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Permalink Reply by Dion Warr, CPL on July 23, 2009 at 23:43

Fred:

I'm sorry that you feel that your question has not been answered.

Do any of the 'addendum items' speak specifically as to what can or cannot be deducted for marketing, treating, or transporting your gas (including, but not limited to, a 'cost-free' royalty provision)? If not, the operator (or lessee) may be permitted to deduct all reasonable costs for marketing and delivering your gas (including transportation costs).

Another reason that I ask (and the issue to which a couple of posters have alluded above) is that many operators have gotten away from a 'net proceeds' method of accounting and reporting on gas sales in recent years primarily because of questions about expenses and deductions. Also, many operators now market their gas outside of the traditional 'mouth of the well' or 'at the meterpoint' definitions, opting instead to shop their gas for the highest net price available based on costs of processing, treatment, and transport and the price realized on delivery to a particular market. What you may be seeing are the operator's intent to account for these values.

Also, many operators have employed more sophisticated oil and gas accounting software that allows for these various costs to be reported more easily on a field-by-field and/or a unit-by-unit basis; thus many owners are now getting to 'see' the deducts as compared to before.

I would suggest comparing your realized proceeds on production against major commodity indices per mcf (or per mmbtu) as a general guide. Henry Hub is relatively stable IMO, and usually tracks pretty well against the region. Compare it to average long-term trends in the area if you can (try reaching out to a friend or neighbor that has had long-term production with the same operator if you can). If the relationship between the local production and your 'new' production tracks closely to Henry Hub (my example) before and after the accounting change, it may very well be that you are just seeing more of 'what's behind the curtain' than what had been traditionally seen. One particular operator with which I have dealt over the years has generally paid prices within about 5 - 8% of Henry Hub spot, with treatment, processing, and transportation deducts held out, even through a recent accounting system change. Those deducts have held at about 2-3% of the gross value of the gas; the recent accounting change now shows both the gross price sold and transport costs have risen slightly but still pretty much offset each other, yielding a result of within 5 - 8% of HH. (Ergo, accounting change = twice as long statement = same general proceeds = whoopty-do.)

If the trend varies significantly from the historical norms in the area, you may have to start inquiring into the operator's activities and accounting.

Finally, it never hurts to be informed. Most operators include contact information in their statements (royalty owner hotline, or similar). GIve your operator a call and find out what's going on. Ask specifically about how they arrive at their figures.

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Permalink Reply by Dion Warr, CPL on July 24, 2009 at 3:06

Caliente:

Agree. This is why I suggest a comparison against a known benchmark as a first-line tool. An out-of-line drop from the 'norm' can be revealed quickly, especially if an operator changes their accounting style or reporting midstream.

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