I have a lease which clearly states that royalties are to based off of wellhead pricing, however, the gas developer entered into a fixed price arrangement with the local gas utility company. This had an obvious adverse affect on royalties. The gas company responded essentially that they were sorry but they were stuck, to which I said that’s your problem. Looks like we are going to court. Anyone ever dealt with something like this?
I haven’t dealt with this personally but it sounds like a very interesting issue. I wonder what language in the lease they think allow them to sale your gas in this manner, especially if it’s below market price. Keep us posted as I find this very interesting. I would think the operator would have a fiduciary duty to market your gas in the most favorable terms, you may also be able to take your gas in kind and negotiate a sales contract with local gathere in your field.
Dear Mr. North,
Exactly what does your lease form provide? A typical provision reads as follows:
“To pay lessor for gas and casinghead gas produced from said land (1) when sold by lessee, one-eighth of the amount realized by lessee, computed at the mouth of the well…”
My lease form provides for the royalty to be based on market price, which I defined as the Henry Hub posted price, less 5 cents per thousand, or the price received, whichever is higher.
As Mr. Jaehne points out, many lease forms provide that you may take your royalty gas in kind, but you are responsible for your own hook-ups, etc.
Your situation reminds me very much of the problems that we had with the NGPA where you had tiered pricing based on market. That is when the open ended term “market value” was removed from many lease forms and had market value defined as the price received.
Thanks for the input. The lease clearly states that royalties are derived from the average monthly market rate in the area, paid by the regional utility (don’t have it in front of me). What makes it more interesting is that a different lease signed at the same time with the same company specifically permits the developer to enter into a contract for sale of hydrocarbons (and did so). Another lease, same company, same timeframe, same area, with the same language, pays royalties based upon the average monthly market rate (close to the Henry Hub Spot Price). A few years ago when gas prices were in the teens, I had one well paying market rate royalties and one well (this one) paying royalties derived from $2.34/mcf. Regarding the “in-kind” option, this is already part of the base lease and I receive 200,000 cf annually. What I think I have is a gas company that did sloppy work and got themselves into a fixed price arrangement without a lease that permits it.
Mr. North,
I think that you are absolutely correct giving the verbiage of your form. I surmise that the operator is in a world of hurt on this issue. Do you have a gauge on the average price in the area paid by the regional utility? With a spread like you talk about several years ago, this could be some real damages.
S E North said:
Thanks for the input.
Mr. Cotten I have all the production records going back to when the well was turned-in plus the wellhead price of gas from other wells in the same market, so I can determine what the gross should have been (and therefore the net) I did some rough math going back 5 years and it appears to be worth the trouble. My attorney said that values in such a case are not always derived strictly in that manner. It’s an average well for the area, not great but viable.
Buddy Cotten said:
Mr. North,
I think that you are absolutely correct giving the verbiage of your form. I surmise that the operator is in a world of hurt on this issue. Do you have a gauge on the average price in the area paid by the regional utility? With a spread like you talk about several years ago, this could be some real damages.
Good luck,
Buddy Cotten
www.cottenoilproprties.com
S E North said:Thanks for the input.
Mr. North,
I am curious about Pennsylvania law. Is the payment of royalties under an oil and gas lease a condition of lease or is it a covenant in the lease form?
I believe that your attorney is giving out good advice.
S E North said:
Mr. Cotten
I have all the production records going back to when the well was turned-in plus the wellhead price of gas from other wells in the same market, so I can determine what the gross should have been (and therefore the net) I did some rough math going back 5 years and it appears to be worth the trouble. My attorney said that values in such a case are not always derived strictly in that manner. It’s an average well for the area, not great but viable.<</body>
Mr. Cotten, I’m not an attorney but I believe that 1/8th is a statutory minimum, but every instance I’m familiar with is articulated in lease form.
Buddy Cotten said:
Mr. North,
I am curious about Pennsylvania law. Is the payment of royalties under an oil and gas lease a condition of lease or is it a covenant in the lease form?
I believe that your attorney is giving out good advice.
Best wishes,
Buddy Cotten
www.cottenoilproperties.com
S E North said:Mr. Cotten
I have all the production records going back to when the well was turned-in plus the wellhead price of gas from other wells in the same market, so I can determine what the gross should have been (and therefore the net) I did some rough math going back 5 years and it appears to be worth the trouble. My attorney said that values in such a case are not always derived strictly in that manner. It’s an average well for the area, not great but viable.
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