The article below was sent to me.  I am somewhat bothered by the "10-year, 100 percent fixed-fee gathering agreement."  That seems to eliminate any competition or motivation to keep gathering costs down.  Given the concerns we already have about CHK's higher-than-average deductions for their royalty owners, this does not sound good to me.  Does anyone else have a better interpretation of what this means?

 

Midstream paying $500 mln cash

* Involves 220 miles of pipeline in Louisiana

HOUSTON, Dec 16 (Reuters) - Chesapeake Midstream Partners L.P. CHKM.N> said on Thursday it plans to buy a natural gas gathering system and related assets in the Haynesville Shale from a subsidiary of
Chesapeake Energy Corp (CHK.N: Quote, Profile, Research, Stock Buzz) for $500 million cash.

The acquisition will be financed with a draw on the partnership's revolving credit facility of about $250 million plus $250 million of cash on hand.

The partnership will acquire Chesapeake's 100 percent ownership interest in the Springridge system which consists of 220 miles of gathering pipeline in Caddo and De Soto Parishes in Louisiana .

At closing, the partnership will also enter into a 10-year, 100 percent fixed-fee gas gathering agreement with Chesapeake Energy.

After the deal, Chesapeake Midstream will have about $500 million of additional borrowing capacity on its credit facility.

The deal is expected to close before the end of this year. (Reporting by Anna Driver in Houston; Editing by Tim Dobbyn)

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Henry. I got your message but my reply will not go through. This is the same rep that will not return my call, I will try to email her.

Thanks for all you do.

Here is some more reading material.  One is an Arkansas class action against Chesapeake and BP and the other is a Texas case, ROSS V. SHELL OIL CO., which has been through appeal and had a decision early this year.
Attachments:
These issues have been litigated in Texas and Louisiana extensively.  Both states are identical in permitting lessee's the right to charge reasonable post-production costs to the royalty owner.  The lease does not have to set out this right expressly.   (Other states, such as Colorado and Oklahoma follow the marketable product rule, providing the operator must cover all charges incurred to render the gas "marketable").   Texas and LA have diverged in their treatment of leases containing a cost-free royalty clause.  Texas' more oil company friendy Supreme Court has held this language is superfluous, because the operator can utilize the net-beck method of arriving at "market value" at the wellhead.  Louisiana has not followed this line of reasoning, and one would hope they will not. 
Ben can you explain the net-back method, please.
The operator starts with the downstream price it receives at market, nets out all of its post-production costs incurred up to the point of sale (compression, gathering, transportation, processing, etc.) all the way back to the wellhead and the end price is deemed to be "market value" at the wellhead.  

So, what happens when the lessor has a cost free royalty clause (other than taxes)? Are you saying they still pay the "net-back" price at the wellhead to the mineral owner?  What is the point of even having that clause, if you are going to pay all of those costs anyhow, due to the operators accounting methods for deriving the price of gas sold? 

Is there (lease) language that can be used to stop them from doing this? 

In Texas the clause has little use without additional language.  What I and other lawyers have done is insert language in our leases to the effect that the lessee agrees not to use the net-back method of determining price on which royalties are to be calculated under the lease, and that the case of Heritage Resources v. Nationsbank (the TX case at issue) is inapplicable to the parties' agreement.
Has it (additional language) been effective, in your opinion?
Has not been tested in the courts yet, and have not heard from clients as to whether it is being complied with.
Well said GoshDarn. Very well said.  I've been thinking for some time, it will take a class action suit to force them to do what's right.

Hold up on that thought, GoshDarn.  I think the keyhole event is up next.  Let's see if that cowboy can get his horse, indeed has a horse capable, of turning on a dime.  Might give the payin' customers something to cheer and give the idle rodeo hands something to do.

 

80)

I'd hate to see a class action suit... but if that's what it takes to get their attention... so be it.  Chesapeake's board of directors seem asleep at the wheel.  I once thought they were some fairly honorable people.  I also think a mass number of people showing up at the next stockholder's meeting might be an option!

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