Beware of all the gas companies!

I signed two lease's back in 2011 with Gulfport Energy on 80 acres that I own in Belmont County, Ohio. Let me start by saying don't believe anything that any of the land men tell you, the are working for the gas companies and their own benefit not yours period. While I was negotiating my lease with several companies at the time in 2011. I clearly explained to them that any lease I would sign would require a Pugh clause, and that I would not except any lease that required me to pay any of the cost associated with the production or marketing of the finished product from any wells drilled onto my property. I ultimately ended up signing with Gulfport Energy because of the higher bonus payment and higher royalty percent, and the land man assured me the Pugh clause and the deduction clause weren't a problem, that a lot of people were requesting it. Well the land man was lying through his teeth after receiving my first royalty check and statement there were $14,574.11 in total deductions. Beware of any lease that includes the language below.

 

"All oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without monetary deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other proceeds produced hereunder to transform the product into marketable form; however, any such cost which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements.  However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee."

 

It was explained to me that this was exactly what I wanted and that the second part of this clause only meant if they did any advertising to enhance the selling price of the finished product I would have some associated cost from that. Well I have since found out that this is the language that the big oil companies have adopted to lead land owners to believe that they are getting a no expense deducted clause in their lease. If you find this language in your current lease be assured be ready to pay every single cost that is associated with bringing the product to market. Don't sign it! Ask clearly for a no production cost clause and have it reviewed by a gas royalty attorney.

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Permalink Reply by Joseph-Ohio on November 8, 2013 at 12:25am

So - how would that work out ?

1st the E & P / O & G entity charges the Landowner / Lessor a fee for ' Market Enhancement ' and then sells the production low to a subsidiary paying the Landowner / Lessor royalty on the basis of the low sell; and then finally the subsidiary sells the recently purchased / enhanced production at the highest fair market value ( locking the Landowner / Lessor out of a royalty return based on the higher fair market value sell ).

What do you call those maneuvers / tactics ?

Seems kind of like the riverboat shell games from the old movies to me.  

Permalink Reply by Rick on November 8, 2013 at 2:19am

Joseph, its kind of like insider trading on the stock market. The trader (seller or buyer) knows what is going on ahead of time, but no one else does. I know i know... its not the same, but just as dishonest... This is a commodity, and i dont know if there rules governing selling or buying commodities to oneself or friends or affiliates in order to manipulate the price... maybe we should investigate?

Like you say, even with no market enhancement clause, and a statement of "no deductions" they will still screw you by selling lowball to themselves, an affiliate, or a corporation that they hold substantial stock in, or have back door business agreements with..

Would it be possible to state in a lease that you would be paid on a formula of world or national gas commodity price? Isnt grain bought and sold with commodity price from chicago, with slight variations for geographic location?

Permalink Reply by Larry Pearce on November 8, 2013 at 3:09am

Can you prove that?

Permalink Reply by Joseph-Ohio on November 8, 2013 at 4:46am
If you are asking me that question, my answer is that it's not up to me to prove but appears to be what Kevin implies.

What's up to me is to avoid being ripped off should I be fortunate enough to begin and successfully negotiate an O & G lease on my property.
Permalink Reply by Greg K on November 8, 2013 at 4:52am

They are selling nat gas to Mexico right now for $7.00 a thousand cu feet.

Permalink Reply by Larry Pearce on November 8, 2013 at 3:21am

So you are saying the Midstream sells all of the individual products BACK to the operator?  It would have to here, cause you wouldn't know the value prior, it would be a guess,and then resale occurs getting them out of a price hike to share with the landowners?  And you don't think that would also red flag the buyers? That'd be an awful lot of conspiracy going on by multiple etntities that are watched like a pack a of hawks.  I don't see how auditors would miss that and not have it on the liberal sh_t head news immediately.

Permalink Reply by Joseph-Ohio on November 8, 2013 at 4:27am
Thinking what's of concern to landowners / Mineral Owners is the possibility of the ' Midstream ' entity being a subsidiary / owned by the E & P / O & G / Operator and paying the landowner / Mineral Owner royalty on the basis of the sell price to the ' Midstream ' entity and even charging the landowner / Mineral Owner the ' Midstream ' entity's enhancement costs ( in whole or part ?). Afterwhich the ' Midstream ' entity ( a subsidiary / owned by the E & P / O & G / Producer ) sells the enhanced production at greater profit with landowner / Mineral Owner having paid for the ' enhancements ' ( in whole or part ? ).
Permalink Reply by Joseph-Ohio on November 10, 2013 at 3:08am
What would be wrong about language inserted in the lease to the affect that if a subsidiary of the lessee, owned in whole or part by the lessee, or working in concert with the lessee; purchases lessor's production and then enhances and sells it on the market that the subsidiary also pays the lessor royalty ? Especially if the lessor must pay enhancement costs ( in whole or part ?) by application of the previous agreed to language.
Of course this is only functional if the subsidiary sells production for a profit covering the lessor's enhancement costs and generating a net positive return for the lessor. If it does not then the subsidiary does not charge the lessor enhancement costs.
Gets complicated doesn't it ?
Permalink Reply by Larry Pearce on November 8, 2013 at 3:28am

This is OLD SCHOOL thinking, this used to happen long ago!

Permalink Reply by Kevin in Belmont County on November 8, 2013 at 4:54am

Larry,

Really, this used to happen a long time ago. Well I guess you are the one that better get you facts straight Larry. Why don't you Google Dallas Business Journal August 12, 2013 ," Lawsuit accuses Chesapeake of selling gas to itself ". Bradford County, Pennsylvania. And while your at it why don't you Google" Chesapeake settles lawsuit" September 13, 2013 pertaining directly to the "Market Enhancement Clause" and the under paying of royalties to land owners. Unless maybe Larry your definition and my definition of a long time ago differ, I think this is very current . I would make a stretch and guess here, that if Chesapeake felt they could defend against these charges, it wouldn't be paying out a multi million dollar claim to multiple land owners to settle it.

