I received a royalty check showing a sales price of $2.62 in May, $2.65 in June 09', no deductions. Seemed low, so I researched historical pricing and found a U.S. Wellhead price of $3.45 for both months on the Energy Information Administration website. Any thoughts / feedback?
Apologies if I wasn't clear - The prices I listed are for the line item of Sales Price on the check, not the amount of the check. Acreage, royalty percentage and production do not affect the Sales Price. I have a Free Royalty clause, so there are no deductions of any expenses. You read how some of these Operators hedge there sales, greatly increasing the amount they sell for ($10.00+). Shouldn't we get paid on whatever amount the actually received when they sold gas? If "the market" was paying $3.45 in May and June, then getting paid on a price of $2.62 and $2.65 seems fishy. Maybe my Operator just sucks and does not know how to sell their (our) gas.
No one escapes severance taxes. No one. The state gets their portion of every drop of oil and every mcf of gas that is parted from the wellbore (even the RI's portion), less and except statutory reductions or waiver of the taxes in special situations (e.g., stripper wells, deep wells, certain horizontal wells, etc.) What you might want to check from time to time is whether the operator is the beneficiary of a special tax treatment (statutorily reduced or waived severance) so that the severance deducts on your portion is not being excessively charged at the standard severance tax rate (because wells are granted this status on a total production basis, your gas should be treated the same as the WI owner). I have heard of operators who have 'accidentally' withheld the full severance tax normally due on wells which had reduced severance tax rates because of 'an accounting glitch'.
No one "gets the deal that the state gets" because on state lands, the severance taxes are also paid to the state. Operators just end up paying the gross proceeds on bbls / mcf produced, no matter how you slice it.
I think you got the right answer Gosh Darn, although I'd hardly call it "creative accounting excuses/methods". There are various pipelines in the HS area and each buys gas at a different price. Plus, as you stated, the owner needs to NOT look at the Henry Hub price, but rather the marker price called for in your lease. Local prices can vary widely from the Henry Hub price. I'd expect at least $0.30 or more, but that number changes a lot!
And I believe even a "no deductions" lease will still allow the operator to charge back the Royalty Owner's share of severance taxes. Your royalty gives you ownership to natural gas and the state wants a payment for "severing" those molecules. But typically that wouldn't be rolled into a "Sales Price".
Also, depending on the gas contract and the terms of your lease, you may have "no deductions" but the company may be realizing a wellhead price that is lower because the pipeline company doesn't charge any fees, they just lower what they will pay for the gas. I've seen it done this way.
Other corrections which would not qualify as "deductions" would be if your gas contained contaminants like CO2, H2S, etc. This would serve to reduce the overall BTU content of the gas. Pipelines actually pay on a BTU basis, not an MCF basis so if your gas has contaminants, then you will get a lower price, again not covered under "no deductions". Now the cost to remove the contaminants would be covered by "no deductions", I believe, but if they are low enough and meet pipeline spec's, then they aren't removed but do give you a ding on realized prices.
And yes, Gos Darn is correct on hedged prices. Hedging has ZERO impact on royalty owners. Hedge contracts are not written specifically to an individual well or field's production. They are financial contracts between the gas company and another party. Believe me, you don't want to get caught up in that. A year or so ago when gas was selling at $13 at the market, many companies were hedged at $9 or $10. Would you like the "benefit" of those contracts too?
goshdarn, and Mmmarkkk, thankyou both for the explanations.
Mmmarkkk, is H25 commenly found in the Haynesville shale? i have been doing some checking and have found it commen in some formations but absent in others.
also, if a lease talks about well head price, is that to say once the gas leaves the property the royalty is no longer responsible for treating?it just seems charging me well head price , then sending it down the pipeline (at which point the gas has been sold according to my operator) and then charging me for off premiss dehydration is a kind of double jepordy in my opinion.
So did the driller actually sell the gas for 2.60 something or did they sell it for 3.45 and just gave the MI a split on 2.60?
Seems like if the MI got less due to expenses, those should have been itemized on the statement somewhere wouldn't they?
pg, they are itemized. one of my operators explained they market the gas once a month to the pipeline owner. (enbridge) so this leads me to believe the gas, once it leaves my property, is nolonger my responsibility to treat or dehydrate. the operator also stated to me the price has nothing to do with the hub price, only what they negioate with the pipeline operator.
for example if i am a watermellon farmer i may sell mellons to walmart for 30 cents a pound and may sell to krogers for 35 cents a pound. it's just whatever the people cutting the deal decide. i had always thought the price i got was an average of the spot price for the entire month. not so....
with all that said- how does the operator take advantage of the hedge if the gas is sold as soon as it hits the pipeline ?
another question... my lease has specific language in it regarding treatment of oil, but no mention of me being responsiable for gas treatment. they are taking out gas treatment expenses and when asked about it, the operator said everybody has to pay their fair share of treating the gas. i am letting the treatment costs accrue and i at some point plan to get a lawyer to help me with it after it becomes an amount worth going after.
does anyone have any opinions on this???
I have been saying this for some time. The buyer for oil and gas set the price. It may indexed to a spot price in some way, just depends on the agreement. Gas can be particuliy tricky to market, since you have to send your gas to a nearby sales line.
Hedgeing is a seperate finacial transaction, not nessarilly tied to any specific well.
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More