Who Determines how much an operator Sells your gas for?

How can an operator sell your gas for $1.06 when it says the average is is selling for $3.25? And this is just an example, but I'm sure you get the point?

And are there any organizations that oversee this matter and can stop this madness?

People keep saying go to a lawyer ask a lawyer, but apparently all give conflicting information. And it doesn't matter what the topic or issue is. It has come to my attention that you can't trust anyone when it comes to your money.

Even someone at the conservation office said don't trust anyone, and that's a real shame.

Should I take this and many other issues to Federal court?

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Natural Gas Wellhead Decontrol Act of 1989?

Ken Boone--- most operators sell their gas to Brokers via contract competiitive market bids --- the broker then resells to end user or to storage ---and then some like CHK sells it to companies they own themselfs cheap as you can review many post on this site that discuss CHK in depth

Ken, my thoughts to each of your questions are below. I apologize for the long post. I'm having a similar royalty statement "hangover" and Ken's questions struck a nerve.


1. Who Determines how much an operator Sells your gas for? 

Most gas is sold by the operator to a third-party gathering/pipeline/midstream company at the wellhead or close by. In this scenario, the operator and the purchaser will negotiate the price which should theoretically be the "market price," which is roughly defined as "the amount for which property should change hands between a willing buyer and a willing seller in an arms-length transaction." Things get hairy when the sale is not arms-length. See next answer.

2. How can an operator sell your gas for $1.06 when it says the average is is selling for $3.25? And this is just an example, but I'm sure you get the point?

First, the spot price of natural gas at Henry Hub is likely higher than what is actually paid to royalty owners anywhere. The economics of this are rather complex, but basically it boils down the fact that the purchasers in any given locale have only so much capacity, and thus they will buy gas from the "lowest bidders," which effectively lowers the wellhead price. 

Second, a royalty statement reporting the sale of gas at $1.06 per mcf likely came from an operator who reports the net price, rather than reporting the gross price received and then deducting itemized exenses. In effect, both methods involve deducting expenses for marketing, compression, etc, but the net price approach is less transparent about what deductions are made and for what. I have heard horror stories of royalties in the Barnett Shale being paid on $0.15 per mcf this past year. The only operator I am personally aware of that reports net price is Chesapeake. Put mildly, I find this method of reporting to be inadequate at best.

Third, there is the possibility of accounting shenanigans, deceit, or honest mistakes by the operator. I believe most problems falling in this category are due to honest mistakes, but suspicion of foul-play is always lurking when the operator sells gas to a related party, as was the case with Chesapeake until recently.  

3. And are there any organizations that oversee this matter and can stop this madness?

Governmental - not really. The LA Office of Conservation does NOT monitor or regulate private royalty issues because they will not interfere with individual freedom of contract. If there are serious allegations of criminal fraud, the state Attorney General may get involved, but I have never heard of this actually happening and the standard for criminal fraud is hard to meet - federal anti-trust law would be even less helpful. The ideal solution would be for the legislature to mandate certain royalty reporting requirements, but the very powerful industry lobby combined with the confusing nature of the issue makes this a challenge.

Non-Profit/Watchdog The National Association of Royalty Owners and their Louisiana chapter advocate for the rights of royalty owners, but they are most helpful in providing education and prevention at the contract negotiation phase. NARO appears to me to be less potent in aggressively pursuing litigation or lobbying efforts, but I may be wrong.

Private/For-Profit - There are companies you can pay to monitor your royalty payments to ensure their accuracy, and will address any discrepancies with the operator on your behalf. This is usually a consulting service, and should not involve them owning any of your mineral rights. In the Haynesville, ShaleTrak is by far the most effective and reputable consulting service that I am familiar with, but there may be others that are good as well.

 

4. People keep saying go to a lawyer ask a lawyer, but apparently all give conflicting information. And it doesn't matter what the topic or issue is. It has come to my attention that you can't trust anyone when it comes to your money. Even someone at the conservation office said don't trust anyone, and that's a real shame.

