Discrepancies between production on stetements and TRC

Andrew_Gerald · May 13, 2018, 1:09am

After reviewing all of my revenue statements from 2008 to present, my accountant and I have found the following "anomalies" and discrepancies, and I'm wondering if anyone knows what/why or sees the same on their statements:

1. Comparing production amounts of both gas and condensate om my statements to what was reported to TRC, we see that what was reported to TRC exceeds what was reported on the statements by 5% to 12% every month. The ONLY few times TRC and my statements ever listed the same production amounts is when there was no production that month.

2. The amount of the DISCREPANCY in #1 climbs month by month, for varying periods, until it drops to closer to 5% and then repeats the climb. To be more specific, it ALWAYS increases over the previous month until one month it drops, and then the increasing discrepancy resumes. (In other words, the total production amount on my statements becomes less-and-less than what was reported to TRC as several months go by, then it will "reset up" to about 5% less, and then resume the same downward procession.)

3. Statements will have NEGATIVE gas and condensate production numbers on some lines, thus negative dollar amounts in my revenue column. Negative production??? They're injecting gas into the ground???

4. Statements will have a positive production amount with its respective positive revenue amount on one line, then negative production and revenue of exactly the same amount on the next line; they're putting it on, then taking it off.

5. My lease limits my exposure to expenses to "wellhead stuff" like separation, drying, compression, etc, and caps my exposure at 5%. A couple of years ago I caught the current operator (Sabine) tacking on transportation and marketing expenses, and after challenging them they credit me with about $3000 on the next statement. Their incredibly lame "excuse" was that when they took over from El Paso they simply hadn't reviewed any of the leases. On all statements going forward from then, we don't see any T&M expenses listed, but the "wellhead-related" expenses are close to the previous total expenses; it's as if they rolled T&M expenses into wellhead expenses.

Beyond these seeming-anomalies, I'm interested in learning about all the ways operators/producers rip off mineral owners. Has anyone come across a site or sites detailing the ways we mineral owners are being stiffed, and how to identify and expose these criminal activities?

James_Marrow · May 13, 2018, 10:48pm

A few points that might help. I have found that there are discrepancies between check stub and RRC reports, but be sure to go to the disposition pages to see what they sold, vs what was produced. Some companies use the production on the lease, etc. So, try tying the amounts you are paid for with the disposition amounts.

Secondly, the negatives appear, usually when they reprice gas (operators are supposed to pay within a certain amount of time, and they estimate the price of gas. I have seen stubs that showed the same amounts in and out with slightly different prices, going both positive and negative. If you see a negative and no similar amounts, try a previous stub.

Andrew_Gerald · May 14, 2018, 1:20am

"be sure to go to the disposition pages to see what they sold, vs what was produced"

On TRC, natural gas production amounts and disposition amounts for the entire history are exactly the same numbers. (Is this normal or should they be different?) Condensate disposition amounts most often equal production amounts, but sometimes they're lower, sometimes there's zero disposition, but in a few cases disposition is higher than production.

"If you see a negative and no similar amounts, try a previous stub"

I'm not seeing those negatives matching a positive on any previous or subsequent statements.

From 2007 through 2011 the operator was El Paso. After NFR/Sabine took over, the statements just don't seem to jive with El Paso's. Also, annual revenue immediately fell by about 50% while production numbers continued their seemingly normal decline, and that's with a normalizing factor applied to smooth out natgas price changes. It just looks "wrong" and "smells bad" but we haven't yet nailed down why.

Both my accountant and I are very suspicious re that incrementing and resetting 5-10% discrepancy; it seems like there's an accruing error that gets reset every now and then.

FWIW, since it's public info, these are the leases:

WATKINS SCHOLARSHIP TRUST, Lease No.: 231773 , Well No.: 1

WATKINS SCHOLARSHIP TRUST, Lease No.: 234700 , Well No.: 2

WATKINS SCHOLARSHIP TRUST, Lease No.: 232384 , Well No.: 3

WATKINS SCHOLARSHIP TRUST, Lease No.: 239224 , Well No.: 5

While I'm on the subject of producers/operators stiffing owners, something owners need to be wary of is an experience I had several years ago... I was spot checking a few dollar amounts and suddenly realized a discrepancy between the total the operator reported to IRS versus what the operator actually paid me... The operator was withholding and submitting Texas severance tax as they should, but reporting to the IRS the total amount and not indicating the amount of severance tax withheld and paid to Texas. I had to re-file tax returns and request a refund, which triggered a nasty audit by IRS; the whole mess cost me more than I recovered.

