At the Wellhead royalty

I am wondering if anyone out there recieving royalties, who has the language "royalty based on price of gas at the wellhead," is seeing production or processing costs deducted from their royalties.  I am particularly interested in Pa. landowners.  I am curious about which gas company is taking these deductions, if any company is.  The latest NARO bulliten is confusing to me and I did not see the term "at the wellhead" discussed as a point to calculate royalties from, if that term is part of a landowner's lease.

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Permalink Reply by Brian Day on January 16, 2013 at 6:48am

I am not surprised at your answer.  It is just one more example of government sanctioned thieves being allowed to get their way by the total corruption of the legal system and the common,accepted use of English language for a couple of hundred years.  My response is; If I sell a cow to buyer for a price for him to pick up "at the barn door" and he writes me a check for the cow, minus the cost of gas both ways from two states away plus his time and wear and tear on his vehicle, he is going home empty-handed with the imprint of my boot on his behind.  If he comes back to steal the cow, he might get shot.

Permalink Reply by Brian Day on January 16, 2013 at 11:21am

I don't think such language exists.  I think the corruption in the hearts and minds of the gas companies and the law makers and enforcers who enable them will redifine any word or phrase put in front of them to steal. 

One final defense for land owners is quickly slipping away.  It is a slim defense, but it is something.  If a landowner has not signed a right-of-way for a pipeline, he/she should thoroughly examine the lease that they have signed and research how their lease holder deals with royalty calculations for people already recieving royalties. If the gascos don't have clear path to get their product to market, perhaps they will reconsider the meanig of "at the well head."   When East Resources approached me about a lease 6 or 7 years ago, there were no gas and oil attorneys available.  "At the well head" seemed to be the planest, most uncorruptable language available.  It still is. The integrity of the gas companies and the government officials is clear now too, but it has changed 180 degrees. 

"At the well head" means price straight from the ground owned by the landowner without transportation and proccessing costs removed in my dictionary.  If you are saying it means anything else, you are pissing down my back and telling me it is raining.

Permalink Reply by Brian Day on January 17, 2013 at 3:33am

If your rain is an analogy for the total discarding of honest business etthics and you are condoning such as a natural, perfectly acceptable state that all people should embrace, then yes it is certainly raining.  As for all of those supposedly justified production cost deductions, that is what mark-up on a product is called.  Using the term well head price is an intentional corruption and deception of what later, after the leases are signed, has been corrupted in to perhaps raw material price - which is never listed or standardized.

Permalink Reply by Tony Yurina on January 16, 2013 at 5:32pm

What if the Steer had to be taken to a place to be cleaned or washed before he could be sold? who pays for the fuel, water and time to wash the animal to make him marketable? The sale barn, no, the trucker, no, the animal seller/owner pays to make him marketable.

Unprocessed gas must be cleaned, heavy NGL's removed, gas pumped and dehydrated (both require substantial electricity, fuel usage, equipment maintenance and labor) this has a direct cost to make the gas marketable at the point of sale.

Where does the fuel gas come from to perform the above tasks in order to make the product fit for merchantability  Answer:  The production/midstream gas pipelines that flow from the individual wells on pads.

Question:  How does the Production company determine the gas volume and gas quality originating from each well?  Bear in mind, there can be multiple wells that are aggregated to a single point of sale meter.

I think you will find that each well has a meter to quantify volumes from each individual well.  The total of the individual well head meters, minus the point of sale gas volumes is the quantity or volume of lost gas, company used gas for treating, processing and compression facilities.  Essentially this piece is the production costs, excluding labor and expendables,etc. 

Now, typically processed gas is marketable at a higher price than non processed gas, many companies will not accept the gas that does not meet tariff specifications.

So, you see, there is a necessary cost to clean up the gas to make it marketable, the question is who should bear this cost?

I would attempt to eliminate any type of production, post production, processing or compression cost deductions to the royalty owner.  

The point of sale meter volume plus net difference between the well head meter and point of sale meter should be the number without any production cost deductions.

I have heard post production cost deduction lease language that is so broad that it permits vehicle, labor, meals, travel, many far reaching costs that can be totalized and used in calculating the post production cost deduction... crazy, but quite a real possibility.  

