Replies to This Discussion

Permalink Reply by 1kw6x71km1v37 on February 6, 2014 at 7:37

In lieu of Point of Sale, which can be the right hand selling to the left hand, I prefer the term Point of Ownership Transfer to a non-affiliate of any kind, and to specifically exclude sales to favored parties as ownership transfers.

As far a pricing goes, you just have to know the market, or someone who does.

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Permalink Reply by jim weyland on February 6, 2014 at 7:56

we used to use the words "arms-length" and "non-affiliated third party" with respect to sales/purchases. and, somewhere we'd state that it was the parties' intent that all transactions would be representative/reflective of fair market value at the time/place of the transaction. and, somewhere we'd state that the parties to the contract acknowledged that they had the duty of dealing in good faith in all regards with respect to their performance under the contract. 

maybe, it was because folks that would agree to such language were not of the sort to try to put the wood to you, but we never had issues when we got those items in an agreement.

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Permalink Reply by jim weyland on February 6, 2014 at 10:22

and, were i to be drafting an agreement from the rio's perspective, i'd define  the "pricing point" as the first liquid sales point d/s of the wellhead/lease line which has a published index price, in this case the perryville hub.

from there, back to the agreed upon "sales point", let's say, the wellhead or lease line, i 'd then allow for the deduction of actual and verifiable costs of getting the product from the "sales point" to the "pricing point". in so doing, you've limited their opportunity to knock you into the cheap seats as to price.

note; the provisions regarding arms length, ect. as set out in my prior, related post apply here, too.

. note2: the allowable types of deducts would be specified, examples being gathering costs, post lease line and compression fuel costs, post lease line

of course, in a contract, theoretically, everything is negotiable, but in reality the rio usually doesn't negotiate from a position of strength. (now, if you have size, it's a different matter, just ask the kleberg family, owners of the king ranch. when they were leased by humble back in the early '30's their lease was some thirty pages in length, i'm told; it's still in force, as amended.)

a final thought, all of my comments in both posts were based upon the perspective of the theoretical nature of mr. aldridge's thoughtful, original post.

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Permalink Reply by Joe Aldridge on February 6, 2014 at 13:24

Thanks Jim for your very insightful post. I'm trying to get as many responses as possible and I thought there would be more at this point. There seems to be so many royalty owners out there that are unhappy that I wanted to get a thread started that would focus on satisfying some of the concerns and abuses that owners feel they have. 

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Permalink Reply by tc on February 6, 2014 at 14:00

I know this will be unpopular, but I think some landowners are crazy to think they can have a cost free lease and then expect the operator to transport their gas or oil to the best price point.  I see this happening even more when the LNG ports open and landowners see prices listed in the paper and complain when they don't get these prices.  Creating and shipping LNG is very expensive.

I also think one of the biggest mistake that royalty owners make is that leasing makes them a small business and they need to either possess or buy certain skills.  Not only are they a small business, but they are contracted with a much larger business and that type of relationship has a history of ending badly for the unprepared.

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Permalink Reply by Skip Peel - Mineral Consultant on February 6, 2014 at 14:23

Sometimes the unpopular should be spoken.  GHS has a long history of mineral owners that embraced opinion and advise offered up without regard to specific critical facts that led to less than intended outcomes.  That's why Keith has a disclaimer:

THE VIEWS EXPRESSED, by any member(s), ON GoHaynesvilleShale.com have not been officially reviewed by any staff member, legal counsel, or moderator at GoHaynesvilleShale.com (GHS). GHS is not intended to provide official professional advice which includes but is not limited to advice relating to legal, financial, accounting, tax or investment and shall not be relied upon in any way.

Polite discussion including spirited disagreement should not be constrained.  And everyone should feel free to post their opinion short of personal attacks and conduct specifically prohibited by the site rules.  However it is good to occasionally remind members that GHS is not a substitute for professional assistance in dealing with the complex issues often discussed.  

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Permalink Reply by Joe Aldridge on February 6, 2014 at 15:17

tc,

I agree 100%. And I agree that some will not be happy with your view or mine. When I first heard of "cost free royalty" I could not understand the concept. All leases are written with the stipulation that the operator can use produced gas for lease hold purposes. That includes: treatment, compression and even running a pump jack among other things that are directly related to the lease and are used on premises. This brings up an incongruity though that all current leases seem to have. They state something to the effect that production shall be considered as product produced at the well head. That to me means that the royalty is "cost free". That seems to be where heads start butting.

Now I can understand the problem that some have seen with their gas being sold several times or to affiliated companies before their royalty is paid. On the other hand if the gas is sold numinous times then each sale should be at a higher price. So the royalty should be the highest amount paid at that point. Would love to see the accounting. On the other hand if the NG is sold FOB at the point of sale (entry into a common carrier pipeline) and that price is tied to the Henry Hub price and not some arbitrary price that the operator or pipeline comes up with then would this not be a better system?

And  Skip, I'm not trying to give legal advice. I'm trying to understand why some royalty owners are not happy with the income from the production and start a discussion to see If there is a better way to describe the point of sale for the royalty income. This approach that I have outlined above would keep companies from undervaluing the products produced and sold and still allow for the expenses that the operator incurs for producing the product.

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Permalink Reply by Skip Peel - Mineral Consultant on February 6, 2014 at 15:31

That's fine, Joe.  Go ahead.  I am merely pointing out that language attempting to address a complex legal point should be vetted by a professional.  It should also be mentioned that the language may not be acceptable to an energy company.  Some mineral owners are in a better negotiating position than others owing to size and location of mineral interest.  It is wise to know the potential implications before deciding on a course of action.

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Permalink Reply by jim weyland on February 6, 2014 at 15:24

i agree, sir.

the reason for a liquid pricing point methodology as i've previously described is to ensure a fair, market priced transaction for all parties. all legitimate post lease cost deductions such as gathering and transport, among any others, should/would be made in order to netback to a non-gamed wellhead or lease line price payable to the rio.

were i an operator, i know my wio's would expect no less were they to sell joa.

imo, the best result/outcome for parties not electing to market their shares of production (i.e. those selling joa) or those parties not able to market their "share" of production ( rio's) is to try to contractually to clearly identify a liquid marketing point and to even more clearly recognise allowable deducts back to the title transfer point.

those selling joa have protection(s), not the least of which, in addition to joa defined terms/rights, is being not wanting it to get around that you've done your non-ops wrong. do it often enough and you won't be able to get anyone to go in with you in the future.

as a general matter, imo, most rio's sit in much less equal/desirable positions. lacking strong correlation of "interests" with the state (the lack of which seems unfortunately, imo, to be the case in la; much less, the state's seeming toothless dog enforcement of those rights it chooses to recognise/legislate upon), the rio has only the power of expert knowledge and "throw weight" the later of which usually only comes if possessing acreage of such size or location, the lack of which would put a serious hitch in the operator's come along.

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