Replies to This Discussion

Permalink Reply by The_Baron on September 23, 2011 at 5:16

You are right. Very few operators would drill under ULMO in order to increase near term cash flow.

 

Unfortunatly, they few are some of the biggest, including CHK and HK.

 

 

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Permalink Reply by John Brewster on September 27, 2011 at 6:36

If you or anyone ever has proof that Chesapeake or Petrohawk are selling gas to a subsidiary at less than market prices, please provide it and I can help with a claim.  Absent that, all of us who are unhappy that our gas prices seem low compared to others (including me) have nothing but our suspicions.  I simply want to be fair to the operators.  My personal opinion is that these two large companies would not engage in such an obvious illegality.  I might be wrong, but I'd be surprised.  There are many other ways to take advantage of us - as other comments have illustrated.

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Permalink Reply by essay on September 23, 2011 at 5:27

"However, I do not believe CHK uses subsidiaries as a means to hide charges."

 

yeah, well, here's the subsidiary they're not using to hide charges.  couldn't possibly have anything to do with their consistently lower prices.

 

http://www.chesapeakemidstream.com/Pages/information.aspx

 

hedges only have meaning for who ever it is on the other side of each particular contract, and furthermore, CHK is not negotiating for YOU a better price, they're getting THEMSELVES a better price and sticking it straight up your hoohah, and everyone else that is leased with them.

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Permalink Reply by John Brewster on September 23, 2011 at 5:39

You'll have to do better than that.  I don't dispute that CHK is using subsidiaries.  I merely suggest it is OK as long as they are charging market prices.  I assume they are, unless you have proof to the contrary in which event I will represent you in a lawsuit.  Hedges are a means whereby a producer can realize a higher price than what it is actually paid in the field.  They are a financial instrument.  You are half right, a counter-party takes the other side of the trade, but if CHK (as an example) has assured itself of $5 Mcf for a certain supply, one could argue that they are less concerned about receiving a nickle less in the actual sale.  Again, if you have any proof that CHK or any other producer is knowingly and intentionally selling hydrocarbons for less than market prices, or that they are utilizing subsidiaries to charge expenses that are greater than market prices, then as a royalty owner you will have a cause of action.  Alleging that they are sticking something up royalty owner's hoohah, is not informative.

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Permalink Reply by essay on September 23, 2011 at 6:58

i know what a hedge is.  so now it's chk that is less concerned about the price, where before your argument was that they were applying pressure to the purchaser.  if i am not informative, then you are not coherent.

 

and furthermore, they are consistently paying under every other operator's "market price" and it is certainly not a "nickel less"

 

so where is the difference coming from, if not the scheme they have set up with the subsidiary, of which they own a "significant" portion?

Permalink Reply by John Brewster on September 23, 2011 at 8:43

Sorry, I must not be making myself clear.  My statement was: Because of favorable hedges, one might argue that CHK is not as aggressive as they should be in negotiating the best price.  I also said that their size should give them good negotiating leverage to get good pricing.  Giving me the name of one of their subsidiaries does not prove they are utilizing subsidiaries to cheat royalty owners.  At the risk of repeating myself, it is entirely legitimate for a producer to use subsidiaries and provide goods and services as long as those are at market rates.  I regret that you find my views to be incoherent.  If I provoked you to resort to personal attack by objecting to the colorful comment that CHK was "sticking something up one's hoohah," then I apologize.  My only point was to encourage posters to offer facts and evidence, not vitriol.  As an attorney with 35 years in the oil and gas business, I prefer to consider what we know rather than what may be speculated.  Finally, I can't explain why some of CHK's prices seem low compared to others.  I can make the same observation about SWN and several others.  However, I've found no basis to presume it involves any illegal conduct.

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Permalink Reply by The_Baron on September 23, 2011 at 9:07

John,

 

I don't think we are saying what CHK is doing is illegal, I am sure they have a small army of attourneys making sure they walk the fine line.

 

They do pay less, even when compared to wells in the same section, or field. Almost always. I myself have not seen any examples to the contrary. But, as they are so fond of promoting in their reports, they recive many times the going rate, due to their marketing efforts. I do not believe that as long as gas is sold to a wholly owned and Private subsidiary that any real motivation exists to negotiate (negotiate with who? themselves?) for better prices, as they are already reciving the top of the market.

 

I see similar practices in the drilling and operating side. Do they work to drive down drilling costs? I do not believe they do, and why would they care?

They own the driller! There is no competive biding, any extra costs are shoved down the consent, non-consent, and unleased interest owners throat. Even more interestingly is that the driller rents much of their equipment (Rents???? Why would they want to rent when they could own? CHk continuously brags about how many wells they have to drill).

