Deductions from Royalty checks

Is anyone else getting unusually high deductions from your royalty checks from Haynesville shale wells?

My most recent royalty payment from Petrohawk has deducted 23% of Gross Owner Value for Transportation, Treating and Gathering costs. When Petrohawk started paying last year, deductions averaged 15% and they've been climbing since. The Lease is not specify on deductions with a general "boilerplate" clause regarding business expenses.

Most of my other payments have no deductions (other than Severance Tax) and 2 other payers deduct less than 3% for similar charges.

What's your experience?

Thanks in advance,

Diane

Tags: Deductions, Royalties

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Permalink Reply by Diane Daniels on February 22, 2012 at 8:23

Thanks, Henry - you are right.  My deductions are about $.80/MCF. Here's the breakdown:

TRK = Treating charge which varies from $.14 to $.18 / MCF

GTK = Gathering charge which is usually $.36 / MCF

TR  = Transportation charge which varies from $.24 to $.28 / MCF (and only started being deducted after Petrohawk stopped deducting Severance Tax - odd coincidence).

I'll try to upload my analysis spreadsheet for your Gas Survey, Henry.

Also, since I posted this, I've received a Certified Letter from Petrohawk, as has another co-owner. To be referred to a "litigation attorney" after we each respectfully requested clarifications and support of the deductions seems unusually defensive.

Petrohawk's position is that the royalty is based on "market value at the well" [as the Lease states] and it's computed by deducting  "costs incurred to treat and move the gas from the well to the point of sale".  They claim this is supported by the case of Merritt v. Southwestern Electric Power Co, (La. app 2d Cir. 1986).  I'm not a lawyer - does anyone know this case?

The issues seem to be:

- applicability of Merritt to our situation, and

- how to validate the costs/deductions charged to us (Petrohawk states we have no audit rights), and

- how to write future leases to insulate owners from unsubstantiated deductions.

Any suggestions on how to proceed without paying for an attorney?

Permalink Reply by w.r. frank on February 22, 2012 at 10:00

Diane,

Does your lease have an addendum prohibiting deduction of "post production" expenses (i.e. gathering, treating, dehydrating, processing, marketing, compression, transportation). If not, you are probably stuck with these expenses.

Permalink Reply by GoshDarn on February 22, 2012 at 16:00

Diane:

As the previous poster advised, your signed lease takes precedence, short of fraud.  So without lease/addendum language specifically excluding such deductions, the operator has wiggle room to pass on the associated production costs to the royalty owner (as I understand it, but I'm not a lawyer).

In other words, such leases are binding contracts to both parties.  Also, the courts like to define fraud as "intent" to fraud.  Without intent, it's hard to get a judge to rule against a corporation.  Plus, if these particulars went to court, it'd be civil court, not criminal court (unless there was fraud).

Which means, if I'm reading your statement correctly, your royalty is relatively low and it wouldn't be worth it to hire a lawyer.

About all you could do would be go to small claims court, i.e., without a lawyer.  But I doubt you'd win.  Or join a class-action suit.  (Tough call on that one.)  CHK is facing such, it seems. 

So, per all of the above, basically you can only complain to HK.  That's about it.  And I doubt that'll do you much good, unless you can find a blatant mistake being made in the numbers somewhere, and not in the general context of the high percentages of deducts.

Finally, if Henry is correct -- and the guy really does seem to consistently know his stuff in regards to these types of issues -- then once the price of NG goes back up (and it will maybe someday), then these onerously high percentages will drop.

Lastly, since you posted a spreadsheet, and since there are so many columns, and since I would advise you to delete that post so as to protect your privacy -- I can tell you that I've compared HK NG pricing to other operators and HK does consistently pay a relatively higher price to the royalty owner for the gas.  So, yes, the deductions are high, but per that pricing wash, the bottom line isn't really enough to get too bent out of shape about.  In other words, you can rationalize it or justify it by calling it the price to do business.

