Replies to This Discussion

Permalink Reply by wyalusing jim on April 15, 2013 at 1:48am

well like i said, it's a start. you used to insist that there was no market for gas at the wellhead anywhere, but now it's just bradford county.

some folks just learn slower than others.

wj

Permalink Reply by wyalusing jim on April 18, 2013 at 5:19am

after a week of phone tag, i finally got through to 3 of the 4 interests in the well from which i receive royalties.

while i was on the phone with chk, i asked where the first point of sale was for the gas from that well. without hesitation, the analyst for that well stated unequivocally that chk appalachia is selling the gas "at the wellhead". i then asked if the sale was to c.e.m.i., and she said that she didnt have that info handy.

i am still waiting for mitsui's answer to that same question, although they did say that they sell the gas to their marketing affiliate just like chk.

anadarko says that they are not required to disclose that info.

although technically i do agree with hump that there is no "market" for gas at the wellhead, i.e. con ed doesnt buy there, that doesnt mean that it cannot be the first point of sale to an affiliated 3rd party.

now to me, that does bring up a very interesting question regarding enumerated deductions from royalties under leases which allow them. if their lessor, chk appalachia, is transferring posession of the gas at the wellhead, before it enters the the dehydrators, gathering lines and compressors, what gives them the right to take those deductions which would occur after they have sold the gas?

i know that it is in the lease and all, but it does seem to be a possible point of contention.

and then, in case some of you arent aware, regardless of lease terms, all royalty owners within a unit are paid based on the same pricing. if chk is netting back post production costs by lowering the actual sales price to a wellhead "value", there might be some double dipping going on when the deductions are then made from the already netted wellhead price. not sure yet, but i'm workin' on it.

wj

Permalink Reply by Frank Walker on April 18, 2013 at 6:10am

wyalusing jim

The reply you received from CHK, if they were being truthful with you, is troubling.  I will not go into detail here.  And besides, you read widely enough you likely already know what's on my mind:

In another forum, at least a year ago, a lawyer there mentioned trying to ban wellhead sales in his leases.  Another poster over there outlined how, with wellhead sales and existing "no deductions" leases, one of which I assume you have, that the "no deductions" provisions could legally be circumvented.

I've been watching for reports of wellhead sales ever since.  Yours is the first I've seen.  As you know better than I do, "natural gas is not sold at the wellhead".  That has always been industry practice.

My hope is the woman at CHK was giving you a "party line", not realizing how knowledgeable you are.  But if they really are selling the gas at the wellhead that's big news.  And BTW, it's not impossible.  

Permalink Reply by wyalusing jim on April 18, 2013 at 6:57am

frank, i asked the question, she replied immediately.

i then asked, "please be certain, i am not asking if my price is based on a wellhead value, but is there actually a sale consumated at the wellhead".

"yes" she responded.

could she be misinformed? sure.

could she be lying? i doubt it.

do i believe this? not 100%, but so far everything that i am seeing and hearing has me leaning toward there being actual first point sales, "at the wellhead".

just as interesting as the chk analysts' answer, is, that anadarko refused to answer the question, and mitsui has been dodging the question for over a week now.

regarding the banning of wellhead sales in a lease...good luck. you're gonna have to thread your way through a minefield of legaleze to eliminate the possibility of both wellhead pricing and all deductions.

getting back to the friendsville lease, remember that in the case of affiliated sales there is a mechanism to correct inequities. the tgp zone 4 minimum price requirement.

wj

Permalink Reply by Frank Walker on April 18, 2013 at 7:18am

wj

I appreciate the response.  True, genuine, wellhead sales differ, of course, from "netback" sales.  Our "no deductions" leases (I have one, too) protect us from "netback" sales.  But from true, genuine, wellhead sales I have no protection at all, nowhere to run, nowhere to hide.  It's not something I ever anticipated because when my lease was drafted wellhead sales were "not industry practice".

For others:

Gas at the wellhead is not finished gas.  It is not pipeline ready.  Therefore, it is worth less, and sells for less, than finished gas.  But there is nothing whatsoever prohibiting a third party purchaser from contracting separately for finishing services following their wellhead purchase.  And activity attendant to our natural gas, but subsequent to sale of our gas, is not addressed in any lease.  

