landowner

Advice Requested on Expand Royalty Deductions

Here is my situation. I have a property that was leased to Chesapeake in July 2008 with the following clause:

TRANSPORTATION CHARGES: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by State law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas, and such other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oi, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements.

A well was put into production in December 2011, and from that time until January 2018 the royalty checks were without any deductions. Chesapeake sold the lease to Indigo MInerals, and beginning with January 2018 began to deduct for gathering, compression, and treating even though they were bound by the same lease language as Chesapeake. Chesapeake came back as the owner of the lease in February 2015, and to this day the deductions continue. (By the time Indigo assumed the lease in 2018, royalties were down around $100 per month and the deductions averaged 9%, so I didn't try to fight it. MY MISTAKE.)

Now a new well has been drilled, the royalties are much more substantial, and Expand has continued the deductions, but now those deductions are averaging 17% of the total payment. I have reached out to Expand through owner relations and received a reply from Kate Ferguson, Lead Land Analyst, who says the deductions are in line with the lease language due to "enhancements to the value" I am receiving. Yet they ignore the 6+ years they paid without deductions.

I would welcome advice as to how to proceed from here, especially from anyone who has faced a similar situation with them.

As a bit of additional information I have a second property less than 5 miles away that was leased to Penterra under the exact same lease language in 2017. Penterra paid royalties without deductions. Chesapeake became the owner of the lease in 2022, and since then has paid royalties without deductions. 

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Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on Saturday

Who supplied the Transporation Charges lease term text?  This is a form of No Cost Royalty clause although it does include the enhancing the value clause.  You need to get an opinion from experienced O&G attorneys who have dealt with this question and know the case law that informs it.  My O&G attorneys could likely provide an answer for little cost.  The question then becomes a formal demand for enforcement of the clause.  Knowing Chesapeake/Expand it could take filing suit to get some relief.  I have a client suing Expand now and it is slow going which all O&G operators employ to try and wear out plaintiffs.  Be forewarned that experienced O&G law firms do not send demand letters unless the client is willing to sue if the demand if ignored or rejected.  Attorneys that make demands and do not sue are soon totally ignored by O&G firms.  The specific circumstances of your case as to CHK paying royalty without deductions prior to the transfer to Indigo and the lack of deductions under your Penterra lease lead me to believe you may have a strong case but I am not an attorney and the case law aspect is important.  The last question that needs to be addressed is approximately how much  money is at stake.


landownerPermalink Reply by D Carnahan on Saturday
Skip thanks for the info. My attorney, who's no longer servicing oil and gas matters, provided the transport charges language.
As to the value of the deductions it is currently in the low 5 figures, growing by over $1000 per month.
Expand has state approval for more wells in this Section, so by the time everything is drilled out the $$ could be very significant.

Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant on Saturday

The first step is to have a qualified O&G attorney give you an opinion on the enforceability of the clause.  Let me know if you need a referral.


Oil & Gas ProPermalink Reply by Todd ATTALLA yesterday

I believe your instincts are very good in trying to get this resolved before the dollars grow and I'm sure this is something you have already figured out and that is the "however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements." language can be difficult to overcome as many Lessee's will add this language to "no deduct" leases to cloud the issue.

At the end of the day, it could be very difficult to determine if the additional costs exceed the increased value but odds are they are paying you at a WASP (weighted average sales price) from a large pool of gas with many individual sales and it would definitely help to see that sales pool (which may be difficult unless conducting an audit) to ascertain if you may have a claim to underpaid royalties.


Oil & Gas ProPermalink Reply by Rock Man yesterday

From personal experience, one can get these charges reversed out and credited if you have a good "cost free lease". However, it takes time and often repeated communications to get the operator to do this.

My examples were with OXY in the Permian Basin and Permian Resources (also in the Permian). It took three different communication efforts with the latter to get these charges reversed - including certified letters. Finally got results when I sent the request letters to several managers at Permian Resources.

Then finally got a notice saying that Permian's lawyers had reviewed the lease and deemed it to have the appropriate "cost free: language.

Operators hope that people will "quit" after a while as to pursuing credits for these charges.


Oil & Gas ProPermalink Reply by Rock Man yesterday

FYI - THIS DISCUSSION THREAD IS ANOTHER EXAMPLE OF MY NOT RECEIVING A NOTICE OF A "NEW" DISCUSSION. ENDED UP FINDING IT ON MY OWN.

UNACCEPTABLE. AND FRUSTRATING (SINCE I HAVE BEEN TRYING TO GET THIS CORRECTED FOR MY ACCOUNT FOR A FEW YEARS)


Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant yesterday

Thanks, Rock Man.  All members experiencing this need to speak up and to contact Keith via a website message.  I email him often on the subject.  Did so earlier this morning and will do so again now.


landownerPermalink Reply by Keith Mauck (Site Publisher) yesterday

and every time Skip has emailed me i have sent a message to the admin who has the power to edit the backend...which isnt me. I cannot go into the back end and flip a switch to make it work. I am waiting to get clarity on them from something and i will be in touch.


Oil & Gas ProPermalink Reply by Rock Man yesterday

Thanks Keith. 

As a significant contributor to this site, it is frustrating to have to dig up these new discussions on my own instead of being notified.


Oil & Gas ProPermalink Reply by Todd ATTALLA yesterday

If this helps anyone.  Along the lines of notifications, I've received three notifications of other posts after my post.


Oil & Gas ProPermalink Reply by Skip Peel - Mineral Consultant yesterday

I receive notice emails also.  Rock Man, you may need Keith's help in setting your personal preferences.

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