Replies to This Discussion

Permalink Reply by JD on August 18, 2010 at 2:36

Henry,

It might also be beneficial to know who the gas was sold to and who the deductions were paid to.

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Permalink Reply by Henry on August 18, 2010 at 3:04

JD,
Yes! At this point, since I'm so confused, I'll take any/all info I can get, and try to figure out if there are any trends at all that I can find.

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Permalink Reply by layla on August 18, 2010 at 3:34

I realize this it slightly askew from the direction of the thread, but I tend to think in terms of $$$. CHK may not be the only company adjusting their figures for selling to affiliated companies, but it looks as though they are the most egregious. When/if more information is forthcoming, then that statement is subject to correction.

Say they are $1.00 off the market price per mcf. Based on the EURs that have been released of 6 Trillion cf per well, adjusted to mcf, the unaccounted for money amounts to $6,000,000 per well. Extrapolate this out to 8 wells per section and we have come up with $48,000,000 or in those areas where there is both Haynesville & Bossier shales with up to 16 wells per section (allowing for somewhat reduced EUR on Bossier wells) then we are talking about $80 MM to $90 MM per section. If CHK has control of over 400,000 acres, then we are talking about 650 or so sections which brings up to quite a tidy sum in the HIGH TENS OF BILLIONS of dollars over the time the field will be in operation. "A million here and a million there and pretty soon we are talking about real money". This would work out to low tens of billions which are NOT going to be paid in royalties. For the state and parish governments, this has a significant direct effect on what they will receive in royalties also. It will also affect what they can expect to take in as sales tax income because that unpaid royalty will represent money that will not be spent locally. The state will lose money from sales tax revenue, severance tax revenue after the exemption expires (as well as whatever short-term interest they make and probably get to keep during the time they are collecting the severance tax before it is ultimately returned to the royalty owner for the exemption period) and also from personal income taxes as royalty owners will not be paying income tax on money they won't be receiving.

I seem to recall that Louisiana is having pretty major budgetary problems so it would certainly behoove the legislature to consider closing whatever loophole/legal strategy allows this to occur.

Agree? Disagree? Thoughts? Comments?

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Permalink Reply by Skip Peel - Mineral Consultant on August 18, 2010 at 4:09

layla, though I applaud your math, I must point out that your initial EUR figure is off. Big time. The only trillion figures I have seen in reports is in relation to GIP (Gas In Place) by the square mile (section). No where near that figure is "recoverable". The average Haynesville Shale horizontal will probably produce 7-8 bcf over its economic life. So EUR (Estimated Ultimate Recoverable) for a section may be on average in the 60 bcf range. If you wish to be more accurate in your calculations, do a little more research or ask Les B. I think you will find that the answer is still a really big number.

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Permalink Reply by JD on August 18, 2010 at 4:15

Skip,

What is your EUR for a section that has both Haynesville and Bossier strata?

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Permalink Reply by Skip Peel - Mineral Consultant on August 18, 2010 at 4:46

JD~

I don't have one. Les B. keeps up with this much better than I so I suggest that those interested members pose their questions to him. The challenge as I see it is that the EUR per section varies widely across the extent of the Haynesville Shale Play and I expect the Bossier will also. There is insufficient data for me to form an opinion at this time concerning the Bossier. Numerous operators have published projected EUR's per well and per section in their public reports for their Haynesville acreage. I do not recall any for the Bossier.

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Permalink Reply by Les Bamburg on August 18, 2010 at 4:59

JD, probably on the order of 80-100 billion cubic feet (Bcf) where both stratas are present and developed.

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Permalink Reply by adubu on August 18, 2010 at 4:41

skip---I think layla should have said 6 bcf per well not 6 tcf---however the math is correct for $1 for 1 bcf is $ 6 million dollars. If what you say is correct that the wells EUR is 7-8 bcf then that $6-7 million per well so numbers go higher that layla stated by 10-20% more. Even the Liberal Congress would agree that real amount of money

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Permalink Reply by Skip Peel - Mineral Consultant on August 18, 2010 at 4:50

adubu, $1 per mcf for 1bcf would be $1M, would it not?

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Permalink Reply by adubu on August 18, 2010 at 5:23

Skip--yes $1 per mcf for 1 bcf would be $1M but a 6-7 bcf EUR well= $6-7 million, would it not. I think layla 6 tcf was typo rather than 6 bcf

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Permalink Reply by Les Bamburg on August 18, 2010 at 5:06

Layla, it is not clear that selling to affiliate is the real issue with Chesapeake or that is an issue with any operator. The larger issue is likely the allowable deductions for post production costs under lease agreements. Affiliate sales are not necessarily a "loophole" as case law dictates that the price used for valuation has to be refelective of one received for an arms length sale. This issue has been well worked for the federal royalties paid on offshore leases.

I would encourage any royalty owner to ask their lessee for further information first.

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Permalink Reply by Henry on August 18, 2010 at 5:18

Les B,
I'm with you 100% about needing more information. I know that Landowners #14 and #18 had cost-free royalties, and while #18 seems to have done a bit better, Landowner #14 did not. But I am asking ALL of the Chesapeake landowners to go back to Chesapeake and ask for an explanation of their number. Find out the gross, find out the deductions, and find out who the gas was sold to. Report back to me or on this discussion. Then we can begin to make sense of this.

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