I know it’s not ethical, but is it legal for an operator to sell to it’s own subsidiary? Isn’t “market price” then negated and royalty owners screwed?
Unethical? In my opinion, yes, by all definitions of the word. Illegal? Apparently not.
From what I have witnessed, Chesapeake apparently started this trend many years ago, selling their Natural Gas at about $2 per MCF below Market to their wholly owned subsidiary, Chesapeake Marketing, which then sold it to the Market at Market Price.
Many other Companies, unfortunately, have followed suit.
I don’t have any figures about Oil, Condensate or Other Products, but I would imagine they have all been doing the same thing with regards to those much more valuable products.
Most Mineral / Royalty Owners didn’t notice it when Natural Gas was selling at $10 to $12 per MCF and Oil and Condensate other products were selling at much higher prices than they are now. They were happy with their Royalty Checks.
Now, with prices much lower, the Ouch is much more noticeable, but after so many years no one appears to be able to do anything about it.
When I think about the subject today, I imagine the “wholly owned Marketing Subsidiaries” of these companies as being a single phone on the floor of an otherwise empty room in an office building in Las Vegas… [Nevada, as well as some other States, apparently don’t require full disclosure about how businesses are owned, organized or structured.]
The World has gotten meaner. Capitalism has run amuck.
Wait’ll you get a load of what they are doing with “Post Production Costs”.
This is a reason to define market value as ultimate price paid by unrelated third party and to exclude sales to affiliates. You also need to have carefully drafted language regarding post-production costs. You can study the State of Texas oil and gas leases for examples of such language. It is best to consult with an oil and gas attorney to review and revise a lease before you sign.
It is not illegal, unfortunately. A properly worded “gross proceeds” clause in the oil and gas lease can eliminate the effect on royalties of sales to a subsidiary.
Charles, excellent reply! After many years, I’m selling my legacy royalty rights so that I don’t have to deal with these turds any longer. Getting bids from smaller buyers to test the market, (investors not brokers), and then will list on an auction site to see what they are really worth. Wish me luck!!
Tennis, these are legacy royalty rights so no opportunity to alter the lease unfortunately.
Unfortunately, I do not have that luxury as these are legacy leases from 60 years ago.
That is the reason why you want to have an oil & gas attorney review the lease documents BEFORE signing the lease agreement. You can absolutely negate the “market price” problem you are talking about for your lease, regardless of what the operator is doing for other leaseholders. A simple properly worded paragraph in the lease can keep that from happening to you. If the operator balks, they don’t get the lease.
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