You should trust yourself above all. If you have the time and patience to gain a lot of education, familiarity with Louisiana's Department of Natural Resources, and to constantly monitor your royalty your own efforts can go a long way. However, most people don't have enough royalty at stake to make a full-time job out of monitoring it, which is why third-party management companies can add value in some cases.

5. Should I take this and many other issues to Federal court?

Litigation is expensive, messy, expensive, time-consuming, and expensive. Oh, and it's expensive too. Litigation should always be a last resort. I am told by numerous parties that most royalty issues are the product of genuine mistakes (or perhaps incompetence) by operators. If you've exhausted all other remedies, consider whether the cost of pursuing the suit would be more than the potential recovery (hint: it usually will be unless at least 6 figures are at stake). 

On a more technical note, most plaintiffs prefer to bring suit in state court, as state courts are theoretically more favorable to citizens who elect the judges (federal judges are appointed for life) and are less expensive than federal courts. Conversely, the defendants will often do everything they can to get a suit moved to federal court. As for the "many other issues," some kinds of claim will have to be brought in state court, where other have to be brought in federal court. The attorneys for both parties will spend months or years arguing over which courthouse to try the case in before anyone starts to even think about a trial.

Main Takeaway

Prevention is the best medicine. Issues with royalty payment and reporting are one of the many points of lease negotiation often overlooked by eager mineral owners. In this respect, a qualified attorney will be much cheaper in the negotiation phase than in litigation, and can save the mineral owner substantial sums. Even small mineral owners should consider hiring an attorney to negotiate a lease as long as the legal fees are less than the total bonus.

In nearly all cases, legal advice from a qualified attorney is usually a good idea, and this post doesn't qualify, so please consider asking other members of the site for referrals if necessary.

Every time I see pricing on here I try to chime in, but Andrew gives a pretty good summary.  Setting aside the numerous CHK issues, I would love for just the issue of prices are determined at the first sales point in the field to be addressed.  But lawsuits are expensive for an issue where sometimes the only smoking gun is the price seems unreasonable.

Instead, it may be worth focusing on efforts with your state legislator to gradually add protections within the Code.  I'm just talking about slight revisions to provide avenues for owners to request certain information formally in writing where the company would have to comply under the code.  I see OGM leases as a business partnership, so it is not unreasonable to provide the owner with an avenue to request further detail related to deducts or sales.   It should at least be a conversation the legislators engage since more constituents than ever are now royalty owners with the multiple production plays in the State.   

HBP,

I am one who has been screwed (at least in my opinion) by gas companies and usually unable to do anything about it because the amount is too small.  So I did some thinking about how the little guy might gain some way of having a shot of a fair deal.  I can come up with only two industries in which a gazillion Average Joes sign long-term contracts with large corporations -- the mortgage industry and the extraction industry.  As a result of the mess-ups over the last 5  years, the federal government chose to become involved and has set up an agency to protect the consumer against predatory lenders.  They are setting new rules aimed to protect the consumer.

I don't see any parallel agency/organization to protect the Average Joe when dealing with the extraction agency.  (I'm not advocating one.)  But, the state could review the bare minimum that it requires to go into a lease and possibly modify that.  The state could also set up a mechanism whereby a little guy could go up against the oil/gas company -- maybe in arbitration, or some such thing.  Trials are just too expensive.  Little guys have no recourse if they are screwed.  However, it has always been said that the Louisiana legislators are in the hands of the oil/gas industry, so it is not clear that they would want to be friendly to the land owners.

Do you have any better thoughts on this?

In Louisiana (or any productive state) you always walk the fine line of wanting to encourage industry's money to your state to benefit the citizens(in theory) while also protecting the citizens' rights.  And I do want that encouragement to be there for LA.

If legislation was attempted to allow the royalty owner more involvement in their checks, then the companies will say it is too burdensome/uneconomic to provide extra services; or they will say "if they want something, they are free to put it in their lease" (which is true, but you do not always have that bargaining power).  

