How do you lose 3000 Barrels of Oil?

Frequently on revenue checks you will see a negative production volume for a prior month followed by a positive production volume for the same amount/same time period.  It looks like this on a "lease" side of the CHK stub:

1213   1   95.00   2   02   -9000.10   ......

1213   1   95.00   2   02    9000.10   ......

 114    1   92.03   2   02    8502.90   ......

In this example of a January check stub, the production for December was apparently subject to an "internal audit" with no changes.  The December production balances out and there is no effect on the royalty owners bottom line.  The royalty owner is paid their percentage of the 8502.90 barrels of oil produced in January.

However, at times there is "internal auditing" or adjustment that makes a HUGE difference in the royalty owners bottom line.  To date, no one has been able to explain these adjustments.  They would look like this:

1213   1   95.00   2   02   -9000.10  ......

1213   1   95.00   2   02    6000.00  ......

114     1   92.03   2   02    8502.90  ......

In this example 3000.10 Barrels of oil has just been "un-produced" leaving the royalty owner with a reduction in the current month's check.  So instead of getting paid their share of the 8502.90 barrels of oil, they get paid their share of the 8502.90 minus their share of the 3000.10 barrels of missing oil.  Last month's check could have been $40000, but this month's may only be $2000 - not because of a decline in production, but because CHK took back $38,000 in previously paid royalties.

Production numbers filed with the state are adjusted as well.  For example, production reported for the month of June 2013 for a certain well might have been 7000 Barrels.  Six months or a year later, looking back at production numbers for June 2013, they might show that only 4500 Barrels were produced from that well.  It seems that CHK has found a way to report high levels of production to the state, pay royalty owners large sums of money for the products produced, and then "adjust" the production amounts months down the road and take the money back from the royalty owners.  How can this happen?  How can a company consistently mis-report production numbers?  How can anyone know whether the well produced 9000 barrels as originally reported or 6000 barrels as later adjusted? 

Another issue with this is that the royalty owner pays a hefty income tax bill on the mineral production from the previous year. CHK sends out a 1099 reporting that it paid royalty owner John Doe X amount of dollars in 2013.  Now, in the middle of 2014, CHK is taking back a very large chunk of money that Mr. Doe already paid taxes on. Mr. Doe would likely have been in a lower tax bracket if the amounts had been properly reported. 

Has anyone hired an auditor to verify that CHK is paying royalty owners the proper amounts?  How much did it cost and who did this for you?  Were errors discovered? Has CHK offered any explanation as to why they consistently miscalculate the amount of oil they actually produce? You would think that the oil would be metered at the wellhead, reported, and then royalties paid appropriately.  How do you find out 6 or 10 months later that you didn't produce as much as you thought you did? (This happens with NGL and NG also.)

Thank you for your comments!

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Replies to This Discussion

Permalink Reply by Alan Bowers on August 5, 2014 at 1:35pm

With an ALOV Lease with CHK, Chesapeake is responsible for 100% of any and ALL Severance Taxes on EVERYTHING they take out of the ground.

Permalink Reply by Cathy J Zimmerman on August 7, 2014 at 3:17am

I was looking up information on severance tax for Ohio and it does say Ohio has serverance tax for extraction or removal of a natural resources from the ground or water. ORC 5749.  I also found a recent article where Ohio is trying to increase the percentage.  Like they need more....This is a dirty shame that they don't do the right thing.

Permalink Reply by Zack Jameson on August 9, 2014 at 11:52am

Who is watching these producers to make sure everything is on the up and up? It's sort of like the fox guarding the chicken coop. We, the landowners don't know what's going on for sure. Are we being deceived? Look at how this industry operates. The answer is right before you.

Permalink Reply by Joseph-Ohio on August 9, 2014 at 12:27pm

Once again Good Morning Mr. Zack.

The onus appears to be on the lessor seems to me.

Permalink Reply by bo boboski on August 9, 2014 at 2:22pm

That is a great; ANF FUNNY; analogy. sad, but true "the fox guarding the henhouse!"  Mr. DEWINE, take note.

Permalink Reply by Cathy J Zimmerman on August 5, 2014 at 6:57am

It all looks confusing to me.  Like why don't they tell you exactly how many days of production too.

Permalink Reply by Cathy J Zimmerman on August 5, 2014 at 7:03am

I noticed there is indeed sev tax on mine through Magnum Hunter, Eclipse.

Permalink Reply by steve sifferlin on August 5, 2014 at 1:59pm

get a good accountant, and have them audited, its legal and they would have to show their  records of the well.. I was told by an oil and gas lawyer

Permalink Reply by Cheryl on August 7, 2014 at 12:33am

Do you know of anyone who is experienced with this type of audit?

Permalink Reply by Dexter Green on August 7, 2014 at 2:02am

HBK in Canfield, OH.  They've done oil and gas accounting for decades.

Permalink Reply by Cheryl on August 7, 2014 at 12:29am

Thanks for the input.  My question still remains - has anyone audited CHK? Who did you hire to do the audit, how much did it cost, and were errors confirmed?  We could chat about this for days and complain about the oil and gas companies, but I am looking for concrete, factual information that I can use to move forward in this case. I appreciate any first hand info that helps me with that.

Permalink Reply by Steven Kacerski on August 7, 2014 at 4:58am

Cheryl,

My firm does this type of work.  Feel free to send me a friend request and I will send you my contact information.

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