CHK Unit Survey: Now they tell me they've over paid

 I own a royalty interest in a CHK well that has been producing for almost 5 years.  I recently received a letter from CHK indicating that they have performed a new survey of the section, and that it is ~5 acres smaller than originally calculated to be.  As a result, according to the letter, I have been overpaid more than 15% on my royalty payments (the section shrunk by less than 1%) and they have suspended my royalties, and, oh by the way, would like for me to start mailing them monthly checks to cover the overpayment.  I have a few questions related to this situation, and I'm hoping some of you will have some advice.

1.  Any idea how a reduction of less than 1% of acreage in the section could lead to an overpayment of more than 15%?

2.  Since I took calculus in college (4 courses), it seems to me that the only statistic that matters is what my % of the unit is.  If the unit got smaller, CHK's income from the well didn't go down, so why should mine?  Did my % of the unit get smaller?

3.  this situation is complicated by the fact that my extended family owns at least 1/2 of the land in the unit, and it seems that all of us were overpaid.  this seems contrary to my simple math approach.  Any comments/observations?

4.  My family members and I are fairly certain that no actual "on the ground" survey was performed.  No stakes, no flags, and some of the sizable tracts are behind locked gates not accessible by CHK.  The CHK financial person that called me (after I didn't respond to the letter) and then the CHK landman I was referred to suggested that perhaps when I bought the property, I didn't get a good survey, and I own less than I thought.  The problem here is that my family bought the property more than 100 years ago, and it has merely been divided among the children.  And we all seem to be the losers in this survey.

5.  Louisiana has a law that sets a statute of limitations of 3 years for claims for the overpayment or underpayment of royalties, assuming the Party asserting a claim has been reasonably diligent in discovering the overpayment or underpayment.  Which leads to the obvious question - why would CHK wait 5 years to do a second (that's right, a second) survey of the unit?

It is very difficult to not make assumptions of bad motives here.  My simple thoughts are that CHK drilled a well, and the well has produced whatever it has produced.  Assuming that every tract is leased, then CHK owes royalties to the mineral owners of whatever the % is of RI.  A survey can't decrease, overall, the RI and result in an increase of the WI.

on final question:  we are guessing that the "survey" is based on satellite data, not on the ground actual surveys.  Would this stand up in a La. court?  Fences may not be in the precise place, but the various owners would be very hard pressed to prove "ownership" through adverse possession.  In fact, almost none of the various family owners of parcels actually live or actively possess their tracts. 

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Permalink Reply by Spring Branch,mineral owner on February 9, 2015 at 6:13

Often times a 5 acre reduction in the total acreage count in a section results in an INCREASE, not decrease in the royalty interest of a mineral owner as the denominator used in the calculation is now smaller!!!!    That is unless it's your 5 acres that is being eliminated.  Have you asked to see the new survey?  I would want to know which specific tracts in the unit have been reduced by the 5 acres.

Permalink Reply by Steve P on February 9, 2015 at 9:02

I have asked for a copy of the survey, but have not seen one yet.  My family has owned several hundred acres in this section for more than 100 years.  Best I can tell, according to CHK, all of us have been substantially overpaid.  Our letters do not reflect that our individual tracts are less than described on the ownership roles, just that the unit is smaller.  It is possible that I own less than I thought, but collectively, highly unlikely that all of the family owns much less than what we thought. 

208ef0t5wi05pPermalink Reply by 208ef0t5wi05p on February 10, 2015 at 5:04

Skip,

   What you don't know is that when I filed a complaint with CHK over shorting my royalties, the Revenue Dept accidentally sent the CHK Spreadsheet of the well production, showing that they have sold to themselves CEMI on every sale, and had 3 columns of deductions.

My lease is a no deductions lease and the royalty statement shows no deductions.

That makes CHK a company you cannot trust.

Permalink Reply by Skip Peel - Mineral Consultant on February 10, 2015 at 5:22

Ron, since I work with O&G law firms on a regular basis, including occasionally in litigation against CHK, I follow closely the result of decisions and settlements in regard to the legitimacy of deductions.  I've seen evidence uncovered in discovery and participate in discussions with attorneys who have filed suits against CHK.  Since I'm not an attorney I won't attempt an explanation but I can tell you that not all "no cost royalty" clauses stand up in court.  The attorneys that I work with have a page and a half of royalty deduction language in their custom leases.  Anything short of that amount of detail may or may not be construed in a court of law to prohibit all deductions under all circumstances. 

