Replies to This Discussion

Permalink Reply by 1kw6x71km1v37 on January 1, 2014 at 7:43

An attorney's explanation of what's wrong with the standard royalty clause and how it happened:

http://images.jw.com/com/publications/140.pdf

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Permalink Reply by Andrew on January 1, 2014 at 18:05

Cheap Shot, thanks for posting that article. Mr. Dunlap's essay only begins to raise a point that should be obvious to most people who are involved in oil and gas - the traditional royalty clause in a Bath/Producer's 88 lease is antiquated, and probably creates more confusion than it prevents.

Technically, the lessor's "royalty" is a right to a percentage of the actual oil or gas that are produced from his land. At the dawn of the industry, the lessee would deliver the lessor's share of production to the lessor's tanks and wish him the best of luck in selling his oil. This arrangement made sense when the industry was born, in a low-tech era where oil was used for kerosene lamps and natural gas was nothing more than a blowout risk that was vented into the the atmosphere.

Today, the "royalty" the lessor wants is a check in the mailbox at the end of the month, which can be from nearly a dozen different hydrocarbons produced in a hundred different ways. If the industry stakeholders today were to make a contract from scratch that would reflect what all parties expected when negotiating a lease, I can't imagine that their contract would bear much resemblance to what is still being used in virtually all modern leases.

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Permalink Reply by Paul on January 2, 2014 at 2:56

we own 52 acres

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Permalink Reply by Paul on January 2, 2014 at 2:56

Are you saying that that well only produced $29 per acre per month?

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Permalink Reply by Skip Peel - Mineral Consultant on January 2, 2014 at 3:47

Yes, that is what I am saying.  The production for the month of Oct. 2013 (the last monthly report on SONRIS) was 24,109 mcf (thousand cubic feet).  Divided by 640 (the acres in the unit) that would be 37.67 mcf per unit acre.  Assuming that you have a quarter royalty lease you are credited for one quarter of that production - 9.4175 mcf.  The average monthly settlement price for Oct. 2013 was $3.50.  I don't know your price per mcf for Oct. 2013. I am arbitrarily calculating that your price paid was closer to $3 net, it could be less.  9.4175 X $3 = $28.25.  Since that's for one acre and you own 52, your royalty for the month should have been $1,469.  You should not fall under the pay policy requiring at least $100 royalty per month so there is something else affecting your royalty payment.  I have no idea what that may be. 

It is my desire to have mineral lessors understand the nature of Haynesville Shale production.  The wells produce prodigious amounts of gas in the first few years of life.  The pressure is high and so is the decline.  Monthly production declines swiftly and becomes stable and relatively flat at 5 years.  Royalty payments reflect this production profile.  When your well started producting natural gas prices were around $4.29 per mcf.  Over the life of your well  price has fluctuated as low as $2.04 in May 2012.  Your well is now in its 5th. year of production and the steep portion of the decline curve has occurred.  Your royalty payments as far as the amount of gas produced should decline much more slowly now.  All Haynesville Shale wells follow this pattern with few exceptions.  It is important for mineral lessors to understand these facts so that they can make informed decisions regarding their royalty income.

The other fact that far too many Haynesville mineral lessors miss is that they will get more than one well.  All Haynesville drilling & production units qualify for at least 8 wells.  It is up to the operator how many they will drill however they will all drill additional wells when it suits them.  At some point mineral lessors will be receiving royalty on 6 to 8 wells simultaneously.  They will all be producing in various stages of their life cycle but for most should do so at improved and more stable natural gas prices.

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Permalink Reply by Paul on January 2, 2014 at 4:58

Here's the BIG LIE, we were told that our shale would make us millions, MILLIONS!!!! It's not even remotely close to millions. Our financial guy lied, the gas company lied. the lease guy lied. everyone associated with this mess lied!!! It was all just hype! Tell me why I shouldn't sell my royalties? WHY? I'm so frustrated!!!!!!

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Permalink Reply by Skip Peel - Mineral Consultant on January 2, 2014 at 5:39

Paul, it only seems like a lie because you don't understand the basics.  See my comment about multiple wells over time.  You're basing everything on one well and a single 4 year period. 

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Permalink Reply by Paul on January 2, 2014 at 4:51

Is there anyway to "Shame" Chesapeake into doing the correct thing and actually honor their contracts? Are they really able to just duck their responsibilities? Should I just give up and accept that Chesapeake is a dishonest company that cares not a whit about it's contracts. We now live in a world where someone's word is worthless and even getting it in writing, a past standard protection, is worthless. Our country has failed. Our businesses have failed. Chesapeake has failed. I'm the flea and Chesapeake is the Giant that squishes me with deep pockets and a boat load of lawyers. Would going to the news do anything except open me to ridicule? I don't know what to do? Please help! Is their a lawyer out there that would sue Chesapeake pro bono? I Have a feeling i'm S.O.L. Thanks in advance!!!

