Why are processing cost deductions so much higher than processing costs for other components extracted from wells?
As in, why are NGL deductions higher than oil or gas? Or what specifically do you mean?
Why are they a larger proportion of their value than I see with other components. When prices go low we have processing deductions that are twice as much as the value of the component, resulting in a negative balance for NGL’s. When prices are higher processing deductions are usually 1/3 to 1/2 the value of the component. The portion of the component for gas, drip, oil, while high, is never this high.
It’s hard to say exactly without seeing the statement, since it seems each one is slightly different, but I’ve seen it where the processing fees are burdened to the NGLs, even though it’s both the gas and NGLs going through the plant. It’s just easier for accounting departments to take a fee and apply it to just one product rather than splitting it.
There also may be different places the deductions are happening that makes it not apples to apples. For example, the gas stream may have some of it’s “deductions” taken off in the form of volumes because the volume of gas sold is actually the final “settlement” volume. I’m looking at a plant statement in front of me here where the gas volume is only 94% of the actual gas processed because that’s what’s in the contract. The other 6% helps cover plant fuel and fees.
All the conditioning fees, gathering fees, transportation fees, etc have to go somewhere. I’ve typically seen it applied to one or the other, either the gas or ngl’s, not both evenly. Also, these are typically fixed fees where you pay a certain rate per volume processed. Fuel is also usually a “fixed” type fee. This would make the % fee higher in a low price environment and low % in a high price environment. (Like the % of tax added on at the gas pump. If state and federal tax adds $0.384 per gallon, this is a higher percent when gasoline is $1.20 than when gasoline is $4.00).
Is this along the lines of what you were asking?
I guess my real question is whether there is any technical reason why NGL’s cost more to process. As in, it takes more resources to process than it takes to process gas, or transportation is costlier, or there’s some other factor that could be making the actual process more expensive. Or is it just a combination of a poor lease held by a producer that has a reputation for trying to skiM everything they can from royalty owners.
The NGL are components of the gas. During processing at the gas plant, the liquids (butane, propane, ethane, isopropane and gasoline) are processed out of the gas and sold separately. The resulting “dry” gas is sold at the tailgate of the plant. Generally measured and priced in gallons. Liquids prices have fallen because to the increase in shale gas production. The value of the gas out of the ground increases if it is richer / higher BTU gas with liquids. The value of the gas is the the combined total of the dry gas and the liquids. As to what expenses you are being charged and how the costs may be allocated between the gas and the liquids, depends on your producer and state location and the written terms of your lease. If you post the name of the operator, well name (preferably with API number), county and state, someone familiar with the operator and wells in that area will be able to give you more definite information.
Agree with TennisDaze. In short, NGLs are only sold IF they’re processed, so processing is a necessary evil. Oil and gas at least have the option of being sold at the wellhead and not technically processed. If gas is not processed, it’s just “wet gas” (NGLs are still mixed in with the gas) and is priced at a higher value. That said, processing wet gas and transforming it into “dry gas” (no more NGLs in the gas) increases the value of it since you can typically sell the NGLs off it for more than if they were still stuck in the gas, but it’s still an expensive process.
Oil is relatively easy to sell, and is tied more to gasoline prices since many producers have their oil trucked away (so hauling fees have to cover gasoline prices, the truck driver, and other overhead). Usually it’s about a $4 deduction per barrel for oil to cover those types of expenses, but the quality of the oil also affects the amount of deduction (water and sediment in the oil increases the deduction).
I’ve seen gas typically in the $0.70-$1 range for processing.
NGL is harder to say how much $ taken off for processing, but final pricing you’re paid on is usually 25-45% of whatever oil is selling for. When the market was more stable, 40% was pretty normal. When NGLs took a hit in 2019, 25% was the norm for a few quarters. I haven’t actually calculated it lately…not sure how the current dynamics are affecting things.
All interesting information. Our check stubs have all this broken down. This is an example from our most recent check covering March sales for one well:
Gas: Owner share of gas: 126.08 mcf Sale price per mcf: $1.61 Owner gross value: $202.83 Taxes deducted: $14.03 Processing costs: $33.90 Owner Net: $144.90
NGL: Owner share of gas: 590.70 gallons Sale price: $0.21 per gallon Owner gross: $124.14 Tax deducted: $0.0 Processing costs: $192.24 Owner net: ($68.10)
Repeated in similar fashion for every well paying us royalties. Needless to say it seems wrong to me to have to pay the producer to extract and process NGL’s - our lease is for simple royalties, no cost sharing. This happens on every well. Is this truly normal and we should just accept it as normal in times of low prices? For February sales for very similar volumes when the price per gallon for NGL’s was $0.38 per gallon, we netted only $5.54 on the same well.
The answer is “it depends.” State law - both statutes and case law - is one factor. The precise wording of your lease is another factor. Does the lease language specifically exclude costs or is it silent? How have the courts interpreted the statutes and the similar lease language? You can ask the operator how it is calculating and allocating those costs which can be deducted. Is the allocation based on a formula? The gas and liquids combined are a net positive on your check. Some operators combine the numbers and so you would not see a break-out between gas and liquids. Your question is more general than you realize.
Our leases allow deductions for processing. Because this has been an ongoing issue whenever prices drop too low we had a clause added to a newer lease disallowing deductions that exceed the value of the component. Our attorney in the state where the minerals are located said what we have experienced is not as it should be. He said that the only way this would ever be remedied would most likely have to be a class action suit. When I contacted the state agency regulating oil and gas and told them who we were dealing with I was told not to get them started on this producer. The producer rarely responds to questions and when we do get a response l question whether or not the people who respond have adult relationships with the truth. If you say there are good reasons to have to pay the producer to take what we own I will accept it.
So are you saying that part of the cost of processg gas may have been charged to gas but the majority of the cost for processing gas was most likely charged to NGL’s? And that we should think of the 2 components as a unit even though they are broken down separately on th check stub?
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