Treating and Gathering Deductions not in the Lease, but being deducted from royalty checks

If treating and gathering are not mentioned in the lease, what tells me that they can deduct it from your royalty checks?   Section 4b of the lease states the following.   


The royalties to be paid by Lessee are: (b) on gas, including casinghead gas, or other gaseous substance produced from said land and sold or used off the premises or for the extraction of gasoline or other products there from, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale; such gas, casinghead gas, residue gas, or gas of any other nature or description whatsoever, as may be disposed of for no consideration to Lessee, either through unavoidable waste or leakage, or in order to recover oil or other liquid hydrocarbons, or returned to the ground, shall not be deemed to have been sold or used either on or off the premises within the meaning of this paragraph 4 hereof; (c ) on all other minerals mined and marketed, one-eighth, either in kind or value at the well or mine, at Lessee's election, except that on sulphur the royalty shall be one dollar ($1.00) per long ton.


I was mislead about the deductions and was not told upfront about these deductions. 
As a landowner,  it appears that they silently wrote it hidden and misunderstood.  Even though there is nothing that states the lessor cost or expenses. 

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"I hope The Baron did not mean to accuse CHK of paying royalty based upon a less than market price by interposing a wholly-owned subsidiary as the first purchaser."


No, no one has ever tried to do that before.  Which is why some mineral owners have employed "not less than the average of the best three (3) prices paid in the field for product of similar type and/or quality" or any one of a number of "price to be calculated at the price of the first arms-length transaction" clauses in order to maximize net pricing paid by lessees / operators on products saved, marketed, and sold on the behalf of the lessor.


I have not employed any type of correlative analysis on Henry's data (after all, it's Henry's data, not mine), but the initial findings are certainly provocative.


Additionally, in such a scenario, generally the parent company is not going to find such allegations by mineral owners compelling.  Their argument is, "we (the operating subsidiary) are getting paid the same as you are on gas coming out of your well".  What gets left out of the conversation is that the gathering, processing, and/or marketing divisions of the parent company is/are posting additional profits as a result of such legerdemain.  Whereas the mineral owner is getting paid out of only one pocket, the parent company is reaping the benefit of wearing the whole set of pants.


IMO, Baron is correct in his analysis: the subsidiaries are utilized as vehicles to transfer all or a portion of the potential liability and expense of a venture of the parent company and defray same by passing it to other owners and non-operators, while being rewarded in doing so.  In its most benign forms, this type of activity is regarded as innovative and enterprising by many who cheer on those companies that help realize the grand goals that the industry espouses to promote.  As the incidences of such activities become more numerous and more egregious, they begin to leave a scent trail.  If it rises to the level, say, of the banks that marketed mortgaged-backed securities to one set of clients out of one division and had their hedge clients bet against the same securities out of another division, it can stink to high heaven, even though not being "technically illegal."

To use your venacular, the producer is entitled to "wear a whole set of pants" if it wants.  The fact that CHK and others have elected to provide post-production services does not imply fraud or misdeeds.  They are welcome to do that and make money -- and it is irelevant to royalty owners as long as the services are necessary and appropriate, and the costs charged (and deductions) are based on arm's-length, market prices.  My comment about buying gas through a subsidiary referred to a famous case where TXO was buying gas at a cheaper price through its sub, Delhi Gas Pipeline.  They were sued and got crushed.  I don't believe that is happening these days - certainly not by CHK.


Respectfully, there is no "technically illegal," here. 

There is a "no-separate-benefit ban" that "applies to lessee affiliates."

In fact, I would opine that Chesapeake Energy, et al, has a financial incentive to shaft payees, and the "et al" is conspiring with the "Parent Company" all the way to the bank.

In fact, my opinion is of the "ethical" notion that the lowest royalty $/mcf of all payors per Chesapeake, et al, across the board, and then "hedging" with ill gotten gains from the "et als" is a flat out, in one's face, direct hit at the "no-separate-benefit ban" that applies to lessee affiliates." 

"The Mutual Benefit Implied Covenant for Oil and Gas Royalty Owners," written by John Burritt McArthur, needs to be read by all oil and gas payees.

"...take care not to allow lessors to be deprived or defrauded of their royalties by their lessees entering into delusory or collusive assignments or gas purchase contracts.  Whenever a lessee or assignee is paying royalty on one price, but on resale a related entity is obtaining a higher price, the lessors are entitled to their royalty share of the higher price."

Respectfully disagree with you DW on this one..."technically illegal," my #&**.