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Permalink Reply by 1kw6x71km1v37 on January 2, 2014 at 5:19

This Haynesville Shale royalty payment fiasco is beginning to smell strongly of class action with so many similarly situated lessors seemingly shortchanged in the same manner. If I had a dog in this fight, I would certainly at the least run the issue by a good O&G attorney.

http://caselaw.findlaw.com/la-court-of-appeal/1052440.html : The prerequisites for class action lawsuits are found in La.Code Civ.P. art. 591 et seq.   Pertinent to the issues before us is La.Code Civ.P. art. 591, which provides:

A.  One or more members of a class may sue or be sued as representative parties on behalf of all, only if:

(1) The class is so numerous that joinder of all members is impracticable.

(2) There are questions of law or fact common to the class.

(3) The claims or defenses of the representative parties are typical of the claims or defenses of the class.

(4) The representative parties will fairly and adequately protect the interests of the class.

(5)  The class is or may be defined objectively in terms of ascertainable criteria, such that the court may determine the constituency of the class for purposes of the conclusiveness of any judgment that may be rendered in the case.

B. An action may be maintained as a class action only if all of the prerequisites of Paragraph A of this Article are satisfied, and in addition:

(1) The prosecution of separate actions by or against individual members of the class would create a risk of:

(a)  Inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or

(b) Adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests;  or

(2) The party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole;  or

(3) The court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.   The matters pertinent to these findings include:

 (a) The interest of the members of the class in individually controlling the prosecution or defense of separate actions;

(b) The extent and nature of any litigation concerning the controversy already commenced by or against members of the class;

(c) The desirability or undesirability of concentrating the litigation in the particular forum;

(d) The difficulties likely to be encountered in the management of a class action;

(e) The practical ability of individual class members to pursue their claims without class certification;

(f)  The extent to which the relief plausibly demanded on behalf of or against the class, including the vindication of such public policies or legal rights as may be implicated, justifies the costs and burdens of class litigation;  or

(4) The parties to a settlement request certification under Subparagraph B(3) for purposes of settlement, even though the requirements of Subparagraph B(3) might not otherwise be met.

Further reading on class actions:

http://www.keanmiller.com/docs/2011_class_action_decisions.pdf

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Permalink Reply by Skip Peel - Mineral Consultant on January 2, 2014 at 5:48

cheap, the problem is that Louisiana courts to date have placed stringent limits on class certification in cases involving royalty disputes.  Those limitations have had the effect of keeping the number of qualifying plaintiffs relatively small.  Until a judge would choose to loosen those limits cases must be brought by groups of lessors with substantially the same circumstances. 

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Permalink Reply by Skip Peel - Mineral Consultant on January 2, 2014 at 5:30

The first thing to do is to realize that your relationship with CHK, or any operator for that matter, is not a morality play.  It is business.  There are plenty of members who will gladly offer you advise.  You have to decide what to believe and how to act on what you believe.

Here's my suggestion.  Make a list of actions to take in a sequential list.  Although many will say skip everything and go directly to certified letters I have two concerns with that approach.  Many times the answer to a question is simple and does not have to get placed in the large stack of certified letters waiting for review by a legal department staffer and that a certified letter rarely accomplishes what is intended unless it is worded correctly.  In other words if you don't want to get into an extended period of correspondence the letter should contain all the pertinent information and request a specific response.  I prefer to track down the direct email address for the person in accounting responsible for a specific well when seeking answers concerning royalty issues.  Sometimes that will get you  a direct answer as to the well's status and that answer will provide you with the options to proceed.  If a well is temporarily shut-in (for a number of common reasons)  production ceases and so does royalty payment.  Most leases address shut-in payments so you would have to look to that language for the conditions under which shut-in payments are due.  If the problem is one of accounting, you should request an explanation and specific details of how your royalty was/is impacted.  If you do not receive the information requested or disagree with the explanation it is time to write a certified letter.  You'll need help to write a good one or an O&G attorney to do so for you.  The email correspondence can help in this regard.  If you do not receive an answer to a certified letter in a reasonable time frame, say 30 days after delivery, you can get referrals to an experienced O&G attorney or firm from GHS members or whomever you would trust to make an informed referral.  All the O&G attorneys that I know will offer a no cost introductory meeting to determine your issue and the pertinent facts involved.  If you have documentation, emails and any other documents, you can usually get a review and initial assessment.  If the attorney feels that legal action is warranted they will give some idea of actions and related costs for your consideration.  Some O&G attorneys will take pro bono cases under the right circumstances but in my experience the good ones do so only rarely. 

If protests, petitions. letters to elected officials and negative media coverage were effective in modifying the behavior of CHK in regard to royalty deductions the company would have changed its ways years ago IMO.  Although your complaint is not deduction related, that is the main legal issue involving CHK at this time.  It will take no only litigation but verdicts in favor of plaintiffs that will withstand appellate scrutiny in order to force CHK to change it's policy on deductions.  And then it will take further litigation and verdicts to make those decisions stand up in each state.  That big battle is beyond the means of the little guy.  So for little guys I suggest a measured and courteous approach to get all that you can get that way. 

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Permalink Reply by Paul on January 2, 2014 at 7:30

Thank you for your info. My question is, what do I do when they won't even talk to you? They tell me it's in suspension and that's all they can tell me. Also they say a person will get in touch with me soon, it's been three months!!! I can't find out who is even in charge of the accounts to talk to them!!! This is what has been so frustrating!!

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