Replies to This Discussion

Permalink Reply by Big Sky Mineral Trust on May 26, 2015 at 8:10

Why was this not a Class Action?

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Permalink Reply by Henry on June 18, 2015 at 1:40

This is not a class action suit because it is virtually impossible to form a class.  My understanding is that to form a class, all the plaintiffs must be identically situated.  In this case, because everyone's leases are slightly different, they are not identically situated.  McDonald Law Firm does not make its money on mineral law.  Rather, they specialize in what are called "mass tort" cases, where people are harmed my some large company.  (Think Erin Brokovich.)  Each plaintiff files a suit, but the many suits are quite similar, so the law firm doesn't have to do separate discovery for each case.  Once they get going on one case, they are prepared for all the others.  McDonald has done this successfully in the past in cases totally unrelated to oil and gas.

IMHO... the plaintiffs should be happy it is not a class action suit.  All I've ever gotten as a result of class action suits is a coupon for 10% off at a company I never want to deal with again anyway.  In this case, the plaintiff stands to recover actual money, if things go well.

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Permalink Reply by Henry on June 17, 2015 at 12:27

Here are my notes from the Wednesday teleconference of 6/17/2015.  As usual, I only report new things, you can go back to my prior posts for earlier information.

So far 280 cases have been filed.  Nearly 20,000 people are signed up.  Cases are filed with royalty owners grouped by drilling unit.  The most people in any one lawsuit is 453 (must be an urban unit), and some cases have a single plaintiff.

The most interesting thing seems to be that McDonald has now determined that all of the major operators have underpaid their royalty owners.  So they now seem to be going after Anadarko, BP, Statoil, Devon, BHP, Matsui, Continental, and others.   This effort does not appear to be limited to CHK.  So if you have any of the other drillers, they ask you to sign up and they will determine if you have been shorted on your royalies.

They think there are two places where you could be short-changed.  First, is that you could be overcharged for the post-production things like compression, marketing, transportation, etc.  Even though many leases allow for deductions, McDonald says there is an implied covenant under the law that these fees must be reasonable.  The second is that if the company used your gas for hedging and kept the profits, they assert that you should have received the higher hedged price for your gas.

In Texas, you can recover 4 years of underpayments, but in Louisiana you can recover only 3 years of underpayments. 

Henry here....  That's about it.  At one time, McDonald said the first case was scheduled for trial in June.  I am guessing this has been delayed because there was no mention of any near-term trial dates in this teleconference.

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Permalink Reply by Sandbar on June 17, 2015 at 17:10

Thank's Henry,

        I look forward to your weekly report, as I'm sure we all do. Very informative. Have a good evening......................

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Permalink Reply by Pam on June 18, 2015 at 2:02

Thanks, Henry, it is interesting to watch this case play out. I guess there are no laws governing what expenses can be applied to the cost of payout for UMIs and that anything and everything can be deducted from income.

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Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2015 at 2:17

The LA mineral code specifies the types of costs that may be charged to the UMI's proportional share of production.  However the state does not monitor or audit those costs so a UMI must perform that due diligence.

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Permalink Reply by Pam on June 18, 2015 at 2:33

Thanks, Skip.

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Permalink Reply by Henry on June 18, 2015 at 4:26

Pam,

Here is a thought....  I have no idea if it applies to you or not.  If your operator did what CHK did with hedges, then  (and I have no real idea) you might be entitled to the hedged price.  I don't know the law.  And it may be that your operator charged excessive fees for transportation, compression, etc.  While the law allows them to charge you for these fees since you are UMO, I doubt the law allows excessive charges for these fees.

The only way to know for sure is to call the McDonald Law firm and discuss your situation with them.  They will tell you if you they think you've been short-changed, after analyzing your statements and comparing your deductions to what their experts say are reasonable deductions.  If it is found that your operator is charging excessively, they might take your case.

If you don't call them, you will never know.

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Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2015 at 4:31

There is existing case law on the question of royalty interests receiving payment based on hedge prices.  Hedges don't always work.  Companies often loose money on hedges.

Lessor is Not Entitled to Royalty on Hedging Profits

By Charles Sartain on May 21st, 2013 Posted in Lease Disputes

A Louisiana lessee does not owe its lessor royalties based on hedging profits, said a federal district court in Cimarex Energy Co. v. Chastant. Cimarex, the lessee, hedged its gas contracts and didn’t pay its lessor, Chastant, earnings from the hedge.

As the court described it, hedging involves buying and selling financial positions as a strategy to avoid the risk of a price fluctuation. The hedging party uses financial transaction derivatives to minimize the risk if/when the price of the commodity drops below a certain level. 

Cimarex Memorandum in Support of Motion for Summary Judgment is a good description of the hedging process and its value to oil and gas producers.

The question for the court was whether additional royalties must paid on amounts the lessee generated by a separate, purely financial, transaction from the sale of the oil and/or gas at the property.  The answer is “no”.

Chastant’s royalty clause provided for payment by Cimarex, on gas, of 1/8 of the market value at the mouth of the well and on oil, 1/8 of the price received f.o.b. the leased property.  In Louisiana, a royalty is the “landowner’s share of production, free of expenses of production.”

Chastant argued that since Cimarex calculated the hedge price in filings with the SEC, the hedge price constitutes “market value” under the lease. Chastant cited Frey v. Amoco Prodcution, a 1992 case where the Louisiana Supreme Court held that royalties were owed on a take-or-pay case settlement because the the take-or-pay payments were part of the “amount realized” under the terms of the lease. Therefore, said Chastant, any benefit derived by the lessee because of oil and gas production, even separate transactions, should be included in the calculation of the royalties due to the lessor. 

Cimarex argued that the lease royalty provisions are in keeping with well-established Louisiana principles in which “market price” is based on the market price at the well or field for the oil and/or gas. Therefore, the market price cannot be tied to some future financial transaction because of the oil and gas produced.

The court rejected Chastant’s arguments. To agree with Chastant would overturn decades of Louisiana oil and gas law by holding that standard lease language allows royalties to be based on something other than the price or value of the oil and/or gas. According to the court, such a holding would allow royalties to be based on monies earned by any transaction remotely connected to the oil or gas. Therefore, Cimarex did not owe royalties based on its hedging profits.

Many thanks to Ann Weissman for her contribution to this post.

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Permalink Reply by Pam on June 18, 2015 at 4:45

Thanks, Henry and Skip. As always, your input is valued and appreciated!

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Permalink Reply by Skip Peel - Mineral Consultant on June 18, 2015 at 5:13

You're welcome, Pam.  This topic has been discussed on several occasions over the years.  If lessees/operators were required to pay royalty based on hedges and royalty interests knew that they had as much risk of receiving reduced payments as they did increased payments I think the majority would stick with the market price at the well or field.  The more relevant question is the deductions allowed for gathering, treatment, compression and transport.  Adding the hedging allegation to the claims in a suit would seem to detract from that more important question.

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Permalink Reply by Pam on June 18, 2015 at 6:02

I agree, Skip. I don't even know if Encana is involved in this hedging business anyway. As far as deductions, I don't have any idea who could go over five year's worth of quarterly statements to check for excessive deductions and I doubt I could afford to pay someone to anyway. It seems to me that only actual expenses should be deducted, whether reasonable or not. I would think someone would need copies of supporting documentation such as invoices to do an audit of deductions. So, I feel like I'm just SOL, lol.

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