This Doesn't Sound Good

The article below was sent to me.  I am somewhat bothered by the "10-year, 100 percent fixed-fee gathering agreement."  That seems to eliminate any competition or motivation to keep gathering costs down.  Given the concerns we already have about CHK's higher-than-average deductions for their royalty owners, this does not sound good to me.  Does anyone else have a better interpretation of what this means?

 

Midstream paying $500 mln cash

* Involves 220 miles of pipeline in Louisiana

HOUSTON, Dec 16 (Reuters) - Chesapeake Midstream Partners L.P. CHKM.N> said on Thursday it plans to buy a natural gas gathering system and related assets in the Haynesville Shale from a subsidiary of
Chesapeake Energy Corp (CHK.N: Quote, Profile, Research, Stock Buzz) for $500 million cash.

The acquisition will be financed with a draw on the partnership's revolving credit facility of about $250 million plus $250 million of cash on hand.

The partnership will acquire Chesapeake's 100 percent ownership interest in the Springridge system which consists of 220 miles of gathering pipeline in Caddo and De Soto Parishes in Louisiana .

At closing, the partnership will also enter into a 10-year, 100 percent fixed-fee gas gathering agreement with Chesapeake Energy.

After the deal, Chesapeake Midstream will have about $500 million of additional borrowing capacity on its credit facility.

The deal is expected to close before the end of this year. (Reporting by Anna Driver in Houston; Editing by Tim Dobbyn)

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Permalink Reply by Les Bamburg on December 25, 2010 at 11:43
SB, deductions for alternate wells in a unit will likely be the same rate as the original unit well. 
Permalink Reply by sesport on December 25, 2010 at 12:14

Guys - Seems there are some others looking for answers to similar concerns.

 

http://www.oilandgaslawyerblog.com/Coffey%20v%20Chesapeake.pdf

 

Hope this helps,  80)

Permalink Reply by Spring Branch,mineral owner on December 27, 2010 at 9:09

Les, it appears to me that in the Haynesville, the royalty owners are taking a sound whipping on price (discount to Henry Hub or Nymex of X %) and then taking another beating on the lightly regulated or totally non-regulated pipeline gathering systems.  In the example I cited above where Exco charged me 17.75 % of my gross royalty for gathering and transportation, what exactly is to keep Exco or anybody else from charging 27.75&, 37.75%, or 47.75%.  Then when the pressure drops enough to require compression, they can up the charges to 35%, 45%, or 55% and my 1/5 royalty becomes a net 10% royalty, Before Tax!!!  I'm not sure I wouldn't be smart to offer to swap my 1/5 royalty or 1/4 royalty for a 10%  or 1/8 NO COST royalty like they had back in the 30's, 40's, and 50's.

Permalink Reply by Les Bamburg on December 27, 2010 at 11:02
SB, attached is a chart that shows the basis for three interstate gas pipelines in the area for 2010.  Generally the pricing would be ~ 10 to 20 cents/MMBtu below NYMEX.  Personally I do not believe the typical lease agreement allows for the deduction of any cost for gas treating and compression.  Some gas transport cost may be justified but only to the extent such cost allows the natural gas to access a higher priced market point.  For example -- a 10 cent/MMBtu fee on an interstate pipeline increases the marketprice by 12 cents/MMBtu.   
Attachments:
Permalink Reply by JD on December 27, 2010 at 11:59

Les B,

Without pointing fingers at any operator, how do you think a 20% deduction below NYMEX could be justified?  For example, gas on the NYMEX is $4.00 but the operator pays $3.20.  This of course would be a lease "without" a cost free clause.

Permalink Reply by Les Bamburg on December 27, 2010 at 12:48
JD, I do not think it is justified.  Instead I would expect to see an all-in net back of +/- $3.80 per MMBtu based on a $4.00 NYMEX value.  Of course I realize there is huge debate over the interpretation of the provisions contained within the lease agreements related to allowable deductions.  It is disappointing that the lease agreements continue to contain such antiquated language that is a recipe for lawsuits. 
Permalink Reply by Henry on December 27, 2010 at 13:02

JD,

I think the answer is that some operators will try to charge the royalty owner as much as they can get away with.  Others won't.  At least that's what my survey suggests. The royalty owner with the bad operator has only one recourse -- the courts.  And that is an awful way to go.  Louisiana law says the operator must operate the well for the "mutual benefit" of both the operator and royalty owner.  So, until a large landowner (or class action suit) takes this issue on, I doubt it will get fixed.

 

A good first step would be for the legislature to enact a transparency law that requires all reports to show gross price, and an itemization of each deduction.  Most statements today are not that transparent.

Permalink Reply by JD on December 27, 2010 at 15:45

Les B,

Wow! Ground breaking!  I was taught long ago it's not what you say but how you say it.  In this case it is not what you ask but how you ask it.  Without finger pointing I finally got an answer that I hoped for.  A 20% deduction off the top has seemed unreasonable to me.  I am glad to hear someone that truly understands the business agree.

Thanks Les

Permalink Reply by Ben Elmore on December 28, 2010 at 4:16
As you can see from the Oklahoma lawsuit against Chesapeake, it appears to be a relatively small amount at issue per individual royalty owner.  It would not be economical for each individual royalty owner to bring their own suit, thus the class.  The companies know this.  They know how litigation works and know that they can get away with a little overcharge.  Spread out across a  number of royalty owners is lucrative for them, but not significant enough on an individual basis for any one royalty owner to do anything about it. 
Permalink Reply by pal on December 28, 2010 at 5:11

I have a well that was drilled by Petrohawk. I have a no deduction lease with CHK. PXP bought 20% of the lease from CHK.  Petrohawk markets the gas, pays CHK and PXP.  I receive a check from CHK for 80% and one for 20% fromPXP for production of the well.  CHK pays 60 cents a unit less then PXP pays. When I called CHK on this they said that deductions had been taken out and that legal would review the lease.  That was in October, Chesapeake is still taking out the deduction and the rep I talked to will not return my call.

Ben, I think you are on target!!!!!

Permalink Reply by Spring Branch,mineral owner on December 28, 2010 at 5:57

I think you can multiply this situation by hundreds, perhaps thousands of situations.  Even in the case where the lease is not specifically a no-cost lease, the wording in the lease in my opinion gives the Lessee no specific right to charge for gathering, transportation, compression,etc. 

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 therefrom, the market value at the well of one-eighth of the gas sold or used provided that on gas solld at the wells the royalty shall be one-eighth  of the amount  realized from such sale........Exhibit A goes on to change the fraction from 1/8th to 1/4th.  

No question such terms as "market value" and  "amount realized from such sale"  invite litigation.  Is anyone aware whether this issue has ever been litigated in Louisiana?          

 

 

 

 

 

Permalink Reply by Henry on December 28, 2010 at 6:01

Pal,

Keep on them.  I know for a fact that one landowner was able to get CHK to stop deductions.  This landowner saw, from my survey, what the gross prices were and called CHK.  It took about a week, but CHK corrected it and gave all back pay as well as fixing the problem going forward. 

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