I just noticed after almost 8 months of receiving royalty checks that Chesapeake added some deductions for gathering and fuel to my production statement.  My lease call for a free royalty.

When I called Chesapeake the lady indicated that I had "an enhancement clause" that allowed them to charge me for these additiional items.  Does anyone know if this is true?

 

 

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I might be able to explain this.  Please respond to my friendship request, so we can discuss this privately.
William, I sent you a friend request.  I can tell you what is going on, but it is a little too complicated to explain in one discussion reply.  If you want, accept my friend request and we can talk in more detail offline.

William,

Ben Elmore will tell you what I would have told you, and he'll be able to help you.  So deal with Ben Elmore, and you'll get the story.

Howdy ben. Its nice that the res† of us cant know the answer. Your a real shaler guy. Do you pull wings off butterflies ,o do you just want everyone to know how smart you are?

 

No Pat, I am happy to tell you what I know.  In short, the enhancement language at issue was included by CHK and its landmen typically at the end of some cost-free royalty clauses.  The language I've seen provides:

 

It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, for the cost of producing, gathering, string, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, Lessor's share of any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements.  However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.

 

Based on conversations I've had with others who have spoken to CHK about this, CHK is using this language to deduct costs for transportation, processing, etc... that would otherwise not be deductible under the cost-free language, under the premise that such costs are incurred to enhance the value of gas.

What If found particularly upsetting about this language is the following:  I know of at least three people, who when negotiating their lease with CHK, asked for cost-free royalties.  They were all told, yes, you may have cost-free royalties, and we will give you the language to put into your Exhibit A to ensure you get them.  They were given the above language and they put it into their lease. Then, once payments started, CHK took deductions, and claimed the language allowed it.

Ben,

 

In the situation you have evaluated, do you think CHK has a leg to stand on?  I have discussed this (almost exact) clause w/ contract landmen in regard to a Pennsylvania CHK lease and they indicated it referred to processing or enhancements specifically not the items excluded above.  Clearly a misrepresentation if CHK were to try and deduct gathering etc... 

Based on the situations I have looked at, CHK is using the clause to do an end run around the cost-free clause.  Do they have a leg to stand on?  IMHO, no. 

If we are paying the "enhancement fees" to help the gas bring a better price,why are we still getting the going rate for gas? Shouldn't we all be reaping the benefits of the enhancements?

 

That is one thing CHK is a master at is making one statement then throw a clause just the oppisite. One would think if they were making more money they would pay mineral owners. However that is just not the case since they have many lawsuits for breech and failure to perform. Of course the company always has some lame excuse for non payment. Sad they have taken a company that should really prosper and run it in the ground. Their stock prices do not reflect well for all their holdings. However they throw money away rather than keeping their commitments. I heard they have not kept their drilling commitments in the Eagleford. Further they have lawsuits in Michigan,North Dakota,Texas and I am sure other states. They had rather spend money to litigate instead of doing the right thing. And its the mineral owners that always get shorted.

Roy,

CHK knows that 99% of individual mineral owners won't ever file suit...

And CHK is getting away with "fracking" financial fraud...IMMostHumbleOpinion

CH Unleased Mineral Owner

I do not know that your 99% figure is mathematically accurate, but the underlying content is quite accurate.

The royalty owner is at a tremendous disadvantage. Although there are honorable companies out there, IMO, Chesapeake is not one of them.

* we know of Mr McClendan's shenanigans: betting against his own company, taking out huge sums in zero or low interest loans. Etc.

Most of us could talk for hours on how Chesapeake scams royalty owners, with the latest being their 'disregard' of the no-cost royalty clauses in many of our leases.

But the deck is truly stacked in their favor.

* the great majority of royalty owners won't litigate to right the wrongs.

* if a royalty owner is determined to pursue a wrong, it can be daunting to find a good and reputable O&G attorney or firm who is not conflicted. Moreover, the good plaintiffs' firms are already swamped with clients and may not have the physical resources to accept new clients

* those who get this far face a long and expensive legal battle just to get to court

* if you actually win a decision, Chesapeake is sure to appeal, adding more years and expense to already considerable legal fees

* Louisiana O&G law makes it extremely difficult to collect legal fees even if a case is won, so the royalty owner may have to 'eat' all the expenses

* further, if a property exhibits undivided ownership, it can be problematic to hold the plaintiffs to stay the course, especially if some of them are unable to foot their share of the costs.

* even if you 'win', the odds are excellent that you will still receive considerably less than was rightfully due you.

* you will NEVER receive more.

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