the rates charged by 13 the pipeline system have been approved by the Michigan public 14 service commission, or if the rates charged are reasonable, as 15 compared to independent pipeline systems, based on the pipeline 16 system's location, distance, cost of service, and other pertinent 17 factors. 18 (2) A lessee shall not charge postproduction costs incurred 19 on gas produced from 1 drilling unit, pooled or communitized 20 area, or unit area against a lessor's royalty for gas produced 21 from another drilling unit, pooled or communitized area, or unit 22 area. As used in this subsection, "unit area" means the forma- 23 tion or formations that are unitized and surface acreage that is 24 a part of the unitized lands, as described in either of the 25 following: 26 (a) The plan for unit operations that is the subject of the 27 supervisor's order as provided in section 61706. 06458'00 3 1 (b) An applicable agreement providing for unit operations. 2 (3) If a person who has entered into a gas lease as a lessee 3 prior to or afterthe effective date of this sectionMARCH 28, 4 2000 charges the lessor for any portion of postproduction costs, 5 the lessee shall notify the lessor in writing of the availability 6 of the following information and if the lessor requests in writ- 7 ing to receive this information, the lessee shall provide the 8 lessor, in writing, a specific itemized explanation of all post- 9 production costs to be assessed. 10 (4) A division order or other document that includes provi- 11 sions that stipulate how production proceeds are distributed, 12 received by the lessor from the lessee, shall not alter or define 13 the terms of a lease unless voluntarily and explicitly agreed to 14 by both parties in a signed document or documents in which the 15 parties expressly indicate their intention to amend the lease. A 16 lessee shall not precondition the payment of royalties upon the 17 lessor signing a division order or other document that stipulates 18 how production proceeds are distributed, except as provided in 19 this subsection. As a condition for the payment of royalties 20 under a lease other than a lease granted by the state of 21 Michigan, a lessee or other payor shall be entitled to receive a 22 signed division order from the payee containing only the follow- 23 ing provisions, unless other provisions have been voluntarily and 24 explicitly agreed to by both parties in a signed document or doc- 25 uments in which the parties expressly indicate their intention to 26 waive the provisions of this subsection: 06458'00 4 1 (a) The effective date of the division order. 2 (b) A description of the property from which the oil or gas 3 is being produced and the type of production. 4 (c) The fractional or decimal interest in production, or 5 both, claimed by the payee, the type of interest, the certifica- 6 tion of title to the share of production claimed, and, unless 7 otherwise agreed to by the parties, an agreement to notify the 8 payor at least 1 month in advance of the effective date of any 9 change in the interest in production owned by the payee and an 10 agreement to indemnify the payor and reimburse the payor for pay- 11 ments made if the payee does not have merchantable title to the 12 production sold. 13 (d) The authorization to suspend payment to the payee for 14 production until the resolution of any title dispute or adverse 15 claim asserted regarding the interest in production claimed by 16 the payee. 17 (e) The name, address, and taxpayer identification number of 18 the payee. 19 (f) A statement that the division order does not amend any 20 lease or operating agreement between the interest owner and the 21 lessee or operator or any other contracts for the purchase of oil 22 or gas. 23 Sec. 61503c. (1) Notwithstanding section 61522, a person 24 who knowingly violates section 61503a or 61503b is responsible 25 for the payment of a civil fine of not more than $1,000.00. A 26 default in the payment of a civil fine or costs ordered under 27 this section or an installment of the fine or costs may be 06458'00 5 1 remedied by any means authorized under the revised judicature act 2 of 1961, 1961 PA 236, MCL 600.101 to 600.9948. 3 (2) The attorney general or the lessor of a gas lease with 4 respect to his or her lease may bring an action in circuit court 5 for injunctive relief or damages, or both, against a person who 6 violates section 61503a or 61503b. 7 (3) If a person who has entered into a gas lease as a lessee 8 violates section 61503a or 61503b, each day the violation contin- 9 ues constitutes a separate offense only for 5 days; thereafter, 10 each day the violation continues does not constitute a separate 11 offense. If a person who has entered into a gas lease as a 12 lessee violates section 61503a or 61503b and such a violation 13 affects more than 1 lessor having an interest in the same well, 14 pooled unit, or unitized area, the violation as to all lessors 15shall constituteCONSTITUTES only 1 offense. 16 (4) If a court finds that a lessee deducted postproduction 17 costs from a lessor's royalty contrary to section 61503b(1), the 18 lessor may recover as damages the amount of postproduction costs 19 deducted contrary to section 61503b(1) AND MAY ALSO RECOVER REA- 20 SONABLE ATTORNEY FEES INCURRED IN BRINGING THE ACTION UNLESS THE 21 LESSEE ENDEAVORED IN GOOD FAITH TO CURE THE ALLEGED VIOLATION 22 PURSUANT TO SUBSECTION (5) PRIOR TO THE BRINGING OF THE ACTION. 23 In addition, apartyLESSEE who prevails in litigation under 24 this subsection may recover reasonable attorney fees incurred in 25bringingDEFENDING an action under this subsection, if the 26 court finds that the position taken by thenonprevailing party27 LESSOR in the litigation was frivolous. 06458'00 6 1 (5) A person shall not bring an action under this section 2 unless the person has first given the lessee written notice of 3 the alleged violation of section 61503a or 61503b, with reason- 4 ably comprehensive details, and allowed a period of at least 30 5 days for the lessee to cure the alleged violation. 06458'00 Final page. 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