So, this is another example of why I'm interested in finding or making a resource for mineral owners to share notes on how operators stiff owners, whether deliberate of inadvertent.

TennisDaze · May 14, 2018, 2:01am

Operator reports gross gas volume and divides it into disposition. Looking at Watkins #1, in December 2017, total gas = 1236, of which 1159 went into pipeline and 77 is lease use. If your lease does not provide that you will be paid for lease use, then you will only be concerned about the 1159. Some of that volume will be disappear in pipeline, for example gas is used for compressors and allocated back to the leases. The plant will calculate distance from well, # compressors, etc for allocation of volume reduction through the pipeline. Some gas will be used during the plant processing. The dry gas as the tailgate will be sold and this volume will be less than the wellhead volume. Some companies use the welllhead volume and so the price will look lower. If there are liquids such as ethane, propane, gasoline, extracted, then those may be reported as products on your check stub or the sales revenue may simply be added back into the gas and reported together. You might ask for a plant statement to see this detail. For December 2017, Texas Comptroller CONG reports the gas and products if any as one number. Using wellhead volume of 1159 and reported sales of $3,883.17 = price of $3.35. Does your check stub show gross sales of $3,883.17? CONG also reports marketing cost of $505.72 which is deductible before the calculation of severance tax. See if this is reported on your check as a deduction or maybe is reducing the gross sales. As for condensate / oil, the sales volume is what is picked up by a truck which comes out when the operator calls to report enough volume in the tank. Reports to RRC are monthly production less any dispositions. The net is added or subtracted to the volume in the tank at the end of the prior month. Closing volume in July 2017 was 32 bbl + August production of 155 less 160 bbl sold = 27 bbl at end of August. Use the RRC lease id numbers and the county to see the sales revenues reported to Comptroller each month.

Andrew_Gerald · May 14, 2018, 3:05am

"Does your check stub show gross sales of $3,883.17?"

The 2/18/2018 statement covers December 2017 production and royalty and I'm not seeing those numbers on it, unless I'm not understanding it correctly (which likely I'm not, and that's half of my problem.)

UPDT: OK, I missed to add the $3502.18 to $387.81, and then there's $6.82- to subtract, but as I understand it "P" indicates plant products and "G" is gas, which is listed as 1145MCF.

James_Marrow · May 14, 2018, 3:07am

Tennis, I know that the severance taxes (especially on gas) can vary from almost nothing to 7.5%, but I have never seen any operator reduce the severance tax by calculating on the net after marketing. I have always seen it as gross, which I think is correct. What I have seen is some operators, knowing that the lease calls for no costs, adding them to the severance tax amounts, which is why Oil will show greater than 4.6%, and severance taxes greater than 7.5%.

TennisDaze · May 17, 2018, 3:30am

See my post of gas severance taxes. Gas sales should be reduced by costs before the calculation of the severance taxes.

Andrew_Gerald · May 18, 2018, 7:39pm

"Looking at Watkins #1, in December 2017, total gas = 1236, of which 1159 went into pipeline and 77 is lease use. If your lease does not provide that you will be paid for lease use, then you will only be concerned about the 1159."

I've been reading through the lease and I don't see where it says I shouldn't be paid for lease use, that is, if "lease use" means the difference between production reported to RRC and production reported on my statements. How/where might/would the operator be getting/calculating the production numbers on my statements?

Paragraph #4 which I attached an image of in a previous post, reads "...computed at the mouth of the well..." and furthermore "...when used by the lessee off said land...[computed] at the mouth of the well."

Paragraph #18 refers to "compression, dehydration, transportation, gathering and processing costs incurred past the wellhead" which seems to contradict Paragraph #4, but my share of such costs is capped at 5%, and going over all of the statements since 2007 I see some differences of as high as 12%.

We still haven't figured out the seemingly-strange consistently incrementing percentage over several months; my accountant still suspects some calculation/math error is behind this.

The other seemingly-strange thing is it seems the current operator, Sabine, is calculating things differently from their predecessor, El Paso. My accountant applied some heuristics to the numbers and we see a distinct difference lower after NFR/Sabine took over; no clue yet as to why.

Anyway, here's an example of there being about a 12% difference between gas production reported to RRC and production reported on my statement; for just well#1, RRC lists "1857" but the statement lists "1651" and production for the other wells is near zero:

14-Sabine201603statement.jpg (162 KB)

Andrew_Gerald · May 18, 2018, 9:16pm

Also, re... "Looking at Watkins #1, in December 2017, total gas = 1236, of which 1159 went into pipeline and 77 is lease use. If your lease does not provide that you will be paid for lease use, then you will only be concerned about the 1159."

