Replies to This Discussion

Permalink Reply by Sam on September 16, 2010 at 2:06

Chesp did reply...they do sell gas to an entity they own according to their own man. Chesp.Energy Marketing Inc. Now, is it legal and how can I find out if they have been selling it for less than the going price? Thanks. S

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Permalink Reply by Katie McCullin on September 16, 2010 at 3:30

Hi! Below are the responses I posted to the other discussion regarding royalty payments.

In regards to other operators’ midstream and natural gas marketing structures, Encana works directly with Encana Gas Marketing and Petrohawk uses KinderHawk Field Services, the product of a joint venture between Petrohawk Energy and Kinder Morgan Energy Partners. For Haynesville operations, EXCO jointly owns a midstream/marketing company with BG Group, an international on and offshore exploration and production company. J-W Operating uses Q-West Energy Company, an affiliate of J-W Gathering (a subsidiary of J-W Operating). For further details on each company’s operations, I encourage you to visit their websites.

www.kne.com
http://www.encana.com/operations/business/marketing/
http://www.allbusiness.com/mining-extraction/oil-gas-exploration-ex...
http://www.jwoperating.com/q-west-energy-company


1. To whom does CEMI sell the gas? Chesapeake Energy Marketing Inc., (CEMI) is a wholly-owned subsidiary of Chesapeake Energy Corporation. CEMI provides natural gas marketing services including commodity price structuring, contract administration and nomination services for Chesapeake and its partners. CEMI purchases natural gas from Chesapeake Operating, Inc. and sells downstream at multiple sales points throughout the country based on contractual and spot market conditions. Examples of multiple sales points include interstate and/or intrastate pipelines, local gas distribution companies and large volume natural gas users. Before natural gas is delivered to a sales point, post-production processes take place including gathering produced natural gas from the wellhead, compressing, processing and treating the gathered gas. All of these post-production processes are considered costs for which royalty owners are charged only their proportionate part required to deliver natural gas to these sales points. Royalty payments are based on the exact amount that CEMI receives for natural gas sold, less the proportionate share of post-production costs.
2. How is the price that CEMI sells the gas determined? The price of natural gas is set by market forces, primarily supply and demand. Those market forces provide information where informed buyers and sellers agree on the price of natural gas on a constantly changing basis. Natural gas is considered a commodity and commodity markets are inherently volatile, meaning the price of commodities can change often, and at times drastically. Pricing for natural gas is driven by the economy, the weather and other pertinent factors making it one of the most volatile commodities on the market.
Natural gas is priced and traded at different locations throughout the country. These locations, referred to as 'market hubs', exist across the country and are located at the intersection of major pipeline systems. There are over 30 major market hubs in the U.S. and prices fluctuate at each hub, depending on the supply and demand for natural gas at that particular point.
3. What does "Weighted Average Sales Price" mean? The Weighted Average Sales Price (WASP) of natural gas is the average price that CEMI pays Chesapeake Operating, Inc. during a given time period, usually a month. CEMI aggregates natural gas from multiple wells into a “pool.” The volume of natural gas aggregated in this pool is then divided into sales to many different sales points. The WASP is calculated by averaging the price received from individual sales out of this pool across the entire volume contained in the pool. This WASP is then applied to all of the wells whose production contributed to the sales pool. Chesapeake royalty owners are typically paid based on this weighted average amount in accordance with the terms of their lease which is an individual contract between the mineral owner (lessor) and the operating company (lessee.)
4. Please elaborate on “royalty payments are very specific to an individual well and lease.” The British thermal unit (Btu) value of natural gas is different from each producing well. Prices paid for natural gas may vary depending on the produced natural gas being considered higher heating value (HHV) or lower heating value (LHV), which is determined by the Btu value. Additionally, natural gas from a particular well may require more or less post-production processing and require different routes to sales points (discussed above) which will certainly impact wellhead prices.
An individual lease is a contract that is negotiated between a lessor and lessee. The lease terms may vary to meet the individual needs of a mineral owner so it would be inappropriate to try and answer a specific question about an individual lease. We encourage each Chesapeake mineral owner with questions concerning their royalty payments to contact our Contact Center Hotline. Our Contact Center is available to provide first-rate customer service for our mineral/royalty owners and is staffed with employees dedicated to answering your questions. The Chesapeake Contact Center Hotline is open Monday through Friday from 8 a.m. to 5 p.m. Central Time. You can reach us at 1-877-CHK-1GAS.

