Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on November 6, 2013 at 9:10

John, does your lease include a No Cost Royalty clause?  The monthly NYMEX - Natural Gas Contract Settlement Price History is better than spot prices for comparison but neither takes into account all the costs attributable to a specific lease and point of sale.  Chesapeake is swamped with requests like yours.  You can send a certified letter asking for answers to your questions however it's quite possible that a response may take some time.  Chesapeake has made serious staffing cuts.

• ▶ Reply

Permalink Reply by IRielley on November 6, 2013 at 9:44

We have a lease with BHP/Petrohawk which includes sections operated by CHK. One of our sections is operated by BHP, and all monthly production for each section appears together on our royalty check stub. On every royalty check for the past several years, CHK's price per mmbtu has been between $.70 and $1.00 less than that paid by BHP/Petrohawk and much less than either the spot price or the NYMEX for each month. There was some early discussion about this on the various blogs that suggested this was the result of CHK selling gas to affiliates rather than the open market.

For what it's worth, our lease with BHP/Petrohawk provides that we will be paid based on market price at the wellhead, with no deductions for treating, gathering, transportation or marketing.

Paying a royalty based on a below market price for gas sold to an affiliate just can't be legal, can it?

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on November 6, 2013 at 9:59

Yes, CHK did sell gas through an affiliate in the early years of the HS.  That affiliate later sold their pipeline gathering systems when CHK needed to raise money. So the question of an arms length transaction is moot for sales after the date of sale.  The deductions involving cost to treat and transport are complex.  Not to mention the possibility that CHK charged customers for costs that are not generally acceptable deductions such as the cost to build those gathering systems.  There is more data being uncovered as law suits go through their discovery phase.  It's like pulling teeth to get the raw data and to get depositions to interpret that data.  The law moves slowly and tends to favor the industry more often than not but I'm hearing some reports of interesting information that will certainly be included in trial transcripts if the cases every go to trial.

• ▶ Reply

Permalink Reply by IRielley on November 6, 2013 at 10:02

Is there a class action or similar suit in which landowners may wish to join? If not, it seems as though one should be considered.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on November 6, 2013 at 10:07

Not in Louisiana.  The LA courts have stringent requirements for defining a class.  And no judge has seen fit to grant class status regarding deductions from royalty issues.  There are individuals, companies and small land owner groups that have filed suits.  CHK has settled some of those cases so there is no ruling to set a precedent.  Some plaintiff will have to stay the course and get a ruling before there will be any case law on the issue.

• ▶ Reply

Permalink Reply by Nixon Dow on November 6, 2013 at 10:58

I have been looking into the whole trans, treat, and gathering fee issue for a while. Chesapeake is by far the most egregious with their fees. However, I have found that BHP is becoming just as bad. I have no problem with the operator taking out actual or "fair market" fees, whichever is less. The term "fair market" this issue very complicated. What is fair market? Is it the fee that is charged to operator by the pipeline company? Maybe. How about when that fee is based off a long term contract between the operator and pipeline company? How about when that long-term contract was created as quasi-compensation when a subsidiary of the operator sold it's interest in said pipeline to the pipeline company? Maybe not so much. I could go on and on with more reason's how the are getting around the rule, the biggest being that the Commissioner of Conservation is the authority to decide what is market value and for the most part he refuses to do so. It is a messed up system that will only be fixed by legislation. Exactly how, well that's for another day but the basic rule should require the operator to prove to a "public bid" type of standard that those fees being deducted are true market value. If they can't meet that standard then they can't deduct those fees from the royalty or non-participating WI owners.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on November 6, 2013 at 11:05

We've discussed the possibility of legislative action in regard to mineral code reform a number of times and the general opinion seems to be that legislators do not wish to get involved with the issue.  Nixon, if you can get one or more legislators to file such a bill I am sure we would all be willing to contact our state representatives and senators to encourage their support.  A lobby battle with the energy industry and their allies would be an uphill fight of epic proportions.

• ▶ Reply

Permalink Reply by Nixon Dow on November 6, 2013 at 12:54

This isn't reform. It just like the revision to 30:10 relating to non-participating lease RI and ORRI back in 2012. Proposing requirements that must be met for operators to deduct "fair market" fees from royalty is not a hard sell, especially when it comes to forced pooling. The other approach and is more or less an administrative one. If they don't want to revise the law to fix the situation they need to revise the current regulatory approach in place. The commissioner of conservation by rule is the one that should oversee these issues and make a determine if the operator is "being reasonable prudent" for all interest in the unit including the royalty owner. However, two major issues prevent this from actually occurring 1) Royalty owners actually have no legal right to demand this determination from the COC, only WI. 2) Even when A WI owners brings forth a request to the COC, they basically refuses to make a determination on these issues(which the way things currently are set up, I don't totally blame him). Skip, as to your statement about getting a legislator to push this forward, well just keep your eye out this next legislator session.

• ▶ Reply

Permalink Reply by Skip Peel - Mineral Consultant on November 6, 2013 at 13:28

I'll look forward to developments, Nixon.

• ▶ Reply

Permalink Reply by Henry on November 6, 2013 at 13:39

IRieley,

Maybe you can explain something for me that I've never understood....  It would seem to me that "market price at the wellhead" is the value of the gas when it comes right out of the ground.  Is that right?  If so, that gas is dirty, wet, and has not been transported to market. So how does that price correspond to a cost-free royalty, where I interpret a cost-free royalty to be the price I would receive for the gas that is sold into the pipeline?  Am I making sense in this question?

• ▶ Reply

Permalink Reply by Dion Warr, CPL on November 6, 2013 at 19:43

Henry:

Not to jump your inquiry of someone else, but that seems to be the relevant question with which the courts have been wrestling. When the value of "off-spec" gas is determined as the wellhead, its value may very well be minimal. In most preprinted forms, this "mouth of the well" determination is defined and the courts seem loathe to discard unless in direct and complete conflict with the attached lease rider containing additional provisions. Courts seem comfortable with the implied duty to market, but not the implied duty to treat, transport and process (at least without Lessee being able to deduct proportionate shares of such costs from Lessor to render the products marketable and transport to the best market re: reasonable and prudent standard). Many landowners have interpreted such costs to be part of the Lessee's obligation (either by convention or per contract). Courts have generally not ruled equivalently or on such basis. To date, the needle has not moved very far in the direction of the royalty owner in this regard, and even less so in the case of the (unleased) mineral owner included or pooled in such units or lease operations.

• ▶ Reply

Permalink Reply by Henry on November 7, 2013 at 1:34

Dion,

The reason I asked this question is that my lease addendum (which was provided by one of the recommended attorneys on this site) says royalties shall be based on "market value at the mouth of the well."  To me, this would mean market value at the point gas comes out of the ground and that I should get a lousy price for my gas.  But my attorney combined it with the words that I won't pay for treating, dehydration, compression, etc.  And that worked -- I am getting cost-free royalties.  But I never really understood it, and still don't -- it seems contradictory. 

• ▶ Reply

• ‹ Previous
• 1
• 2
• Next ›
• Page