And actually Larry I feel quite well about myself not bad at all. As a matter of fact I made some pretty smart investments and really didn't need this O&G money to retire comfortably. So please don't make reference on here to me about feeling bad about myself, you don't know anything about me. I will tell you the same thing I told the representative of the O&G company I am dealing with, " I don't care if I make another penny from this well, but I am not going to stand by and watch one more land owner get taken advantage of by this "Market Enhancement Clause".  I never said that a land man wrote it and in particular I never said that you wrote it. And actually I really don't care who wrote it, all I know is that I have done my homework about it and I know were the clause was derived from and why, and it certainly wasn't to benefit the land owner. And you are right Larry the land owners did ask for a no deduction clause in their lease's and unfortunately this is what we got. And please don't put words in my mouth, I by no means have every said on here that all land men were bad, I have never even hinted at that ever! As a matter of fact I have said on here many of times that I am sure there are a lot of honest and hard working people in the O&G industry that work as land men.

And what would be the problem Larry with having the state governments set up a commission to license and monitor land men working in the O&G industry. I have already contacted my state representative about doing so and I urge others on here to do the same. And in reference to the gas and oil companies barely making any profit off of these wells. I also have a degree in accounting and I know my way around a profit and loss sheet quite well. And it appears to me that the ones I have looked at are doing quite well. But even if they weren't doing well, why would the landowners be the only ones asked to shoulder the expense's of production cost deductions.

Have you been asked to take a 20% pay cut Larry to help the O&G companies cover their production cost? If you were, would you except it? I think its terrific that all of these people are able to find work in the O&G business, its good for our economy and its good for our county!

Permalink Reply by Larry Pearce on November 9, 2013 at 7:46am

Really? You use Chesapeake for your example. Ha

Permalink Reply by Kevin in Belmont County on November 7, 2013 at 11:21pm

Hi Larry,

Thanks for taking the time to respond to my post. Let me first off start by saying that I absolutely was a licensed insurance agent for many years in three different states and very proud of it. I spent some years as an agent and most of my years in management as a regional and district manager. I am proud of every product myself or one of my agents placed to change and "enhance" some ones quality of life after a tragedy, such as a death, a house fire, car accident, or a love one developing cancer and needing that extra money to survive on, or to pay for treatments that weren't covered under their major medical or just to be there in a time of need when someone needed financial advise or just a shoulder to cry on. Yes, Larry I am very proud of that. And the great thing about that Larry is that because I had to be licensed to do business in every one of those states my name is in a data base with the department of insurance  in those states where a potential client can put my name in and find out anything about me and my professional conduct in the business. And after all of the years being in the business I never had one complaint ever and I can verify it because I was regulated by one of the most heavily governed industries in the country and I think that's the way it should be. When you are making decision with people that alter their course in life you should be held accountable.

Where is your database Larry? Were is your professional file where the public can have access to It and see what kind of professional business record you have? There isn't one and that is my point, everyone has to be held accountable for doing things that affect another persons life when it comes to business. Are there bad people in the insurance business, you bet. Do those laws affect the good people in the business no, they don't need to. In all the years I conducted business in the insurance industry I never needed laws to make me do the right thing. But there have been some in the industry that I know of personally who had very short careers in the insurance business because of those laws and regulations and the ability of the insurance commission to enforce them. People with nothing to hide, hide nothing!

I am by no means trying to personally attack you, you sound like you have done your job the proper and responsible way. But what about the ones who don't. Who regulates them?

As far as your examples of profits on a well, 7% of a well making $100,000 a day is a lot of money. Comes out to about $210,000 per well per month. The unit I am currently in will have four wells in production within the next couple of months, so with four wells producing at $210,000 a month that comes out to about $840,000.00 per pad. So excuse me if I don't feel bad for the insurance O&G companies making all that cash. I also don't feel bad for asking what was promised to me by the land man that represented the company. That would be like me or one of my agents delivering a death claim check out to a beneficiary with 20% deducted out of it and saying " we are very sorry for your loss but since we are enhancing your life we felt we deserve 20% more because well you know we are the ones paying out the policy". These O&G companies knew exactly what they were getting into when they decide to drill a well, what the expenses were going to be and they decided to take that risk and most of them are doing quite well at doing it. Take a look at some of the profit and loss statements for some of the major players in the industry, they are making plenty of profit. Especially the ones that decide to set up subsidiary companies to sell their gas to, so they can sell it at a reduced price to themselves, and then turn around and resale it for huge profit down stream. And of course by then the land owners are already out of the picture. Just ask the company over in your neck of the woods in Pennsylvania if they are paying out a large settlement right now to land owners for doing that exact thing to them. Its like a car company building a car putting it on a lot with the sticker price and when the buyer goes to close on the car the dealer says " oh no that's not the price, the manufacturer added these things in they just didn't list it on the sticker, here's your price".  The only point I am trying to make on here is don't sign a lease with a "Market Enhancement Clause" included in it being told its a gross production clause.  And do not take a land mans word for it just because he or she says it is. I have said right from the start of these writings that there are plenty of great people working in the O&G business. But it only takes a few bad apples to spoil the cart and the industry needs to find a way to clean its act up. And the state governments need to start worrying about the land owners rights, because without the land owners agreeing to lease their minerals to a O&G company the price of the well and the production just really doesn't matter then!

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