Auditing of your royalty rights

I read the BP lease with the Trumbull landowner group. I personally think it is not a good lease. Here is why: People agreed to an arbitration clause for any differences that may arise and gave away rights to go to court....very bad idea. The cost of arbitration bargained for is at a minimum 25K to get in the door for each side and you have limited appeal rights if you lose and that arbitration is in Cleveland, Ohio not with a local body. And most importantly, the oil/gas company has the right to deduct from your royalty payments their expenses to bring the gas to market. This means the cost of fuel, electricity, marketing, etc. One of the most hotly litigated issues in all of the shale plays in the USA is in the area of what constitutes a "cost" that can be deducted from your royalty payments. Problem is that if the oil/gas company deducts unnecessary expenses from your royalty payments you have to pay big money to arbitrate the issue and it is not cost effective unless it is a large sum of $.

I am curious to any thoughts/discussions on this matter? How and will you independently audit the wells? If so, what will be the process? What index will be used to determine price? Market price at the well or point of sale? What protections are in place for the sale of the liquids/gas to prevent them from being sold at a cheaper price to a subsidiary of the o/g company? 

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Permalink Reply by Billy Park Whyde on August 6, 2012 at 6:55pm

 Another point is if the O&G owns the infrastructure such as the transportation be it by fleet of trucks, pipelines ,compressor stations, storage and even sale to themselves how could a fair value be placed upon those charges as they set the charges?

Permalink Reply by Marty Yavorcik on August 6, 2012 at 7:01pm

very good point

Permalink Reply by bungalow_steve on August 7, 2012 at 3:28am

The cost of arbitration/audit can be shared among all the land owners in the unit of question, and hopefully among other units which will probably have similar issues. So it might end up costing you a several hundred instead of several thousand. I don't know any other way around this issue, it cost money to audit  a large corporation.

Permalink Reply by Jim P on November 23, 2012 at 2:18pm

Yes...and I have also heard that once a well is drilled on your property you get a "spudding fee" but a 50 acre circle will be drawn around the well that no royalties will be paid ...is what I was told but haven't seen the lease yet to verify..

Permalink Reply by Jack Straw on November 23, 2012 at 2:52pm

It is a bit of a coincidence that I just now noticed this old Discussion - as I had just come across some notes I had made that I had sent to a relative offering my personal opinion of the "Arbitration Clause". I share your concerns.

At first glance, the prospect of avoiding an Attorney and engaging in Court Litigation seemed to be a great idea, but then I gave it more thought.

 

The typical Arbitration Clause calls for:

the Landowner to choose one arbitrator (from a list of qualified arbitrators),

the O&G Operator to choose one arbitrator (from a list of qualified arbitrators),

the two arbitrators to choose a third (mutually acceptable) arbitrator (from a list of qualified arbitrators).

 

My concerns regarding Arbitration have to do with my fear that "the odds are with the house". Although the arbitrators are supposed to be "neutral", enlightened “self interest” can come into play.

As a Landowner, you will (at most) only use Arbitration once in your  lifetime.

An O&G Operator will likely submit to Arbitration much more frequently.

An O&G Operator will likely know (through experience) which arbitrators are "industry friendly".

An O&G Operator will likely know (through experience) which arbitrators are "Landowner friendly".

An O&G Operator will obviously choose an arbitrator they know to be "industry friendly".

An O&G Operator will likely only accept a third arbitrator they know to be "industry friendly".

There is a strong possibility that you start out with the deck stacked against you.

An individual arbitrator knows that the job representing the Landowner will likely be the only occasion that they work for that Landowner. Once employed by the Landowner, there will not be any repeat business from this source.

An individual arbitrator knows that the job representing the O&G Operator will likely result in repeat business - should they vigorously support the O&G Operator.

And, the mutually agreed upon third arbitrator knows that his best opportunity to obtain future business is to side with the entity that is most likely to need such services in the future - the O&G Operator.

And ... if you are not happy with the decision coming out of arbitration .... too bad, you have no recourse .... you have no right of appeal.

 

If anyone is able to present strong support for Arbitration (especially with first hand experience), I would love to hear what you have to say.

 

All IMHO,

                 JS

 

 

Permalink Reply by Jim Litwinowicz on November 25, 2012 at 3:53am

Jack; must say that I appreciate your concerns but do not totally agree with them.  If I were to go to arbitration I would consult an expert oil and gas attorney that has experience in arbitration of oil and gas disputes. He/she would know which arbitrators to select that are more landowner friendly. That would help balance the equation.

Further, would you want to go to court against a multi-billion dollar multi-national with unlimited funds and an army of experienced O & G attorneys? They could delay and appeal for years leaving the landowner with the choice of settling on their terms or bankruptcy.

