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Author Topic: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS  (Read 11996 times)

vlaamseman

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #15 on: January 03, 2010, 08:44:46 AM »
Jim is right about the actual amount of post-production costs. I've heard all sorts of different things. That the deductions equate to 1% out of the 12.5% or whatever the agreed royalty amount is (so that the landowner gets 11.5%, etc.), and also what was discussed, more like 2% to 3% (which would be between 10% to 20% of the royalty). I've asked landmen to get me documentation on this, or some actual estimate, but mum's always the word.

I do agree with MM, that trying to go for watertight language is the best approach, but even if you think you have watertight language you may either a) get screwed by creative interpretation by the operator down the road, or b) not be able to find an operator who will sign on.

I've heard about a few companies that will accept a "market enhancement" type clause - no deductions except for any costs that make the gas more valuable (but NOT the big dogs down here - Range, Chesapeake, CNX). But who knows how they'll interpret "market enhancement" in a few years?

Which brings me to the idea of having an HA for lease groups. Not a bad idea at all. It is incredible - all of that money for gas and really we all just have to take the operator's word that the deductions are proper. Allthough, if I were the operator I'd be scared to death of a class action suit if I tried any funny business. I think that's why they push the standard lease so much though - because they know exactly what they will deduct based on their standard lease. They are creatures of habit. I'd have less of a problem with the standard lease if they'd just say... your post-production deduction costs will not exceed $___ per Mcf of gas.

Its pretty funny, that case in Texas was brought by Bank of AMerica, who somehow ended up as the owner of a bunch of royalties. Leave it to a big bank to go after the gas company!

I think that this whole process of leasing and drilling is just so based on antique industry practices (from other states!) and is so populated with shady characters and corporations that its a huge leap of faith to do anything. But with all of that money flying around, a lot of people are willing to jump, and should be. The real question is, when do you jump? It seems like a lot of members on this forum will be holding out for a long time, bacause I don't know that there will ever be such a thing as a perfect lease, the right amount of bonus money or a completely ethical gas operator!

Joe:  Chesapeake and others do offer lease language that limits deductions from royalty to "market enhancement" cost.    However, this is little help because I  maintain that all post production costs can be interpreted as "market enhancement" costs.   I hear credible reports from royalty receivers that after excruciating efforts, they are discovering that deductions have been made to their royalties of over $2.20 perMmcfe.   

Range Resources recently reported to an investors conference that in the SWPA wet gas field, they are receiving a premium of 45% ($2.31 pre Mmcfe when gas was selling at $5.00, if I remember correctly) from every mmcfe of gas produced, in the form of revenues from condensate at the wellhead and valuable liquid hydrocarbons like propane, butane, etc.  which are extracted from the gas at the MarkWest cyrogenic separating facility in Houston PA.   However Range also reported that their average post production costs (gathering, processing, etc.) per Mmcfe are in the $0.75 to $1.75 range, which must be deducted from the total revenues.   Like most rosy scenarios presented to investors, I suspect that the post production costs reported by Range to investors are different from the actual deductions from royalty seen by lessor landowners.     And Range Resources is one of the more reputable operators from what I can determine.

In 2008, CNX was offering a $1.00 ceiling on post production deductions from royalty.  That was for dry gas in WV, if I am not mistaken.    But I doubt that this is offered in 2010.

This whole subject of deductions from royalty is a huge can of worms that definitely presents the most significant threat to the future income streams of lessor landowners in PA.    A statewide, or nationwide organized effort by royalty owners is definitely necessary.

mohawk70

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #16 on: January 03, 2010, 09:34:18 AM »
There are all kinds of "funny" practices in different industries that cause problems.  The movie industry has percent of the profits versus percent of the gross.  And  no movie ever makes a profit.   Many multi-national and multi-subsidiary companies have "transfer prices" for when products and intermediates undergo processing at a number of different subsidiaries. 

Tremendous potential for abuse and getting screwed.  That 's one of the reasons why it is important to retain some aspect of the groups structures so that proper audits can be conducted.  Even if only on a spot basis or rotating basis.  So if any "funny business" is detected, immediate legal remedies can be applied.
Please remember:  The planet Earth is a VOLCANO.   You cannot "save" a volcano ... and volcanoes do not NEED to be saved.

