Royalty Deductions

Got a proposed lease from EQT. Their thing now is that they won't do leases without some post production deductions. The royalty clause reads.."our percentage"....."after deductions for costs incurred by Leasee or its affiliates for transportation, taxes (including severance taxes), gathering, processing, line loss, and compression."

I have a lease from another company with the same thing, but it says "our proportionate share" of these costs. Isn't that how the deduction "should" read, IF (big if) we were to agree to this? Does anyone know what kind of money we are talking about as to expenses for transportation, processing etc.?

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Permalink Reply by Frank Walker on January 14, 2015 at 9:15am

Sherre

If it's to the PA Attorney General you're making reference, be careful.  She is currently facing the likelihood of indictment and possibly even jail.  Her name is Kathleen Kane.  If you Google her you will see all the news stories about her problems with the Grand Jury.

So it's probably questionable to anticipate help coming from her direction . . . not that a lot was coming anyway.     

Permalink Reply by Sherre Boyanowski on January 14, 2015 at 9:37am

Frank and Matthew, I would like to meet up with you 2 in Wyalusing some time. Message me.

Permalink Reply by Jim White on January 14, 2015 at 12:15pm

Speaking of audits. I would think that a good accountant who has experience in this area would work and be a good bit cheaper. Anyone know someone like this? I found a group in Parkersburg, but they didn't respond back to me. Probably because it looked like they mostly worked for the "Man".

Permalink Reply by Sherre Boyanowski on January 15, 2015 at 11:02pm

Jim, It will take more that just a good accountant. A forensic auditor in oil and gas will be needed. An accountant will probably find the obvious  mistakes made in accounting, but it will take a good forensic auditor to find where Chesapeake has hidden things that they don't want found. MartiCons is one firm out there, Lee Perry is another gentleman that I met that also does this. Mr Perry has a very interesting book "Good Ole Boys In Oil & Gas". A good read. Read it, and you will understand why an audit is needed. Gather a large group and share the cost of the audit. There are enough of us out there that have been taken advantage of, and you should come up with a pretty large group. 

Permalink Reply by Nancy Mosley on January 14, 2015 at 3:28pm
To the question of class action settlements altering the lease, it sometimes is part of not opting out that you agree to accept some deductions going forward that were the cause of the suit to begin with. Sometimes this is in small print.
Permalink Reply by Sherre Boyanowski on January 15, 2015 at 10:48pm

Yes Nancy, you are correct about that. The settlement of the Demcheck class action suit is as such: You are in the case unless you send written notice to opt out of the case. If you decide to stay in and accept the settlement, you will permanently alter your lease. They will give you 27% of the deductions already withheld. This will then give them the right to take out 73% going forward, even if you feel they should have not taken anything at all. You will then not be able to sue them again for it.The millions that they have set aside will never cover all that has been wrongfully deducted. Chesapeake would love for everyone to take the class action settlement. That is why the settlement was filed the same day as the case against them. It would be cheaper for them.

Class arbitration is another action against Chesapeake.

Other lawyers have said that they will prosecute Chesapeake, but will be willing to settle before that happens, because it is cheaper for the lawyers and they won't have to do any work and they will still get paid the same.  They promise lots of things, but can they deliver?

That is why I said to keep a cool head and research all your options. 

Permalink Reply by Tony Yurina on January 14, 2015 at 11:06pm

You can look at the EQT 2014 Q3 financial release to get the midstream processing costs in order to answer your question.   

Permalink Reply by Jim White on January 19, 2015 at 11:20am

Tony

I looked over the release and most of it was beyond me. It looked to me like transporting and processing accounted for about 10 percent of net operating revenue. With 18% royalties, would that mean a 1.8 drop in royalty percentage or basically royalties closer to 16%? or am I completely missing the boat here. I was told by EQT and some friends in the business to expect around a 2% lower royalty.

Permalink Reply by Jim White on January 19, 2015 at 11:50am

I have heard that EQT takes around 2% of your royalties with their deduction clauses. Anyone have any experience with this?

Permalink Reply by RB on January 19, 2015 at 12:29pm

My landman told me to expect 2% deductions.  But I am not hearing of anyone getting that little taken.  Hmm.  And what happened to the 12.5% law, that they could pay no less than that amount.  I actually thought it would apply regardless of agreeing to deductions ( for which there is no choice anymore) and that the deductions taken could not result in a check of less than a 12.5% royalty.

Permalink Reply by Jim White on January 19, 2015 at 12:43pm

RB

Something I read in the past and is hidden in the back of my mind says that the "less than 12% royalty issue" doesn't mean they have to pay you that much in the end, depending on your lease language as to deductions. Not 100% sure. What I am afraid of is making a decision based on the "Chesapeake Nightmare" and thinking they all are that bad. Bad? Yes. That Bad? Not sure. Hate and reason can be complicated and conflicting issues at times.

Permalink Reply by RB on January 19, 2015 at 12:48pm

If true and it probably is, that makes the undefined deduction clause a workaround the 12.5% law. Pretty slick.  I figured, but took the word of my land-man at 2% to be true.

You can bet not a one of those firms would sign a lease with deductions undefined. Ya.

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