Why would a driller rent drill pipe? So they can pass that cost onto the third party interests multiple times. You challenge the cost, well they send you an invoice for the charge. The mineral code does not address these transactions, CHK would simply say they are passing on the cost from two third party contractors as contemplated in RS 30:10. There is no argument, who says what the fair price should be?, does CHK equipmment rental (Great Plains Oilfield Rental, L.L.C) service any other operators? I don't know if they do, I certainly don't know of anyone who uses Great Plains Oilfield Rental, L.L.C, and it goes on and on, they have a trucking subsidiary, drilling (Nomac, anyone seen a nomac rig on another operators location, I would really like to know).

 

Chk works by totaly contolling, and in my opinion, manipulating the market.

Permalink Reply by essay on September 23, 2011 at 11:52

no apologies necessary, i was pointing out the obvious.  and the hoohah sticking is pretty obvious.  i am not sure what other conclusion i am supposed to draw.  my days of giving chk the benefit of the doubt are over.  chk squeezes every nickel they can squeeze from whoever they can squeeze it out of, including folks who signed no cost leases in good faith that the language would stand, for their own benefit and no one else's.  i also do not assume illegal conduct, but shady and unethical, absolutely and without a doubt.

Permalink Reply by DrWAVeSport Cd1 on September 23, 2011 at 4:20

Baron,

I agree with you per your Chesapeake Energy overview of "Hoodwinking" schemes...to use another GHShaler's phrasing.  However, Baron, we part ways when it comes to "breaking any laws."  IMO, Chesapeake Energy and Mr. Aubrey McClendon are breaking laws at every twist and turn of their royalty, non-consent, WI/BPO, and APO1 and APO2 UMO payees. 

If Chesapeake Royalty Owners received the same Chk Energy "Hollywood" accounting documents that I receive every financial quarter, royalty payees would see the scamming that is taking place. 

Robyn Coffey v. Chesapeake Exploration, LLC, et al...rings bells here?  How much money did it cost Chk to get that one "dismissed?" 

Baron, I know you know.

I, too, know.

Henry, knows.

And, many others are learning. 

 

"...stretching things from an 'ethics' point of view."   Baron, that one is priceless! LOL  An 'ethical point of view' never crossed the Mr. Chesapeakes of the worlds' minds from the beginning of time!  It's called CHEATING.   

Have a Great TGIF Baron, and to all GHShalers.

 

DrWAVeSport Cd1  9/23/2011

 

 

 

 

 

 

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Permalink Reply by DrWAVeSport Cd1 on September 23, 2011 at 4:34

Oh, BTW,

My Chesapeake Energy "accountings," are now in the hands of those who do know!

DrWAVesport Cd1  9/23/2011

 

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Permalink Reply by Ben Elmore on September 23, 2011 at 3:53

LA law imposes the implied obligation on the lessee to obtain the best price possible.  TX law is similar though not as strong.  CHK would say they are obtaining the best price possible, because their marketing affiliate, CEMI, is paying CHK at the wellhead the price CEMI receives for the gas downstream from third parties (which is usually higher than a true wellhead price for raw gas), less reasonable post-production costs incurred by CEMI between the wellhead and downstream market (such as, transportation, processing and a marketing fee). 

 

As an aside, that is why you don't see deducts on your check stubs, because CHK (the lessee) would say it is not incurring any deducts.  The deducts are being incurred by CEMI, who is not the lessee. 

 

So why is CHK's price lower than other operators?  It is probably not because CEMI is getting a lower price downstream from the third party purchasers.  They are selling to the same companies other operators are.  That only leaves the post-production costs being deducted.  So the question becomes, are the costs incurred by CEMI reasonable?  To figure that out for certain, one needs the gas purchase contracts, gas gathering contracts, gas processing contracts, etc...  Without those contracts, you are left speculating that they are doing nothing wrong to they are doing everything wrong.  Bottom line, you will never no for sure without the contracts, and CHK will not hand those over voluntarily.

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Permalink Reply by John Brewster on September 24, 2011 at 4:50

Baron, essay and others:

This is a good analysis.  As I've said, there is nothing inherently suspicious about the use of subsidiaries, and their use does not by itself explain CHK's prices being lower.  CHK has more latitude for misdeeds on properties where it owns 100% of the working interest.  If there are partners involved, the JOA and more importantly the COPAS (accounting procedure) impose significant limitations on the use of subsidiaries -- basically requiring that every charge be equivalent to arm's-length/market price.  Having said all that, what is spent with a drilling contractor or paid for tubing does not affect the royalty owner. 

Most of the concerns expressed here involve post-production deductions.  As Mr. Elmore points out, those must be reasonable and necessary, and charged at market rates.  Unfortunately, it is virtually impossible for "the little guys" (us) check them.  Again, if partners are involved they are better equipped to do so.  However, if improper charges are found as a result of a joint interest audit, as they often are, the royalty owner almost never gets its proportionate share of the adjusted charge unless it is material ... and we never know about it.  That is just the way things go.

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