Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on September 3, 2017 at 15:20

Negative royalty may be caused by over payment of royalty, have you asked your operator for an explanation?  Negative royalty is not an indication that a particular well does not meet the production in paying quantities test. 

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Permalink Reply by shelby on September 4, 2017 at 11:31

Skip,

I have a couple of questions just dealing with the economics. For example, if a company is re-working a minimal, or, non-producing well, and brings it back into production at substantial expense, and post production costs are brought into the equation, on gas sold at depressed market prices, can one assume the company is probably going to experience a "loss" instead of a "net profit". Based on this type of scenario, with the company experiencing a loss in bringing the gas to market, if "post production" costs exceed the profit being generated, can "post production" costs also exceed the royalty amount being paid to a Lessor, who has only a small percentage decimal ownership, from which their proportional share of post production charges are being deducted. Can "negative royalty" be defined in this way, where the fractional royalty paid, is  less, than the post production costs charged back to the Lessor?

Shelby

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Permalink Reply by Skip Peel - Mineral Consultant on September 4, 2017 at 11:46

In general, no.  Production in paying quantities is a slippery slope and one that only an experienced O&G attorney can determine.  Keep in mind that a portion of the production is contractually obligated to the royalty interests under the well.  The rest is the income for the well operator and working interests, if any.  The well costs and Lease Operating Expense (LOE) come out of the income for the operator and working interests.

There is a good bit of "negative royalty" happening now and it's not in any way as you describe.  The royalty owners who are not receiving royalty payments were likely over paid owing to faulty surveys that caused errors in their decimal interest.  This is an issue that myself, my attorney and some other parties are attempting to address with the Commissioner of Conservation.  The faulty surveys were a hidden problem until the advent of cross unit lateral wells.  Now operators are revisiting their Division Order pay decks as new surveys are conducted.

Of course I'm making some assumptions here based on experience with other mineral owners.  I can't get more specific to your situation on the limited information you have provided.

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Permalink Reply by shelby on September 5, 2017 at 3:48

Skip,

Thanks for your comments on this subject. I don't know how to post the article on this website, or, I would. The article was posted in the publication called POWERSOURCE, which I believe deals primarily with the Marcellus play. The article heading was " Landowners seek to turn off wells when royalty payments disappear" published April 24, 2017. One of the quotes; "when cost of moving and marketing gas that month were more that the money made selling it"  this statement simply states one view of the economics generating "negative royalty". It is an interesting read, and PA and WV being "market product" states seem to have progressed in many way far beyond what LA and TX has in protecting the interests of royalty owners. They do share the basic doctrines of "paying quantities" to define the basis of when royalty payments are required to be paid to maintain a lease. Some of the recent court decisions in TX and LA seem to show that our local politicians and legislators are beginning to take PA and WV's lead on some basic oil and gas industry injustices.

Shelby

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Permalink Reply by Skip Peel - Mineral Consultant on September 5, 2017 at 4:01

There it is.  The problems caused by cross reading discussions in different plays.  No offense shelby, a lot of members do the same and it's hard for neophytes to recognize the substantial differences from one state to the next.  The royalty issues in the Marcellus in general and PA in particular generally do not apply in LA or TX.  Many of those mineral owners got low royalty leases with little beneficial or protective language. 

LA regulators and legislators are much more industry friendly than PA.  Additionally our courts and our lengthy case law benefit the industry.  PA, OH and WV didn't have much historic oil and gas production of significance and thus a much more clueless group of land owners.  The industry had an advantage as they always do when dealing with inexperienced mineral owners.  The other side of that coin however is that the elected officials had not been lobbied and financed for decades and had no reason to favor the industry.  When the arguments began those elected officials had more reason to support their constituents than the industry.  As always the courts will have a major role to play in how the business relationship between lessor and operator turns out.

The efforts to "turn off wells" are not about production in paying quantities although they are about "negative royalties".

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Permalink Reply by shelby on September 5, 2017 at 4:34

Skip,

I agree with your comments, but, don't many of the general leasing principles, and matters of law, generally be understood as accepted in all the US states?  Everyone seems to know what "at the wellhead" means (although that can be dubiously interpreted) also, concepts of stratigraphic provisions "Pugh clauses" and other numerous, identical interpretations on royalty and mineral lease law. It seems like many of the leases being drawn up today are shying away from the old "at the wellhead" provisions and leaning towards royalty being based on "first marketable product" doctrines. I have been trying to figure out O&G matters almost ten years now, since the start of the Haynesville, and still consider myself a "neophyte". Just seems that the "Southern" courts are dragging their feet a little, compared to our "Northern" brethren. Even California now I understand is leaning towards the "market product" doctrines, and away from the Texas norms of "non-marketable product" provisions at the well-head in calculating royalties and post-production costs, resisting "net-back" accounting practices; not that I'm a progressive or nothing. 

Shelby 

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Permalink Reply by Skip Peel - Mineral Consultant on September 5, 2017 at 4:45

Courts don't tend to mess with contracts with specific provisions that leave little room for interpretation.  I haven't reviewed lease forms used in the Marcellus but I know they came from the industry and as such don't cover some important and basic issues for lessors.  Trying to litigate those issues after the fact is problematic and at the core of the problem is the penchant for inexperienced individuals to sign whatever is put in front of them and to have an aversion to any cost associated with help from an experienced professional.  People sign leases with less than favorable language and then complain about them later.  That's the way its always been.  Unfortunate but true.  The lesson never seems to be learned in any comprehensive sense.