Permalink Reply by Tom Graves on February 13, 2015 at 15:27

Skip, have these "custom leases" you refer to actually avoided the Fuel and Gathering deductions that many of us started seeing on CHK royalty checks beginning in April, 2013?   My O&G attorney, who sits on the Louisiana Mineral Law Institute Council, was not able to draft a "no cost royalty clause" in my lease that CHK would honor.   Of course, my attorney disagrees with their subsequent application of deductions but the only recourse is costly litigation with a low probability of success!   I certainly agree with your earlier statement that "CHK's reputation leads many to assume the worse."   I think there is enough 'smoke' surrounding this company to justify calling the fire department.

Permalink Reply by Skip Peel - Mineral Consultant on February 13, 2015 at 17:09

Tom, it sounds as if your O&G attorney may also be my O&G attorney.  Yes, the custom lease language has been effective as far as I know.  The other part of the equation however is that the mineral lessors who are able to get a lessee to accept that amount of royalty detail are also considered by the energy companies to be capable of taking them to court if they don't abide by the terms.

Whether CHK or any other operator will accept lease language that restrictive has a lot more to do with the size and location of the mineral interest than it does with who the identity of the attorney.

Permalink Reply by jkw3 on February 9, 2015 at 6:24
  • CHK and some other operators have been a bit tardy in their obtaining tract surveys for their Haynesville units which were required by the original unitization orders.  These tract surveys should be actual surveys prepared by registered surveyors, not estimates from aerial or satellite data.  The changes  from CHK's original estimated numbers are of the overall boundaries of the unit and the individual tracts.  Though the total unit size may have changed less than 1%, changes in the number of acres attributed to your tract in the new survey have a more significant effect on your royalties.
  • Working interest owners, as well as royalty owners, are receiving notice of the resurveys and the effect on working interest and net revenue percentages.  You are correct that for royalties prescription should limit the adjustment to three years.
Permalink Reply by Steve P on February 9, 2015 at 9:04

thanks for the response.  The letter from CHK simply attributes the overpayment to a change in the unit size.  Changing the size of the unit does not actually make the "pie" larger or smaller for the total royalty interest payout,  It may affect the proportion of individual mineral/land owners based on the size of one's tract.  But here, it seems that the owners of almost 1/2 the section are all facing a claim of overpayment of royalties based on the new survey.  I'm interested in see the plat to see who the "winners" are.

the three year prescription is pretty important here, because even if there has been an overpayment, the bulk of that would have been in the first 18 months, which is outside the three years.

Permalink Reply by kittycatmama on February 11, 2015 at 14:43

Steve, I had same thing happen with a different co. and THEY made a mistake on their division order survey. I was able to show them our deed, a copy of ORIGINAL plot plan, and how we purchased the property. It took several months to straighten out but we did receive the back pay. Good luck

Permalink Reply by Mike Bradstreet on February 13, 2015 at 5:51

First, I'm sorry you leased with CHK, second the size of the section has 0 to do with your interest, you own X acreage, and they pay based on your division order what is due you.  Mistakes in the division are not your problem, as much as I hate attorney's, You need one!!

Permalink Reply by Spring Branch,mineral owner on February 13, 2015 at 11:08

Mike B.  I disagree with you.  The size of the Section has everything to do with a person's royalty interest which appears on the Division Order assuming the same mineral acreage ownership.

Example:  Lets say a person owns 10 acres of minerals, leased at 1/4 royalty in a 640 acre section.  The calculation for that person's interest that appears on the Division Order is as follows:   10 divided by 640 X .25 equals ..00390625 RI.  That is the number that would appear on the Division Order.

Now lets say that same person owns 10 acres of minerals, leased at the same 1/4 royalty in a 630 acre section.  The calculation for that person's interest that appears on the Division Order would be as follows:   10 divided by 630 X .25 equals ..00396825. That is the number that would appear on the Division Order.

The person with 10 acres in a 630 acre section owns a larger royalty interest than the person in a 640 acre section.  I can't make it any more simple than that.

Permalink Reply by Greedy Landowner on February 13, 2015 at 14:22
The end of the story will be that you won't be able to do anything about it. They are able to do what they want exactly when they want to because the laws in our state heavily favor the production companies. They have profited millions from their business practices and our elected officials have done absolutely nothing to protect the landowners. I'm in a couple of situations with them that aren't just like yours, but they involve the same shady type maneuvers.

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