Where did you see 1159? On RRC, for gas, I'm seeing that production and disposition are the same number??? Anyway, my statement lists "1145" as the production, not 1159, and 1145/1236 = 7.36% "lease use" if that's what it actually is, which is more than the 5% cap in my lease. So...???

As I wrote before, the percentage-less from disposition listed on RRC is sometimes 12% which seems awful high for wellhead processing and etc, at least from what I've found searching around.

I understand that "obfuscation = money" to operators, but to me so far it equals a migraine. :(

Andrew_Gerald · May 18, 2018, 9:47pm

Posting as I go along...

Paragraph #18, which I attached a copy of above, states, "It is agreed and understood that the royalty share of production payable to lessor shall bear no costs of production or operations..."

Then, paragraph #18 allows up to 5% for specific-purpose costs, so it seems to me that my share of gas required for "compression, dehydration, transportation, gathering and processing costs incurred past the wellhead" should not exceed 5% by volume, and should not exceed 0% for all other uses.

Does this make sense?

Plus, shouldn't any such costs be itemized? Why would the amount of gas that royalty is computed upon be reduced to account for them?

TennisDaze · May 18, 2018, 11:10pm

1) TRC Volumes - Gas has been divided between Disposition Code 2 = Pipeline and Disposition Code 1 = Lease Use. Lease use means that the gas is used on the well, perhaps to operate a compressor or other use. It is not capped at 5% or any other limitation in the attached lease paragraphs.

2) Paragraph 4 of your lease refers to gas sold at the well or used off the premises. This is why you will not be paid for lease use.

3) Paragraph 4 of your lease states that you are to receive the amount received by the lessee computed at the well. This means that when the gas is sold at the tailgate of the plant, the royalty is computed at the sales value LESS all costs are deducted back to the well.

4) Paragraph 18 only bans costs of production and operations. It specifically allows compression, transportation, dehydration, gathering and processing. These are the charges that you are being hit with. The production and operations are things like equipment, salary of field man, etc. The limitation of 5% is on the royalty, not on volumes. In light of the most recent Texas court rulings, the language of computing the value at the well will most likely override any limitation but you may be able to argue this point.

5) There are 4 separate RRC Lease ID numbers for the Watkins wells. All 4 wells are currently producing and being reported to RRC. In March 2016, only the 001 well was producing. Not sure why you posted 2 year old check stub. March 2016 production per RRC was 1659 mcf of which 1515 went into pipeline and 144 was lease use.

6) The P on your check is Plant Products and that is the liquids processed out of the gas. The liquids are reported in gallons. They are a combination of ethane, propane, butane, isobutane and gasoline.

7) The operator is reporting the gas sales separately from the products on your check stub. On Texas Comptroller CONG, operator reports gas and products as one sales number. For March 2016, your check reports total gas-related revenue as the combined gas and products sales = 2578.55 + 318.88 LESS 3.64 LESS 28.54 = $2865.25 Total Sales. On the CONG, the total sales for March 2016 is $2865.25. This is a total match. RRC Gas Lease ID = Dist 6; Lease 231773.

8) I do not see a deduction for costs on your check. There are 2 gas lines which show negative net values of -156.78 and -225.72. These may be costs. BUT you are charges a net -0- at the owners net value and so you are not being charged for these expenses.

Bottom Line - Your check stub looks correct to me.

Andrew_Gerald · May 19, 2018, 12:13am

"March 2016 production per RRC was 1659 mcf of which 1515 went into pipeline and 144 was lease use."

EUREKA: "Shrinkage" isn't calculating on my spreadsheet! :)

Another issue resolved! So where should I have the cold beers delivered? :)

"Not sure why you posted 2 year old check stub."

Because only one well was producing so it's one of the simple statements.

Why might the other three wells not have been producing for January through May 2016? Just curious.

FWIW, even from my fuzzy memories of 2007, an issue raised during lease negotiations was preventing "expense creep" so the lease was supposed to have not allowed unspecified "free" use of gas/oil, which is why those specific operations and expenses were stated. Obviously the lease could have been worded better. I think the specific point was to exclude "free" lease use and instead include those specific uses as accountable costs. So, I'm guessing what the operator is doing is using "free gas" instead of passing on specified expenses. (So, actually, what I caught them doing a couple of years ago was double-dipping; using my gas "for free" and then "billing me" for my gas, which they quickly corrected and refunded.)