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Permalink Reply by The_Baron on September 16, 2010 at 3:51

Katie, please stop reposting the same post over again.

Also, I believe that most of us are not questioning the practice of selling to an affiliate, but the fact that CHK seems to be far below ALL other operators who do. Alos of question is if CHk is using its affiliates to circumvent leases that prohibit deductions for treatment and processine, i.e. Cost Free Royalties.


Luckily there are those (Thank you Henry) who are working to compile some useful data that will indicate what is actually going on. I still have an open mind, but so far the preliminary data is looking like CHk is routinly paying less, sometimes by a substantial amount than other operators in the same field.

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Permalink Reply by Henry on September 16, 2010 at 3:58

Katie,
Thanks for coming on and explaining this. I am really appreciative of your efforts to answer questions. I ask all respondents to be polite when dealing with Katie and/or Chesapeake. Katie is absolutely correct in that the price a leaseholder receives depends upon the specifics of the lease.

I will note that already, in response to my survey, one leaseholder got Chesapeake to admit and error and correct it. Everyone makes errors. I give Chesapeake credit for admitting it and fixing it.

If people think something is fishy, the best way to get to the bottom of it is to contact Chesapeake directly and discuss it with them. But, the second best way is to contribute to my survey of pricing, and let the facts speak for themselves. Right now, I do not have enough respondents to draw firm conclusions. Most of my Chesapeake respondents do not have cost-free royalties. Some, who initially told me they did, did not actually have this feature. I am in the process of contacting each of my respondents for more detailed and correct data, to see if we can learn more.

Finally, Katie can help you, if you let her. Let's not run her off.

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Permalink Reply by Henry on September 16, 2010 at 6:08

And.. some very good news... a second respondent in my survey has had conversations with Chesapeake. He has pointed out a problem, and Chesapeake has agreed to fix the situation, and pay him the extra money he is owed. A happy ending there.

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Permalink Reply by JD on September 16, 2010 at 6:52

Henry,

In the 2 cases you mentioned, did CHK ultimately pay a higher price for gas?

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Permalink Reply by Henry on September 16, 2010 at 8:06

JD,
I believe so. I think (?) that in both cases Chesapeake was making deductions when the leaseholder had cost-free royalties. I've asked both leaseholders to report back to me when the corrected statements come in, and update the prices they are getting. It will take a few weeks. Until I get the new numbers, I'm going to post blanks for them in my database.

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Permalink Reply by adubu on September 9, 2010 at 7:56

Sam---are you following the thread that Henry has been working on and collecting data about what price everyone receiving for their gas royalty on this site for past several months?

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Permalink Reply by Katie McCullin on September 10, 2010 at 15:01

Hi Sam - It's been a couple of days since your post; have you had any success notifying Chesapeake? Because every lease represents an individual contract between a mineral owner and an operator, our Royalty Owner Contact Center at 1-877-CHK-1GAS is the best resource to obtain information on your specific lease. Try to have your Royalty Owner Number handy as that will make it easier to locate your lease, etc. Please let me know if you're able to gain information on your issue. Have a great weekend!

Thanks!
Katie

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Permalink Reply by Sam on September 16, 2010 at 2:11

They did email me back. They DO sell to a Chesp. owned entity called Chesp. Energy Mkting Inc. How can i find out if it is legal? and what the going price should have been? All the info they gave me was what I know...what they paid me! I want to know what the going rate each date was and are they required to give that...S

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Permalink Reply by The_Baron on September 16, 2010 at 3:06

Hope you had your boots on when you read the email.


IMHO, it probally is legal.... but being legal doesn't always make it right.

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Permalink Reply by Henry on September 16, 2010 at 3:14

Sam,
I sent you a friendship request. I hope you'll accept it, and I can then collect your pricing data, as well as let you know the status of my survey.

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