Sort of a small price to pay, more or less (in your case).

Plus, now that you've learned this big lesson, I'm sure you'll never sign another lease without a "free royalty clause."  Ergo, you might tell your friends.  Doing such a good deed won't, of course, make the pain go away, but it'll make your conscience feel a bit better.

Yeah, well -- thanks for posting this topic.  I'm always learning, and because you stepped up and asked some questions which needed to be asked, others on GHS have benefited.

Good luck.

Permalink Reply by Larry G Smith P.E. on February 29, 2012 at 11:49

A note to all of you with Royalty in the Hainsville formation, I have spoken to an Attorney with the Attorney Generals Office here in Louisiana. If there are enough complaints, his office will investigate the problems we are having. You can contact me and we can all send him our information.

 

Permalink Reply by Diane Daniels on February 29, 2012 at 12:26

Larry,

Since I'm getting no cooperation from Petrohawk perhaps the AG office is the best option. 

Permalink Reply by Larry G Smith P.E. on February 29, 2012 at 12:51

I have talked to the Attorney there and he told me if there was enough people having problems, they would consider doing an investigation.

 

Permalink Reply by Henry on March 1, 2012 at 0:56

Larry,

Rather than bury this information in a discussion, why not start a new discussion on the main board to let people know.  It would help people if you would provide the name and number of the attorney in the Attorney General's office, so people would know whom to contact.

Permalink Reply by Larry G Smith P.E. on March 1, 2012 at 1:52

I agree but is any one is interested please send me an e-mail to my e-mail address and I will reply with that information to them.  I have his name, phone number, e-mail address and office address and will share it. I would contact him and let him know that you will be sending information to him.

Permalink Reply by GoshDarn on March 1, 2012 at 12:41

Larry:

I'm glad someone has the AG's ear and is willing to put in the effort to have the state look at this royalty-deductions issue.  The AG needs to do its job.

Note:  I'm not sure if you realize it or not -- but the only way for members to e-mail you is per having to first "friend" you via such a request.  In other words, no one has you private e-mail address.

Then, once you approve a "friend" -- the member can proceed to send you an internal GHS e-mail to your "inbox" and your outside private e-mail address will still remain private. 

Permalink Reply by Roy Austin Smith on March 2, 2012 at 11:24

cheseapeke: is dedcuting hiden expenses out of my check.  as of about june started listed back taxes-company emploees call production taxes-La calls servance tax.

I wrote many many emails and phone calls, because the landowner joing my land was getting approximately $3.70 and I was getting $1.70, they run around the bush for about three or four months and I think an employee accidently sent me a spread sheet showing the expenses deducted.  I did no completly understand it.  I requested(proably a dozen times) for two more copies of different months, by email.  They quit answering my email.  called them on the phone about a different matter, ask employee about the copies i had previously been told by phone, that they would send,. Employee answer: We do not have to send copies and we will not send copies.  C heaseapeake is more than likely deduction this from income tax.  Why can the land owner not get copies and deduct it from his income tax.  After all this land has been in my family for many year.  I and my father have put many, many hard working hours on this place in the last 80 years or more.  It does not belong to the state of Louisiana and does not belong to Cheasepeake.  Would be hard to prove but the broker told me many lies before the leaseing of part of my property.   Threathen to drill(lease running) out if i did not sign for the price wanted.  contacted a lawyer.  cost me a good bit . they raised the price of gas for about one month and then cut production almost to nothing and dropped the prices back.

Permalink Reply by elizabeth person on March 2, 2012 at 10:41

I was told we could deduct "marketing and gathering" fees and there was a state conservation severance also deducted. My total is $1283.23 and that just seems to be too high to me. i was told the same thing last year,but I forgot my total. Does this seem right to you? The man who called me back said he could not give me legal advice and I knew that already.

Permalink Reply by Larry G Smith P.E. on March 2, 2012 at 11:06

the total you are showing, is that the check total or is that the amount that was deducted. Who do you have your lease with?

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