States with long histories of oil and gas production have way too much case law, "friendly" regulations and regulators and even "friendlier" elected officials.  I don't know how states like CA and PA will choose to regulate and legislate but I wouldn't expect anything they do to have an effect on states like LA, TX and OK.  That ship sailed a long, long time ago.

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Permalink Reply by shelby on September 5, 2017 at 6:01

Skip,

Maybe so. I have a bent towards using professional help, and always have regarding drafting of leases, etc. Even so, some of the best lawyers in TX and LA, apparently did not see the "train coming", with how the courts, and legislators allowed O&G companies to construe pretty self evident terms like "free and clear" (as regards royalty calculations, and post production charges) to really mean, questionable net-back accounting methods, from a product that the courts ruled had "no value" at the well-head (gas) and allowed the oil and gas companies to charge back basically every conceivable deduction to the mineral owner in calculations on their earned royalty. I am all for the O&G companies in the United States to expand their present, well earned reputation, as the worlds leading exporter of energy products, natural gas, and refined fuels. It just seems that the average Joe, or, that matter the average O&G attorney, shouldn't require a forensic accountant to figure out what's truly is going on in their monthly royalty statement. I do believe it's getting better however, in all of the plays where general practices of the O&G companies are be challenged as less than "forthcoming".

Shelby

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Permalink Reply by Skip Peel - Mineral Consultant on September 5, 2017 at 9:49

My O&G attorney's custom lease form has a "no cost" royalty clause that is one and one half pages in length and takes into account decades of experience with the applicable case law.  It covers condensate and NGLs in addition to oil and gas.  It covers horizontal wells in addition to vertical wells.  Of course, the lessor must have a significant ownership interest in a desirable location to get those terms.  The problem in LA, and I believe in TX, is a mountain of case law that defines general phrases such as "free and clear" regardless of what most would take the meaning to be.  Only experienced O&G attorneys can point out that potential problem or negotiate lease language to address it.  I know a good bit of the mineral code but I make it a point to never venture into opinions where case law is involved.  If you are dealing with a law firm that has a long history of O&G work, there shouldn't be any "average" attorneys.  The attorneys that I am aware of who fit that term were not O&G attorneys until the Haynesville Shale was announced.  After that a number of them thought that a few readings of the mineral code were sufficient to claim to be an O&G attorney.  Unfortunately the problems they caused will impact mineral lessors for generations.

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Permalink Reply by shelby on September 7, 2017 at 4:19

Skip,

I agree with the complexity involved with preparing post production clauses that cover the whole array of possible gas products, and uses. I also agree, that there were many attorneys who prepared leases, "in the day" and I know for a fact, that they were some of the most renowned O&G attorneys of their day, who could not foresee how future case law would be interpreted, and legislated, and the resulting problems will exist in perpetuity for those bound by those leases. In a way it's like the "industrial military complex" they warned about, but, now the "industrial oil and gas complex" has found its' way into creating a monopoly of power brokers that protected their interests in a way the "old timers" O&G attorneys would  have never thought possible. I'm a real estate guy myself, and though gas and mineral rights supposedly fall under the umbrella of real estate, I think that oil and gas issues fall into a category all their own. I understand contract law and provisions that are most universally accepted; granting clauses, reserve clauses, indemnities, etc. but, when it comes to interpreting oil and gas contract language, let the Lessor beware, and I couldn't agree more, find an experienced O&G law firm to create and review any lease. Your expertise and opinions have been most helpful in my understanding of many oil and gas issues, particularly regarding the concepts associated with owner operators, and drilling practices which hold mineral interests, and many other areas of landman expertise knowledge.

Shelby

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Permalink Reply by Skip Peel - Mineral Consultant on September 7, 2017 at 6:05

Mineral lessors are generally too passive on the front end of a lease agreement but also on the back end.  If you and I had a nickel for every time a member of GHS complained about feeling unethically taken advantage of, I suspect it would be a significant amount of money. 

Case law can be a hindrance or a help to mineral owners and lessors who find themselves in court.  I will take this opportunity to once again point out that appellate level judges are elected by the voters in Louisiana.  The LA Second Circuit has been especially important to mineral case law as it covers the Haynesville Shale portion of the state and has rendered verdicts in many cases that make up LA O&G-related case law.  I believe that two seats on the Second Circuit will be on the ballot in the near future.

If the average mineral owner wishes to have their interests fairly heard then they should become involved in supporting candidates for the Second Circuit that will pledge to do so.  It is a total waste of time to expect that the Attorney General or the legislature will take any substantive action beneficial to the mineral owner and opposed to the interests of the industry.  Those appellate court seats get little interest from the public which makes it easy for special interests to influence the election results.

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Permalink Reply by shelby on September 8, 2017 at 6:14

Skip,

Well said. I think that trend is taking hold, as the public becomes more aware of the practices of the O&G companies, and complex issues are defined in open forums, which might somewhat approach a common sense interpretation of lease law. I also believe that LA and TX mineral law will eventually yield towards a "market product" approach, as it is exceedingly more fair to the mineral owners. And after all, when things work through the court systems, many cases will end up being decided by SCOTUS, instead of state jurisdictions.

Shelby