There is no easy answer in getting justice with these huge companies. Their size, experience, expertise, and financial resources gives them advantage no matter what avenue one has. Best to give it your best shot and then move on.

Permalink Reply by Jack Straw on December 1, 2012 at 8:37am

Jim,

        Your have presented valid points. The reality is that neither Arbitration nor the Courts present attractive alternatives for a landowner, when opposed by a large Corporation. Should a dispute arise, the landowner is thrust into a “lesser of evils” situation; and (as you point out) that is likely Arbitration.

Sadly, our legislators (and the laws that they have historically passed) do not always offer the types of protections that are of particular value. to the landowner

 

RE: “If I were to go to arbitration I would consult an expert oil and gas attorney that has experience in arbitration of oil and gas disputes. He/she would know which arbitrators to select that are more landowner friendly.”

The problem here is that the third (tie breaking) Arbiter is chosen by mutual agreement, and I cannot see an Oil & Gas Operator accepting a third Arbiter who has demonstrated a history of being “more landowner friendly”.  

 

It would seem that the best Defense is …. well, the best Defense. And, that has to be the protections provided by a Lease/Agreement/Amendment that was written in a manner that best represents the interests of the landowner. If one needs to go to either Arbitration or to Court, this demonstrates that there has been a failure in (or lack of) protections provided within the underlying Lease/Agreement/Amendment.

By its very nature, a Lease/Agreement/Amendment as presented by an Oil & Gas Operator will not provide the types of protections most important to a landowner; and should be viewed as a skeleton on which to add flesh, muscle and sinew. The landowner need build a strong wall brick-by-brick (that is, clause-by-clause) in order to protect themselves. It is impossible to foresee every eventuality that might (in the future) trip one up; but there is the potential to thwart most pratfalls should a proper Lease/Agreement/Amendment be negotiated and signed.

 

When a landowner goes into an agreement they tend to do so as moral individuals, and (naively) expect that they are dealing with moral individuals. Recently, I questioned a “Company Man” as to why they had done something that was highly questionable from an ethical standpoint – the response was “We did it because we can.”. In reality, in dealing with a Corporation, you are dealing with an entity that is neither moral nor immoral; simply amoral. A Corporation will do whatever it can get away with, without incurring Criminal penalties (Civil penalties are just money, if the rewards outweigh the risks – the potential for Civil penalties can be justified.). When dealing with a Corporation, it all comes down to "It depends upon what the meaning of the word 'is' is.”.

 

So much for my rant du jour.

 

All IMHO,

                     JS

Permalink Reply by Jim Litwinowicz on December 1, 2012 at 11:26am

Jack, well said. No animosity, just the facts.

Fang F Fang,  I always thought that every one in unit should form a LLC or LP,  pay dues, and use that to monitor activities. Share in the cost based on % of acreage in the unit.

If you see enough questionable activity in several units, perhaps a class action would be in order.  And if you fraud or some other illegal activity kick it into the RICO Act.  That'll get their attention.

Permalink Reply by sldouglass on November 27, 2012 at 6:00am

Arbitration can be a good efficient remedy but one of the problems with agreeing in advance is that when the problem comes up there may be more than one party involved in the incident.  Do you sue some and arbitrate with others?.  What arbitration rules do you follow?  At least one lease I have seen provides that the decision of three arbitrators must be unanimous.  Better wait for the problem to come up - whether it a question of royalty or something else.

The whole are of accounting for royalties is a monster.  What if my gas is mixed with other from others of greater or lesser quality before sale?  Any right to inspect operations and meters etc.  Who determines things like depreciation, reserves for replacement, overhead, profit and a host of other things?  For the operator it may be something like doing a tax return,  If there is a question about a deduction, take it and wait for someone to raise a question.  And how is the royalty defined?  Percentage of sales price or prices at which the several products of wet and dry gas are sold?  And more.

Permalink Reply by Schnoozie on November 27, 2012 at 7:09am

I thought this auditing service was included when you signed with a group.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on November 28, 2012 at 4:01pm

Marty,  To see what a good lease looks like, go to alov.us and look at the SURE Lease March 2012 PDF.

Page 4 Paragraph 2. Royalty Payment, states that the Royalty is Gross not Net which has no deductions.

Page 6 Paragraph 3. Audit Rights, discusses how the Lessor can audit the Gas Company to ensure the correct royalty is paid.   

If you haven't signed a lease, this lease is the most landowner freindly lease that I know of. Good Luck Marty.    Ron

Permalink Reply by Jim Litwinowicz on November 29, 2012 at 3:34am

Matt; with these wells that encompass 1280 acre units there will be many landowners involved in the same wells.  Therefore it would behoove them to work together to hire a single auditor and share the cost based on each one's % of acreage within the unit. There may easily be 25-30 landowners, more in more developed areas, so the cost to each would be reasonable.

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