Rockdale

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #17 on: January 03, 2010, 12:44:07 PM »
There's no question that this highly technical subject of how royalties are calculated are going to be a major preoccupation for anyone with a producing Marcellus well in years to come.  And I agree completely with the idea expressed by some that it is extremely important to retain a landowner association structure of some kind to keep the whole process of collecting royalties honest, or else the royalty owners are likely to be taken left and right over a long period of time.  Some people on this thread have mentioned examples in Texas, Oklahoma, etc.  But there's a case very much closer right in the Marcellus Shale region in West Virginia.  In Roane County, West Virginia, a little while back a jury awarded in a class action suit some 400 million dollars (134 in actual and the rest in punitive damages) to around 10,000 landowners who had been systematically short changed over the years when it came to calculating post production expenses.  Two companies, NiSource and Columbia, had been socking it to landowners by loading on all kinds of expense thus reducing the net proceeds considerably.  Chesapeake walked into the mess by buying up Columbia, continued the practice and ended up being nailed for the jury award for the entire period that landowners had been shorted.  What it appears the court found was that if the state requires a minimum royalty of 12.5%, then any deductions that the gas industry can come up with should not cut into that minimum.

mohawk70

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #18 on: January 03, 2010, 01:23:55 PM »
There's no question that this highly technical subject of how royalties are calculated are going to be a major preoccupation for anyone with a producing Marcellus well in years to come.  And I agree completely with the idea expressed by some that it is extremely important to retain a landowner association structure of some kind to keep the whole process of collecting royalties honest, or else the royalty owners are likely to be taken left and right over a long period of time.  Some people on this thread have mentioned examples in Texas, Oklahoma, etc.  But there's a case very much closer right in the Marcellus Shale region in West Virginia.  In Roane County, West Virginia, a little while back a jury awarded in a class action suit some 400 million dollars (134 in actual and the rest in punitive damages) to around 10,000 landowners who had been systematically short changed over the years when it came to calculating post production expenses.  Two companies, NiSource and Columbia, had been socking it to landowners by loading on all kinds of expense thus reducing the net proceeds considerably.  Chesapeake walked into the mess by buying up Columbia, continued the practice and ended up being nailed for the jury award for the entire period that landowners had been shorted.  What it appears the court found was that if the state requires a minimum royalty of 12.5%, then any deductions that the gas industry can come up with should not cut into that minimum.

It might be worthwhile to check out candidates for the role of "agent" ... no idea what to actually call "it".  The function being to audit the royalties.   There are obviously costs involved, but as in the Roane County, West Virginia case [we should get a copy of the actual decision/ transcript so we at least know the full real legal name of the case], this is a big business.   [Or as "they say", this is big bidness.]

There is a lot of money at stake and ripoffs seem to be out there to trap the unwary.

Trust but verify.   [Who said that?]
Please remember:  The planet Earth is a VOLCANO.   You cannot "save" a volcano ... and volcanoes do not NEED to be saved.

aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #19 on: January 03, 2010, 01:38:50 PM »
simply verify, and remain diligent.

in business trust is a luxury. do they trust us? or is everything they want spelled out in the lease?

trust...nah.

wj
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aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #20 on: January 03, 2010, 01:53:04 PM »
trust but verify was an old cold war saying.

it was a diplomatic slap in the face to russia, saying in essence that sure we trust ya, but not really.

in reality though we could trust the russians more than the industry we face. why? we had "mutually assured destruction" as a deterrent to misbehavior.

what do we have in our arsenal of deterrents? nada, zip, all we can do is send them a letter telling them they ripped us off and hope to get it resolved in a timely manner. in the meantime they have full and unfettered use of our money with no penalties.

so what do they have to lose by underpaying? nothing. what do they have to gain by underpaying? money...lots of it, and at no interest. and if we miss the trickery, they get to keep it too!

again. diligence...

wj
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DebO

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #21 on: January 03, 2010, 04:14:10 PM »
Check this site for current decisions by PA Supreme Court

http://www.aopc.org/T/SupremeCourt/SupremePostings.htm

Kilmer vs. Elexco Land Services (Decision could be published at any time) AND Kropa vs. Cabot Oil are clearly explained at link below.

http://www.martindale.com/natural-resources-law/article_Dinsmore-Shohl- LLP_760238.htm

