An article in the Ft. Worth Star Telegram reports that Chesapeake will begin to charge royalty owners for post production costs. This will amount to a whopping 25% according to the estimates. For those who modified their leases or had an ATTY modify leases with a cost free royalty clause should be spared some or most of these deductions.
http://www.star-telegram.com/2011/08/10/3282702/chesapeake-to-start-deducting.html
Dear Mike,
Some royalty owners have already received the notification from CHK. The notice did say that previous costs would not be assessed, but would be assessed going forward.
As to gas (primary culprit), when market value is set at the wellhead, even though later in the lease it provides that the Lessor will never be charged for dehydration, transportation, lifting, etc., the Supreme Court case decision in Heritage Resources, Inc. v. Nations Bank, 895 S.W.2d 833, refers to the limiting language as mere surplusage.
Buddy: OK, but what are we saying. Is the provision, “cost free royalty,” not relevant in a mineral lease? Will Chesapeake be actually deducting 25% from a royalty owners check under this new policy? Will those who have the cost free royalty provision be impacted as well?
Dear Mike,
If the company chooses to enforce it, cost free royalty is not free if the market value for gas is set at the wellhead. I looked at a lease on which the landowner received the notice on and that is exactly the position they are taking.
As to what CHK will be deducting, I do not know -- and I doubt that the Ft. Worth newspaper knows. In my part of Texas, deducts are about a 5% rate, which as you are aware are dependent on (a) the product price, and (b) the costs of post production.
Check with any competent oil and gas attorney for verification. This case has been on the books for 16 years now. I cannot imagine a Texas O&G attorney that is not aware of it and its ramifications.
Go here for John McFarland's brief and comments:
http://www.oilandgaslawyerblog.com/2009/02/postproduction-costs-part-ii.html
Buddy: This is very interesting. I read the discussion from John’s web site. I am in good hands then. John happens to be our O&G ATTY.
Buddy Cotten said:
Dear Mike,
If the company chooses to enforce it, cost free royalty is not free if the market value for gas is set at the wellhead. I looked at a lease on which the landowner received the notice on and that is exactly the position they are taking.
As to what CHK will be deducting, I do not know -- and I doubt that the Ft. Worth newspaper knows. In my part of Texas, deducts are about a 5% rate, which as you are aware are dependent on (a) the product price, and (b) the costs of post production.
Check with any competent oil and gas attorney for verification. This case has been on the books for 16 years now. I cannot imagine a Texas O&G attorney that is not aware of it and its ramifications.
Go here for John McFarland's brief and comments:
http://www.oilandgaslawyerblog.com/2009/02/postproduction-costs-par...
Buddy Cotten
Mineral Management
It is my opinion that John is the best O&G landowner attorney in the state. Coupled with a good mineral manager, it is a tough combination to beat.
I agree and he is a super nice person to work with as well.
I was just presented an oil & gas lease from a leasing company on behalf of Chesapeake in Tarrant County. The royalty % is 25% computed at the wellhead (this leasing companies standard lease form), and the language they suggested when I told them I would need a no-deductions clause is the following:
"It is agreed between Lessee and Lessor that, not withstanding any language herein to the contrary, all oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without deduction for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, notwithstanding anything contained herein to the contrary, 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 actual cost of such enhancements."
Anyone have an opinion on whether this no deduction clause would actually mean that there would be no deductions from the checks (other than the production taxes of course)? The second phrase beginning with "however,...." is what irks me and makes me think the clause may not achieve my objective.
This property is very small, and frankly, I have very little leverage in this negotiation, so hiring an attorney to review would be neither economical nor effective in all likelihood since the leasing company has already rejected some other minor tinkers that I have requested and they don't need my property for this unit so far as I can tell (as I am on the edge of the unit and could easily be cut out if I dont bend over and assume the position).
Hi A. Loren, I know your situation isn't funny, but I can't quit laughing at your last sentence in the message. :))
good luck.
A. Loren said:
I was just presented an oil & gas lease from a leasing company on behalf of Chesapeake in Tarrant County. The royalty % is 25% computed at the wellhead (this leasing companies standard lease form), and the language they suggested when I told them I would need a no-deductions clause is the following:
"It is agreed between Lessee and Lessor that, not withstanding any language herein to the contrary, all oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without deduction for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, notwithstanding anything contained herein to the contrary, 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 actual cost of such enhancements."
Anyone have an opinion on whether this no deduction clause would actually mean that there would be no deductions from the checks (other than the production taxes of course)? The second phrase beginning with "however,...." is what irks me and makes me think the clause may not achieve my objective.
This property is very small, and frankly, I have very little leverage in this negotiation, so hiring an attorney to review would be neither economical nor effective in all likelihood since the leasing company has already rejected some other minor tinkers that I have requested and they don't need my property for this unit so far as I can tell (as I am on the edge of the unit and could easily be cut out if I dont bend over and assume the position).
Snues, I think the last line is more of an accurate assessment for minerals in Texas, where you can be left out, but still drained if you won’t come to terms with someone. I hope Mr. Loren has been dealing with more than one company, and if he does have to knucle under, 25% beats the 20% that I know many people have signed for. I wish him the best.
Looks like I will have to accept the 25% loss, Chesapeake lawyers I am sure did their homework.
That said, our check last month was $270 on 1/4 acre, free money, hard to complain too much.
Last check was $84, was expecting about $150ish. Looks like much more than 25% deduction for costs.
Dear Mr. Eastwood,
What your check was for has no relationship to deductions. They should clearly be spelled out in the justification portion of the check, next to the taxes deduction.
Mr Cotten,
On the check stub under deductions it all said zero on all 3 wells, as usual.
What was different on this stub was right under the value of the production in nearly ever case was a minus sign followed by number that looked to be deducting proceeds almost always close to the equal of the production.
Its very unclear.
The total production was only about 20% less than the previous check which was for $270. Yet this check was $84.
Also previous stubs did not show the minus signs and numbers at all.
Previously each well made nearly $100, this time each well made about $30.
Operators from time to time will go back a year or more ago and refigure price received and production (generally every so slight). The adjustments will generally only affect one check. Does not sound as if the deductions have hit your check yet, if they are not accounting for them.
Thanks Buddy.
Hopefully its a one time deal.
I will post the results next month.
Meanwhile I have faxed to Chesapeake Exhibit A from the lease which says we are not to be charged costs.
I dont really expect them to capitulate, but its worth a try.
With 3 wells over 5m, 4 more approved, and room for 7 more on the lease they are now doing another seismic for some reason. I assume its to look at the rest of the lease for any potential problems before they drill more wells.
How much did the gas price change between the two checks?
Not too much out of the previous range, it did drop some which would account for a fraction of the lower payout.
(10% maybe?)
Prices ranged from 2.60 to about 3.40. I do not have the stub with me here.
But that is not that much lower than the well head prices of previous checks.
So lower gas prices knocks off 10%, lower production gets about 10%.
Seems I am missing about 30% somewhere.
State taxes are already deducted off the top and not entered into the whole "bring home" check equation I am using.
With all the above said, I am still grateful for "free money."
It just pisses me off that they would try to get out of the no costs agreement I signed.