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 Nancy Mosley on January 19, 2015 at 4:21pm

I think I remember that the 12.5 % minimum in WV is the minimum that can be offered, but that is is not requiring that to be a gross number.

And with Chesapeake, remember that any company can assign its lease to Chesapeake or some other company that needs to pay as little as possible in royalty costs, so will find ways to charge the royalty owner. Where are our legislators when we need them!

Permalink Reply by Kyle Nuttall on January 19, 2015 at 1:37pm

I haven't spent any time doing the research, but it seems to me that if somebody wanted to litigate that 12.5% language, arguing that it's a statutory limit, they would have a good argument and quite a few lawyers willing to take the case.  It also seems like there would be a good argument on the other side.  But again, I haven't dug deeply into it at this point.

Permalink Reply by RB on January 19, 2015 at 2:04pm

Glad to hear your thoughts. 

Permalink Reply by Jim White on January 27, 2015 at 2:04pm

q.

Permalink Reply by Jim White on January 27, 2015 at 2:06pm

RB Are you talking about 2% of your dollar amount, or 2 points off your 18% royalties, leaving you with 16% royalties.

Permalink Reply by RB on January 27, 2015 at 2:32pm

Jim,

2% of the dollar value of the royalty amount which, still protected by law, should be greater than 12.5%.

Permalink Reply by Kyle Nuttall on January 19, 2015 at 1:35pm

I've spoken with a few people who have extensive holding in West Virginia.  They have put the deduction amount in the area of 6-8%.  

Permalink Reply by RB on January 19, 2015 at 2:05pm

That is good news.  So many here claim they can be much, much higher.

Permalink Reply by Tony Yurina on January 19, 2015 at 1:50pm

Ask your land man for an example of a royalty statement with similar deductions on the same midstream system that you are proposed to be on.  They can blank out the name to protect the privacy for the example statement provided you to review.  

Why don't you ask the company you are trying to lease with what the midstream cost and related deductions are per MCF ?  

If anyone can process shale gas for a 2% deduction, I'd like to see it.  2% ????  IMO for $3 MCF gas that is a 6 cent total cost deduction.  Maybe that gas is pure and does not require any processing, heat stabilization or compression and the sales line is very short to the transmission pipeline, but this would be a rare bargain price indeed.  

I think most operators would like to get their processing and compression midstream costs down under $1 per MCF, not many have achieved that success !!!   Do the math, $1 midstream cost for $3 gas !!!!

Ask that company to limit the deductions to 2% of your royalty in writing?  

IF they answer no, then ask for a number they will adhere to as a maximum midstream deduction. 

Consider this:

When gas was $4 MCF and midstream costs were $1 MCF the deduction is 25%.

When gas is $3 MCF and midstream costs are $1 the deduction is 33%.

When gas is $2 MCF and midstream costs are $1 the deduction is 50%. 

Here is the tough medicine, some midstream costs are $1.35 - $1.40 per MCF.

Now, if gas is $3 MCF on NYMEX and your operator is selling to a midstream processor off the well pad for $1.60 MCF that price differential would reflect $1.40 (less) to cover the midstream costs from the wellhead meter outlet located at the well pad to the processing plant cost.

 

Permalink Reply by RB on January 19, 2015 at 2:06pm

Tony, who do you work for?

You are talking dollars, I was talking percent.  The cost would include my percent and the firm's percent for a total dollar cost.  That is provided I am not picking up the total tab on that cost.

Besides, that firm should have calculated that cost of doing business long before they got started in the business. If they are going to hit me with a 50% deduction, they they should be hit with the same.  Seriously, there must be a large margin for processing costs and a lot of gas to extract, to stay profitable, (vs. mega profitable) to absorb a 50% midstream cost.  That is before all the other costs....uh, things don't seem to add up.

Permalink Reply by Tony Yurina on January 20, 2015 at 11:48am

I now work for an engineering firm in the industry, I manage corrosion protection for pipeline systems outside of the Utica / Marcellus Midstream area.  

I retired from Columbia Gas Transmission / Columbia Gulf Transmission 3 years ago. (Measurement, Pressure / Flow Control, Gas Quality and Odorization, all Engineering and Operations)  

I am also a landowner and royalty owner (not EQT). 

EQT attempted to lease me over one year ago, at that time they were using Dominion to transport, they were charging / deducting 27 cents / MCF prior to a change over selling into a large midstream partnership and new processing plant.  That price is higher now.

In 1997 Columbia asked producers to pay 35 cents for gathering and processing costs, they refused, Columbia sold 2,600 miles of gathering lines a that time.  Last I heard the company that bought those lines was charging way more than 35 cents per MCF to gather and process. 

People on the site here are so unwilling to search for good information.  There is information out there if folks would just look.

Left column of deductions is the Q3 2014.   You may be hit with part or all of them, it depends upon the midstream system you are in.

Midstream Revenue Deductions ($ / Mcfe)
Gathering to EQT Midstream $ (0.74 ) $ (0.82 ) $ (0.74 ) $ (0.83 )
Transmission to EQT Midstream (0.20 ) (0.23 ) (0.20 ) (0.23 )
Third-party gathering and transmission (0.45 ) (0.52 ) (0.50 ) (0.58 )
Third-party processing   (0.15 )   (0.10 )   (0.13 )   (0.11 )
Total midstream revenue deductions   (1.54 )   (1.67 )   (1.57 )   (1.75 )

Average effective sales price to EQT Production(c) 

 $ 2.94   $ 3.07   $ 3.40   $ 3.13

I've seen a fair number of royalty statements to know 2% or 6% deductions is a little low.

I'd like to write more, but time constraints are upon me.

Permalink Reply by RB on January 20, 2015 at 2:16pm

Tony,

Thanks for getting back and the information you have provided.

After signing the lease and learning more, I gathered the landman was likely not being honest about the 2%. It is unfortunate that the leasing firm expects good faith from the landowner (trusting them on those undefined deductions), yet will misrepresent the expectation.

I speak from having been educated with an MBA which entails learning how to make business decisions based on micro and macro environments,economics, forecasting, etc.,you have to have a handle on the whole picture.  If the midstream costs alone are 50% of the sales price, with the net having to cover  admin and capital investments costs, well then this is a sorry case of failed CEO analysis on determining whether or not to venture into the business at all. Surely they did projections on what increased supply could do to pricing.

Something tells me there is more to the picture than meets the eye, has to be. They just couldn't all have that bad of judgement.

RB

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