 

Permalink Reply by wyalusing jim on April 18, 2013 at 8:04am

to put a finer point on it frank, netback "values" are not "sales" per se. they are artificially derived values, different from an actual sale.

btw, the friendsville lease also says that the price must be the price in an "actual sale"

frank, i would have thought that you knew that gas from wells in our are is "pipeline ready". dehydration, which is necessary because of produced water, does not affect the "readiness" of the gas itself. the gas from our wells is almost 97% methane and approximately 3% ethane, with a btu value of approximately 1030 btu/cf.

if the gas were too low in btu's to meet pipeline standards, or contained h2s or other undesirable compounds it would require processing or enhancement. ours' does not.

wj

Permalink Reply by Frank Walker on April 18, 2013 at 9:27am

I've no problem with what you wrote.  I was trying to use shorthand to avoid having to detail the usual "laundry list" of deductions which pay for all the stuff needed to get gas to the pipeline in proper fettle.  Ditto on the netback thing.  I've no personal experience with it.  I just know it costs landowners money.  Details aside and notwithstanding, I hope you understood my larger point which was addressing why wellhead sales have the potential to be a big deal.

BTW, this post is not with regard to Friendsville.  I don't have the Friendsville lease and I don't know whether this would be an issue with Friendsville . . or not.  I know with my own lease, which does not prohibit wellhead sales, it's an issue.

Permalink Reply by wyalusing jim on April 18, 2013 at 10:13am

update!

i just received the following from mitsui via email.

"I have an update regarding your questions as they relate to the provisions in your lease.

 

Price Listed Adjusted for BTU Content

Yes.  The price that is listed per MCF on the remittance statement is already adjusted for BTU content.

 

Sale

You also asked about where the sale of the gas occurs.  Our gas is marketed by an affiliated party.  We sell them this gas at the well.  Since the sale is to an affiliated party, the Sales Price definition on page 48 of your lease dictates that the price we receive for your gas must be at least equivalent to the index for the TGP Zone 4.  I have set up your interest with the minimum price components.  Each month, if the price received for your gas is less than the TGP Zone 4, you will receive additional funds to make up the difference so that we will be in compliance with the Sales Price definition clause."

obviously i deleted all names and titles and a few other details that i didnt want to make public. but that is otherwise a "copy and paste" from a mitsui analyst.

wj

Permalink Reply by PLOVER on April 18, 2013 at 6:59am

.....COULDN'T WELLHEAD PRICE SIMPLY MEAN THE PRICE BEFORE DEDUCTIONS - MEANING THAT THE GAS IS SOLD ENTERING TGP ZONE 4 - LINE 300 - AND THAT PRICE IS THE "WELLHEAD" PRICE - SO IF CHK SELLS TO CEMI AT WELLHEAD, AND CEMI SELLS AT TGP ZONE 4 THE PRICE IS THE SAME.  

SO IF $3.00 IS RECEIVED FOR 1000CUFT  - BY CEMI AT TGP ZONE 4 - THAT IS THE PRICE CEMI PAYS CHK.

NOW THE $3.00 IS PAYED TO FRIENDSVILLE LEASES BECAUSE NO DEDUCTIONS ARE ALLOWED.  BUT IF THE LEASE ALLOWS FOR "ENHANCEMENT" OR OTHER DEDUCTIONS THESE ARE SUBTRACTED ????

 

Permalink Reply by wyalusing jim on April 18, 2013 at 7:14am

not sure john, but why would chk need to do the double sale if it's all the same price?

wj

Permalink Reply by PLOVER on April 18, 2013 at 9:03am

...... TAXES  ....

MORE FAVORABLE TAX CONSEQUENCES IS ONE POSSIBILITY .. ..  .... CORPORATION SEEM TO FORM ENDLESS SUBSIDIARIES - I CAN'T HELP BUT THINK THEY ARE TAX RELATED ...   

Permalink Reply by wyalusing jim on April 19, 2013 at 2:51am

ok, i wont pretend to understand the ins and outs of corporate taxes. that may be why they do it.

whenever i'm faced with a situation such as this though, i try to postulate as many theories as i can come up with. after that i start investigating, chasing the various avenues that my theories may open up. some theories quickly fall by the wayside as implausible. what's left, the possibilities, are where i concentrate my energies.

i'm not sure whether the implications to those who have the fvgl are significant at this point, really there may no significance to anyone, we may just be at an end that is now more fully understood, but one possibility that seems to be worth following up on for some is that since chk is selling their gas at the wellhead, why should they be allowed to charge deductions for things that occur after they no longer own the gas?

focusing on a single aspect for clarity, gas enters the gathering line when it leaves the wellpad, obviously after the wellhead.

if chk does not own the gas at that physical point, why is gathering a legitimate deduction?

they might argue that c.e.m.i. is a subsidiary, and so it's still owned by the controlling corporation, but if that is the argument, then chk lessors are entitled to info about c.e.m.i.'s costs and profits since those would affect the lessors royalty share.

here in pa., we seem to be in the same or similar situation to the bass family down in texas. though the applicable laws may differ, there may still be some similar affects when that case is settled. it may be worth following that case.

wj

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