Permalink Reply by Farmhouse on January 16, 2013 at 8:52am

Fang,

Do you still feel this way if there is also corresponding language that specifically forbids any and all deductions regardless of production, marketing, transportation etc.?

Permalink Reply by Frank Walker on January 16, 2013 at 12:08pm

What you wrote is correct . . . . but not complete:

Specifying NG sale price at point of sale is fine, but not alone.

The lease must also forbid wellhead sales.

We, as royalty owners, benefit most when our royalties are based on price paid by third party buyer for finished gas.

Permalink Reply by brat on January 16, 2013 at 4:16pm

Frank, et al,,    Is what you have just clarified also known as "over-riding ' interest?   This term is the one stated on my old clinton well lease, 1/8 th interest).   Should I be included in a drilling unit, I am assuming I would get the full 1/8th , but can they legally deduct other expenses with this terminology?

Permalink Reply by Denver Gallentine on January 17, 2013 at 7:22am
I have found this site very interesting in light of the fact that we have recently been sent a lease proposal that offers 1/8th royalties on wellhead. It also lists numerous deductions (transportation costs, production costs etc.) I sent the lease back unsigned w/ a letter explaining my objections. In reading the responses on this site I see both sides, but I guess where I stand is @ this point I own the oil/gas in the ground. The oil company wants that oil/gas. What they do w/ it after they buy it is their business, thus the cost of whatever they do is their cost not mine. Pay me what it is worth then do what you can to make a profit. It is their responsibility to calculate profits.
Permalink Reply by Brian Day on January 17, 2013 at 7:47am

When you sign an agreement with them for a certain percentage, say 20%, at the well head, you are assuming that you have entered into some kind of limited partnership with them to pay you 20% of what the going rate for gas is when the gas is marketed and they are to use the remaining 80% for their marketing, shipping, and proccessing costs.  If they are good businessmen, they should have profit left.  That is their problem.  This is how "at the well head" is presented by landmen who are direct business representatives of their companies.  What is apparently happened is, because far too much gas has been produced, profits are down or nonexistant.  "At the well head" is now being defined as "As a raw material price minus proccessing, shipping, marketing, etc."  That was not the original agreement as it was presented.  It has been redefined by clever gasco attornys and backed by purchased public officials.

To go back to the sale of a steer or cow analogy.  You agree to sell a steer for 20% of the final price of steaks and hamburger.  The stock buyer assumes the risk and effort of butchering that steer, shipping it, and marketing it for the greater share of 80%.  So he buys too many steers and the price goes down on steak and hamburger.  He still owes you 20% of what he ultimately sold that steak and hamburger for.  But he comes back to you with a greatly reduced steer royalty check, stating that your agreement was not for 20% of the steak and hamburger, your agreement was to provide him with finished, packaged meat at the barn door with money for the shipping.  He has had to assume those costs, so now you are responsable for 20% of them. 

Permalink Reply by Denver Gallentine on January 17, 2013 at 8:35am
Brian, I am a novice @this and still learning. We have oil/gas holdings in Ohio and West Virginia some under lease, but most not. The majority is in West Virginia. My understanding of West Virginia law is that it has the nations strongest "First Marketable Product"law. As I understand it the lease must make the oil/gas marketable and pay the lessor the royalty based on that value. On top of that, in WVA they cannot use a work back method to deduct any post production to a commercial market.
That is why I feel the oil company should not have trans./prod. Costs. Also, it is my understanding that 1/8th royalties is the lowest amt. legally permitted which is why I want to negotiate.
Permalink Reply by Brian Day on January 17, 2013 at 12:55pm

Well good luck Denver.  My situation was in Pa.  Supposably, the minimum in Pa. that could be paid was a flat 1/8th or 12.5% without deductions.  That is what the "at the wellhead" bit was all bout on the earliest leases.  Now it seems the Pa. legal system has kissed the behinds of the gascos yet again over the rights of the land owners and may be allowing deductions off of the 1/8th.

Permalink Reply by Denver Gallentine on January 17, 2013 at 1:37pm
Brian, I am quickly finding out what you are talking about. As I said, I sent this lease back, but I decided to look @ the other four leases we have in West Virginia(great grandfather was a smart guy) and found that three years ago we signed exactly the same lease language. According to everything I can find about West Virginia law it is not legal. This afternoon I hired an oil/gas lawyer. Hopefully he can work things out. - Denver

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