Henry Hub gas prices
I completely realize that this subject has been up and down the flag pole..fileted..sliced..diced..and fried to a crisp. I believe that the difference and discrepancy in the documented Henry Hub market price for natural gas per MCF and the price on royalty check payments in the Haynesville Shale from one particular production company are indicative of stealing money from royalty owners. There are "expense-free" royalty leases in Haynesville shale production, and there are obviously leases that have no "expense-free" addendum(s) of this I have no doubt. The leases that are expense-free, on advice of an attorney, are supposed to be paid in full at market price before any said production costs are withheld from the royalty payment. The royalty payment stub may show no withheld amounts in the "production costs" column, but it is overtly obvious that if the Henry Hub market price is one amount and the pay stub accounting shows a different and lower amount for the MCF of gas produced, it would not take a high school education to see a discrepancy and imagine that something seems amiss. As I said above, I realize from reading previous posts and comments that there are those who attempt to explain and excuse this discrepancy away, even to the point of alluding to the difference in royalty pay stub accounting and Henry Hub data as being "production costs". Case law says if a royalty owner has an expense-free lease then said royalty owner can and should expect to be paid full expense-free market price for the gas produced from under his feet. It is also somewhat interesting that after one multi-billion dollar energy production company has been sued and adjudged to pay back production expenses to royalty owners, that any other production companies engaging in the same practice would be at risk of a large group plaintiff action to sue for recovery of illegally withheld money from royalty owners. It's a nasty business and apparently it's possible that production companies in the Haynesville shale are currently practicing the same. If you haven't examined your expense-free royalty pay stub MCF amount against the market price, then you may be missing something. If you have examined and noticed a discrepancy, then enough royalty owners banging on the lawyers' doors might seek worthwhile relief and repayment. The question in point- why wouldn't a royalty owner be paid full market price for the gas under his land? The land/royalty owner doesn't have to produce the gas, he already owns it and SHOULD NOT have to bear the expense of producing it, transporting it, and/or any other expenses involved in getting the gas to market. Royalty owners must lock arms and rise to demand fair repayment and a cessation of future stealing of the gas that they own. Haynesville shale gas royalty owners need to show prudence and intelligence in seeking the proper channels to realize full restitution for their stolen gas.
Tags: Royalty, expense-free, lease
Views: 1634
Replies to This Discussion
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Permalink Reply by Ed Hill on
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Your post makes some good points. However, there is an incorrect statement in that ownership of land does not include the ownership of oil, gas and other minerals. The "rule of capture" applies to mineral ownership. You don't own the minerals. Barring a servitude scenario, the landowner (you) has the exclusive right to explore and develop his property and to reduce the minerals to ownership. The landowner can do so directly (i.e. drilling his own well) or by entering into a contract (OGML) in which they will be a royalty.
Chesapeake is famous for agreeing to give landowners any clause they ask for and then ignoring the terms of the contract that they agreed to. They are playing the odds that if only 1 in 10 landowners sue them, they are still way ahead of the game even if they have to pay back royalty to the one landowner that sues them.
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Permalink Reply by Skip Peel - Mineral Consultant on -
At the risk of being seen as one who "those who attempt to explain and excuse", I offer the following:
The Henry Hub price is a regional "base" price. Natural gas is commonly contracted at some discount or premium to the base price so the fact that the price on a royalty statement is not the same as the Henry Hub is the norm, not a sign of duplicity.
Many lease clauses concerning royalty include the term, "at the well head". Traditionally royalty interests were not charged anything to drill and complete a well, thus - cost free up until the point that gas/oil was transported from the well. LA case law relies heavily on that term and the specific wording in a lease is important to the ability to prevail in a court of law. Not all "cost free" royalty clauses are created equal. Ones that originate with the lessee or an attorney not specializing in O&G often fail in court. My O&G law firm's custom royalty clause is one and one half pages in length and covers oil, natural gas and natural gas liquids in addition to deductions for transportation, treatment and marketing.
Ed is correct to single out Chesapeake as the leading proponent of pushing deductions beyond what was the norm for decades. Some operators have followed that example to some degree or another and some have not.
It is impossible to provide any guidance without reviewing the specific lease language. And that review should be performed by qualified and experienced O&G attorneys. In my experience most O&G attorneys will provide a free initial consultation. That will often answer the important questions, provide a clear explanation of the salient details and give a royalty owner an idea of the potential for successful litigation and the associated cost. Those royalty interests, depending on the circumstances, may have the option to pay for legal assistance by the hour or on a contingency basis.
http://www.gohaynesvilleshale.com/louisiana-mineral-owner-royalty-u..
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Permalink Reply by Skip Peel - Mineral Consultant on
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For those royalty interests looking for a price comparison, the price paid by other Haynesville operators producing from the same field is probably the most relevant. GHS is a good vehicle for comparing operator prices for the same period in the same field. While comparing the price paid, also compare the royalty deductions. This is best accomplished by posting a discussion on your field in the appropriate parish group. This has been done in the past and the variations reported were informative..
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Permalink Reply by HBP on
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I'll just add that I agree with Brian's intensity on the subject - however the HH is not the calculation point even for cost-free. HH is downstream from the point at which the lessee normally realizes their sales.
You could conceivably have a cost free clause that expressly states HH as the price since we are free to contract for any specific downstream price they would agree to, but you don't see that often - I'd take the price gas trades at entering a residential home, but no lessee would agree to that because they sold the gas long before.
If you have a good cost-free clause and suspect something, then get counsel. We can argue all day about the lessee's duties to non-cost free lessors, but if you have express language with them then it is a contract issue.
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Permalink Reply by Joe Aldridge on
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I have contented for sometime that the price paid should be at the point of sale based on the HH price not at the wellhead. This would, in my opinion would, clear up a lot of abuse.
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Permalink Reply by Steve P on
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for those operators that hedge their sales on some periodic basis, the royalty owner (and the operator) may be gaining or losing by locking the price to some market factor not linked to the operator's actual operations. that's not a bad thing (I'd take it for sure in my CHK lease) but it would make like more difficult for the operators.
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Permalink Reply by Skip Peel - Mineral Consultant on
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There is no such thing. There is too much variation to calculate a norm. As I posted earlier the only reasonable comparison, although it certainly has its limitations; is what other operators are paying on their royalty statements for production from the same field. That means that transportation and treatment costs should, theoretically, cost about the same for all the operators. Any small price variation could have many reasons. A large variation is much more difficult to explain.
For those interested in this topic, Henry authored a discussion for years where members could share the price they were receiving and discuss the variations. That discussion is likely still in the site archive. I don't have time at the moment to pull it up but will try to do so later.
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Permalink Reply by Jon Williamson on
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Brian take a deep breath.
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