Of course, some companies would not even provide the price or volume if it wasn't in the code.  So why not go ahead and codify having to list all deducts?  Then codify  language that allows an owner to make written request for sales or deduction details. 

Very good point about the mortgage industry.  One difference that strengthens the argument for landowners would be that you choose to have a mortgage, but many landowners find themselves pooled regardless of any decision they make.  I spoke with a very intelligent person the other day who made the point that the large producers would benefit by taking on a few state regulations to pacify owners rather than create an epidemic that gains federal attention.  That may be true now with the wide coverage of the active plays.

I would add the insurance industry to the list of closely regulated industries along with the mortgage industry. As much heat as the mortgage industry is getting right now, I suspect it will continue to pale in comparison to the very limited patience legislators and courts have for insurance companies generally. 

As for royalty problems, I have given this exact issue much thought over the past weeks, as I have tried to get an operator of one of my tracts to explain the stunning reduction in my 2012 royalty compared to 2011 (I estimate about 350% more of a drop than can possibly be explained by production decline and commodity prices, combined). I was blown away by how hard it was to get an explanation even though this particular operator was as responsive and helpful as they could be.

I think that legislation on the state level regulating royalty payment and reporting is the best hope, and is sorely needed. Many in the industry would probably be genuine in their concern about additional regulatory burden that may result. However, I challenge anyone with such concerns to review the State of Louisiana's regulations governing reporting, payment, and auditing of royalties on minerals owned by the state. 

I've attached Louisiana's guidelines ONLY for monthly reporting. The document is 57 pages... In spite of that, Louisiana continues to lease its minerals on and off shore every month, and operators continue to play by the rules set for them by the State.

This makes me more than a little curious about how difficult it would be for Louisiana operators to merely comply with the same requirements in dealings with private mineral owners as they do when the State is the lessee. If there were uniform guidelines that operators knew they had to comply with for all Louisiana royalties, it would save them from the considerable headache of having to tailor their monthly reporting and payment regime to the specific terms of each individual lease (or each lease that addresses the topic). I have to guess it would probably make complying with Louisiana's own requirements easier as well, since there would be no need for the operators to devise yet another payment/reporting system for a "special royalty owner."

Though I'm usually wary of the chilling effect that regulation can have on business investment, in this case I think streamlining the minimum requirements for all Louisiana mineral owners would save the industry a lot of time spent on accounting and reporting, make Louisiana's existing regulations easier to comply with, and would most importantly protect royalty owners large and small in a way that nothing else would.

Attachments:

Andrew--- Is 100% correct that a lot of these problem could have been avoided with good language written IF the original lease had been reviewed and amended by a good oil & gas attorney, but unfortunately most of these leases were done before Lessors were educated on the subject of good lease negoitations skill therefore they are stuck with what they have in present lease. Lots of ideals on what to do to correct but all time consuming and too expensive for little mineral royalty owner to fight it. We live and learn and hope people who have not been lease that have reviewed this site will be educated for future leases.  

There has to be some way to get them on breach of contract, over billing, or something. This is out of control. Maybe someone needs to audit their books.

Why would any land owner, in his or her right mind, knowingly agree to have their minerals sucked out of the ground and paid pennies?

Is there a way to have them ejected from the lands?

If one lesson is learned by the members I hope it is that it is far wiser to pay for professional assistance in negotiating a lease than to be disappointed later by less than favorable lease terms which can only be addressed by litigation.  I review hundreds of O&G leases each year and find far too many that are the standard lease bearing absolutely no evidence of negotiation on the part of the lessor.  As GHS  stretches into it's 5th. year of striving to educate mineral owners I see no trend of better educated lessors in the public record. 

There is so much to learn as a land/interest owner.

You know what they say, ignorance of the law is no excuse.

However, I inherited this problem from my grandmother who signed her lease about 2 years ago at the age of 90 years old.

I have some family in the areas of Lakeside, Cedar Grove, Mooretown.  Their interests are small, but they sure could use some professional assistance.  Are you available?

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