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Permalink Reply by Skip Peel - Mineral Consultant on June 29, 2016 at 8:41

I have not run across that particular deduction previously, Gerald.  I will be performing research for a law firm regarding MRD deductions and production reporting later this week and I will ask if they are familiar with what the underlying expenditure would be.  Have you contacted MRD to ask them directly?

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Permalink Reply by Gerald Mitchell Moody on June 29, 2016 at 8:56

Skip, wanted to know a little before we called.  Thanks.  Jay, so this is part of the Penntex?

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Permalink Reply by Skip Peel - Mineral Consultant on June 29, 2016 at 9:17

Jay, in your experience are capital costs for building gathering systems and treatment facilities common royalty deducts?

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Permalink Reply by Hale Yayuh on June 29, 2016 at 14:27

Virtually any lease form does NOT specifically spell it out, so, "if your lease allows" is extremely lenient on the oil company's side, making it sound like they are entitled to making these deductions. Companies are deducting whatever they feel like putting on you. It's a ripoff. IMO, some of it borders on fraud and some is fraud. This all started with the 'shale revolution,' it didn't use to be this way.

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Permalink Reply by HBP on June 29, 2016 at 9:25

You should not be shouldering capital costs as a royalty owner.

I've seen this with MRD as well, and can only say that they have a very expansive view of post-production costs...

Also, I believe MRD will have an answer to what the cost is that does not involve them making any changes to their practice.

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Permalink Reply by Skip Peel - Mineral Consultant on June 29, 2016 at 15:02

Doesn't the LA Mineral Code list approved production expenses for deductions on non-consenting mineral interests?  Would those regulations apply to royalty interests?  Charging royalty interests for gathering and treating infrastructure may be a legal gray area but I expect it will result in litigation.

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Permalink Reply by Dion Warr, CPL on June 30, 2016 at 11:12

Skip:

The Mineral Code (RS 31:1, et seq.) does not provide such an authoritative list.  Non-consenting owners (UMI / UMO and nonconsent WI) can look to RS 30:10 as to general costs permitted to be recovered by an operator, but these are more analogous to JIB costs and deductions.

The general rules on proper expenses collected for RI is spelled out by the contract(s) which create the RI - ie., the Oil, Gas and Mineral Lease.  In general, in the broadest terms, unless otherwise modified in the contract, "mouth of the well" doctrine prevails, which generally permits transportation, treatment, and post-production processing costs to be netted from the revenue stream to the point of sale.

A "capital cost" deduction is rather unusual - even third-party affiliates and/or owners of gathering systems will by and large just calculate a "per mcf" or "per MMBTU" deduct against the captured gas stream in the form of a rate basis.  Labeling it a "capital cost" seems at least problematic from an optics standpoint.  But it is defensible to collect reasonable costs to make a product marketable and transport it to market (particularly gas) in that without such efforts, these products have a greatly diminished value (if any value whatsoever, in the context of rejection)

Without specifics, it is difficult to determine whether infrastructure has been fully depreciated; even so, maintenance and management of an operating system is considered a reasonable chargeable expense.  I would assume that infrastructure around Terryville, though at least long established at its core, has been significantly augmented and upgraded over the years, even if on a mere volume / takeaway basis.

A final thing to remember: most leases allow for the lessee to market the lessor's gas with little if any recourse.  Some owners negotiate to have the ability to receive its share of gas "in-kind", but then it becomes the lessor's responsibility to provide facilities to receive in-kind product, prepare and bring same to market.  This is not a very realistic concern for many lessors to assume.

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Permalink Reply by Skip Peel - Mineral Consultant on June 30, 2016 at 11:25

Thanks, Dion.  JIB accounting is beyond my experience and although I understand why it is relatively unique to the industry that does not address the fact that MRD did not directly incur the costs for the majority of infrastructure in the Terryville Complex.  Those were pre-change of operator costs incurred by Wildhorse Resources, and their predecessors, over many years of development.  And neither WR, or those other operators, chose to deduct "capital costs".  If the charges are actually maintenance of existing infrastructure, it would be helpful for it to be deducted under some label other than capital costs.

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Permalink Reply by Bean Counter on June 30, 2016 at 5:28

I have seen items like that many times  (AKA - Aid in Construction) but this is the first I am hearing of it as a royalty deduct. Normally it is billed out to working interest owners as a JIB item. I suspect Skip is right and MRD is going to be challenged on this  

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Permalink Reply by Skip Peel - Mineral Consultant on June 30, 2016 at 8:13

I agree as to this being a working interest expense, Bean.  Much of the Terryvillle Complex infrastructure (transportation and treatment) was built, and written down/off, in prior years.  As in before MRD bought out Wildhorse Resources.   Those are not "new" expenses.  MRD is opening a can of worms and will be challenged on just what "capital costs" are being deducted and for how far back in time.  This and the number of liens and suits filed in the public record since late 2015 are a big red flag.  MRD royalty interests should be cognizant of keeping good records - not just paper records but emails with the company and notes for any phone communications.

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Permalink Reply by Colleen on June 30, 2016 at 13:56

We just received an invoice for April from mrd will let you know what all they are doing calculation wise for deductions.

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Permalink Reply by Paula Davis on June 30, 2016 at 14:06

Skip, wanted to let you know all my family members did receive checks this week from MRD Operating.  I along with our family members do not understand all the deductions.  However, we are very thankful we did receive our checks. And I must say the checks were more than we thought.  So we are a happy group of people.  Hopefully MRD continues along the right path.  Also, I don't know the Mr. Chris Bowmen who filed the lawsuit, but feel without his pushing the issue, we would not have been paid promptly.  We owe Mr. Bowmen a thank you. I don't know the details of the lawsuit and his reasons for filing, but it worked!  Thanks to all of you on this site for all the information you provide to us.

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