Post Production cost from a currently producing well is 30 cents per MCF (Yes, MCF) deducted from 12.5% royalty

aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #22 on: January 03, 2010, 05:17:50 PM »
interesting and thanks for bringing info deb.

is that .30/mcf for a shallow or marcellus well?

im assuming that you are following the proceedings to determine the effect on your own royalties?

what geo area is that .30 deduction if you dont mind? and does it break down any better as to transportation/compression?

wj
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aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #23 on: January 05, 2010, 04:59:05 PM »
deb, since you're posting, what is the price that the gas is selling for currently?

wj
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ghrit

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« Last Edit: January 05, 2010, 06:10:39 PM by ghrit »
There are two kinds of ships.  Submarines and targets.
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DebO

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #25 on: January 05, 2010, 06:31:09 PM »
Thanks, WJ.
After all of these months reading posts, I thought I might be able to add something of interest and/or value to the forum.

The vertical Marcellus is a refrack in Bradford County, the deductions are for transportation, and the proceedings are of interest to anyone who currently holds a lease with PA MRA's 12.5% royalty.

It would be nice if someone (PA supreme Court) stood up to the Goliaths in the best interest of the people that have lived off the land in PA for their entire lives--the same land that they have leased for pennies.  When it comes to Oil & Gas and PA government there is no check and balance system.  This is where the newly forming landowner groups and coalitions come in.  Power in numbers.


When reviewing and determining the value of a lease members should be familiar with working interest vs.royalty interest.  A good explanation can be found at:

http://www.freeholdtrust.com/about/land_holdings/royalty_lands/what_is_a_royalty.html

Last Royalty 10/09 $3.67 mcf

aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #26 on: January 05, 2010, 07:03:31 PM »
interesting deb, and thanks so much for sharing. i truly hope that you continue to do so, you are on the cutting edge of where this forum needs to be.

a little math if i may then.

@3.67/mcf and .30/mcf deduction for transportation.

a 1/8 royalty would net you .42/mcf
a 15% royalty would net you .50/mcf
a 20% royalty would net you .67/mcf
a 25% royalty would net you .82/mcf

20 mmcfg/d in a 2 well chk bradco/susq co. unit would net you:

8400/d @ 1/8
10000/d @15%
13400/d @1/5
16400/d @1/4 if you owned the whole unit

divide your acreage by 640 for an approximation of what your royalties would have been in oct '09 if all of your land had been in this unit.

then you can figure how much bonus it would be worth trading off for extra royalties, and whether it is worth holding out for the brass ring.

64 acres in this unit, would earn $1340/d or $40,200/mo. @ a 1/5 royalty.

@1/4 royalty $49,200/mo. or 9k additional/mo. an easy 10k/yr first year, over how many years would you recoup your reduction in bonus?

this is off the cuff, so somebody check my math.

wj

oh, the real point of that was:

a 1/8 royalty loses approx. 1% of income for an effective royalty of 11.5%
a 1/5 royalty loses approx. 2% of income for an effective royalty of 18%

and so on...

at least until the minimum royalty act is interpreted. best of luck to all concerned. i believe its gonna be 1/8 period.
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aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #27 on: January 05, 2010, 07:08:39 PM »
oh yeah...dean, so much for no deductions from royalties in the marellus.

wj
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DebO

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #28 on: January 05, 2010, 08:02:32 PM »
Calculations look right on and it would be wonderful if we received the entire 12.5% but when in a production unit, that 12.5% gets divided up according to your percentage of acreage within the production unit.  The decimal interest isn't quite as impressive as numbers go. BUT one never knows what the future holds!

I will check into the WV decision and post links that I find.  A friend of mine from Colorado just received a nice settlement from a class action against and O & G company due to post-production deductions lowering the royalties below the agreed upon minimum.  I hope it doesn't go unnoticed by the PA Sumpreme Court.

To me, "market enhancement" sounds like a loophole with a lot of wiggle room for interpretation.  Could there be a list specifics or 'to be agreed upon by  both parties' in parentheses. That is not 'water tight', but open for discussion.

aubrey

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Re: POST-PRODUCTION DEDUCTIONS FROM ROYALTY GOVERNING NATURAL GAS
« Reply #29 on: January 06, 2010, 11:54:19 AM »
lots of could be's deb, the devil is in the details...or lack thereof.

one things for sure, the market enhancement clause in chk's leases is a minefield for interpretation. gonna screw many i fear.

wj
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