We own a tract of land that has had a gas lease since the middle 70's. It was renewed and had a Coal Bed Methane Lease added to the original along with modifications to the original gas lease in 2008. We conducted an audit in 2014 that actually did not start until 2015. Much to our surprise we found the lease had been totally mismanaged, and the terms of the lease were not being followed. Things such as royalties were being paid to the wrong person, Deductions were being taken that were not in compliance with the lease.
We have 7 terms of the lease not being followed and in correspondence with the gas company have learned the terms will not be followed or honored now or in the future. Just one of the items we are arguing is deduction of "volumetric deductions". In general there is a loss of gas production thru the well heads or gas lines to the sale volume. Historically a 2% loss is considered a high normal. Thru our audit we found a deduction of over 7%. According to the terms of our lease, "no deductions" will be deducted from royalty payments. Keep in mind this is a lease that lawyers, ours and theirs, created and was signed by both parties. This is very significant in that they owe us a lot of money from the past but also will be ripping us off in the future and who is to say they will not increase that percentage of deduction?
So my question is, How do you get the terms of a lease to be followed by all parties, not just one party? It is a matter of principle as much as anything. If you include the cost of the original lease along with current legal fees, and add in the audit fee, the total is a staggering amount passing $75,000.00.
How much Principle can we afford? You do not have to be a rocket scientist to figure out the gas company is simply trying to make it too expensive for the little guys to fight and win.