Replies to This Discussion

Permalink Reply by Bean Counter on October 4, 2016 at 14:28

Transport, gathering and fuel are calculated on volumes moved or lost, Doesn't it make sense that when you are being paid $5 per mmbtu you probably didn't think much about it?

But when the same wells were paid under $2 like in March, it sticks out like a sore thumb. The fees shouldn't change when the price changes. Only when the volumes do. Go back and look at some of your 2014 detail. (the golden days) What % were they charging you then?

• ▶ Reply

Permalink Reply by JHH on October 5, 2016 at 0:43

Ronny... you're right!   32% is oppressive!  Wish i had some answers but they have time and money on their side.  Which means... even if you win in court... you'll end up broke and hardly any cash returns.  Maybe one day a judge will fix this in future judgements.  Sorry for being so negative.  

 

• ▶ Reply

Permalink Reply by HBP on October 5, 2016 at 7:26

Some deductions are based on fixed costs, some are not.  But yes, the overall % will go up when prices are down.  One exercise you can do to compare is to take deduction percentages from Spring of 2012 and compare to this past Spring 2016 because they are at similar price levels for nat gas.

Now, that being said, 32% may not be "oppressive".  Of course it may not be accurate either.  There have been a number of 40-50% plus deduct rates seen by certain HA owners this year.  Also there are a number of other factors that could make one well's deduction rate be above another (treating and different gathering agreements of the operator or lessee).  Its fact specific.

If you do not have language that truly prevents or limits deductions in your lease and you are getting very high deduction percentages, you can make demand, however when there is no alternative language in the lease the company's response is likely that they pass along your proportionate share of actual costs to market the gas.  I do not know a lessee that has agreed with an owner's idea of what is excessive.  It is also the type of issue where any case law that gets created on the topic is specific to that case's particular facts.  And there is not a large batch of caselaw because it is expensive to determine whether deducts are excessive just under the law rather than specific lease language.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on October 5, 2016 at 9:43

If an operator has a contract for a company to gather gas and the cost is, for example, $0.25 per mcf by volume then at a sales price of $2 that represents a royalty deduction of 12.5%.  Under the same contract at a $5 price the deduction would be 5%.  The deduction is always $0.25 per mcf but as prices fall it becomes a higher percentage of the sales price. There are deductions for multiple marketing and transportation costs and as HBP states, some are fixed costs and some are not.  It is human nature to look at reduced royalty amounts and be suspicious of the amounts deducted.  Those interested in understanding how their deductions work can take Bean Counter's advise and compare an older royalty statement at a higher sales price.  IMO it is important to understand this and look beyond the amount deducted recently at much lower natural gas prices.

The comparison that lessors should be interested in is the price paid and the amount and type of deductions from their operator as opposed to the other operators in the same general vicinity.  Operators in the same field and in close proximity often use the same gathering and treating companies although they may pay slightly different prices based on the individual contractual agreement.  Small discrepancies should be the norm.  Large discrepancies are suspicious.  It's hard to go much beyond this simple example as it is difficult for the average lessor to know how to make an apples to apples comparison.

As operators change their policies regarding deductions, new and untested legal opinions become the subject of conjecture and possibly litigation.  A good example is deducting for capital expenses.  The latest example being MRD lessors in Lincoln Parish.  Just because MRD had not deducted for this in the past, does the contractual agreement (lease) with their lessors prevent the company from doing so now?  And if the capital expenses deducted are for the building of infrastructure such as gathering and treating, can MRD charge for both the capital expense on the front end and a deduction for the actual gathering and treating on the back end?

• ▶ Reply

Permalink Reply by Andrew on October 9, 2016 at 8:43

Year-to-date, we have averaged about 30-35% in gathering costs on royalty interests we own. 

Unfortunately, sometimes the operator and gathering company are under common ownership, and the arrangement between the two entities results in the operator improving their economics at the unregulated detriment of royalty owners. 

It is prudent for operators to consider all market options before contracting with an affiliate. They should be extremely careful in ensuring they are engaging in arms-length and market-rate gathering/transportation agreements with affiliated entities and make sure that the agreements do not proportionately disfavor the royalty owners to the benefit of the midstream company. If they fail to do so, anti-trust and collusion issues can arise as we have seen in recent investigations by the DOJ and multiple states' AG offices. 

Landowners should always push for a cost-free royalty, and if they are unable to obtain one, they should have strict language that applies when gathering is handled by an affiliated entity that caps the percentage of gross revenue that can be deducted. 

• ▶ Reply