DrWAVeSport Cd1  9/23/2011

P.S.  Look at who is making the calls at CEMI.  Arm's length, another my %*&*.

At some point, Chesapeake's Mr. Hood-winking himself, will be the fall guy, imho.


UMOs are also getting the lowest $/mcf from Chk.  Again, going through CEMI.



I have felt for years that when new areas of interest were developing that there should be several town halls with folks such as yourself and Skip explaining things to land owners in easy to understand terms.  I think the big problem that I am noticing throughout this thread is that the land owners had no idea about post production charges. 


By the time it gets to me there is nothing I can do, the agreements are signed and in place.  But yet, we are the one's that have to talk with the irate owners.  I have been in this business for almost 20 years now and it has evolved quite a bit.  I remember when the only time a lawyer was needed was to settle a lawsuit, now they are involved in every step of the way.

I have land leased in Louisiana though I live in Texas.  It is with EXCO and they always take out each month, each royalty check.  Plus at the end of the page, they take out Louisiana state taxes, too.

You are entitled to request an itemization of all deductions, and I encourage everyone to do so.  EXCO is correct to withhold severance and production taxes in Louisiana if that is where the lease/production is located.



As had been previously discussed, in cases in which the contract is silent as to a specific situation which may occur during the life of the contract, standard practice is generally considered to be the norm and the expectation.  As I am not an attorney, I do not feel qualified to opine as to law and jurisprudence other than what the courts themselves produce in their rulings.  I hope that confirmation from Mr. Elmore and others here have settled this issue.

This thread is really great - real time - real $$$ - real people.  I will be sending to many others - hope you all don't mind...

Reading the laws and contracts are always difficult even for companies with some resources and background

In California we are also going after costs from drillers for passing thru/under public RsOW, parks, and such and learning alot about franchise, surface facilities for subsurface rights/leases/unit operators


Also does anyone have threads regarding damages against drillers and how they may be charged back to the leasors/royality receivers???


I particularly like the subsidiaries routes as most major O&G companies have hundreds of subsidiaries in order to protect their deeper pockets of cash and assets while the other subs can be liquated by bankruptcy...


Maybe someone can circulate a "Cost Free Royalty Clause for people to compare to their leases/roy-agrmts???



I think that two clauses are needed to ensure the mineral owner gets the right price.  The cost-free royalty clause, by itself, is probably not enough.  A second clause that is needed is one that spells out what price the mineral owner will get for his gas.  Where is the price set, what price is it?  And what if the gas is sold to an affiliate?  Need some words about "arms length" in there.  You need both clauses to get the good price.


Great to hear your voice on GHS.  Without becoming members of GHS, many of us would still be trying (five years later) to find "answers" to "questions" concerning our O&G rights and responsibilities where our mineral assets are concerned.  This is the most information-packed group of individuals you will find on the internet that have collected under one umbrella to help others protect their natural resources and produce them in an equitable arena. 

GoHaynesvilleShale is meant to be a vehicle for your voice and mine and all persons with all sides/views represented here:  producers, mineral owners, landmen, property owners, all interested parties...even a few CEOs and O&G Managers are around this place learning a few things from GHS members (LOL).

A GHS Welcome to you, Tom.   We all learn from other's knowledge, ideas, and opinions. And the more individuals who join GHS, the more knowledge and information will find its way out to those who are facing similar situations as GHS members have faced.  And, GHShalers always share with the purpose of giving others the chance to become more "aware" and to make "wise" decisions where their property, mineral, and "mailbox moneys" are concerned.  But, of course most importantly...where their family welfares are being impacted by all of this oil and gas boon. 

We are a great group!  Happy to have you with us.

DrWAVeSport Cd1 9/24/2011

P.S.  If you don't get a reply to your questions on the first try, just BUMP the discussion, or ask again...Sometimes it takes a few, but GHShalers are a pretty reliable bunch, and will try and help when asked.

A GHS Best to you and yours!





Some royalty deals may be set up 'free of production costs' but some things that ordinary folks would think are production, come after the industry's defined the gas as produced.  


The phrase 'market value at the well'  in the OP's lease as quoted in the post triggers this sort of thinking.  At the well means the value right there, at the well.  At the well it's not necessarily been processed or compressed to the pipeline's specs, and it's surely not been transported through the pipeline to market.  So the costs of getting the gas sold are not thought of as 'production' costs. 


Hope this helps.  Some accountants can chime in hopefully here with a more coherent explanation.


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