How Do We Determine Wellhead Price?

According to the U.S. Energy Information Association the wellhead price is "Price of natural gas calculated by dividing the total reported value at the wellhead by the total quantity produced as reported by the appropriate agencies of individual producing States and the U.S. Bureau of Ocean Energy Management."

That language seems to make it very clear that the wellhead price is a figure determined by a state or regional agency.  Our lease is based on the wellhead price, it says regardless of what the company sells it for.  On the MarcellusShale.org site it says the Wellhead price for Oct1024-Mar. 2015 was $2.80.  If that is the official wellhead price, and our lease is tied to the wellhead price (with no deductions) I assume that meas our royalties should be calculated on that price. Our lease also says if they sell the gas for a higher price, then our royalties are to be based on that (with no deductions)

If a company (like StatOil) uses a price which is half that price, they should be contacted by us to pay the difference.

Is that correct?

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Permalink Reply by Joseph-Ohio on June 14, 2015 at 1:33am
Just wondering Frank, in your circumstance does your producer have to sell it to an unaffiliated third party ?

Or, can your producer sell it to an affiliate if he chooses to ?

If so, maybe it would go back to the 'wellhead price' thing ?
Permalink Reply by Joseph-Ohio on June 13, 2015 at 11:25pm
I'd estimate (based on the terms / info. that you've provided in your post) that if you weren't being paid royalty based on at least the so-called 'wellhead price' that you would have an apparent legitimate grievance.

Based on what I've read on these pages pertaining to other's grievances returning successful results, I couldn't / wouldn't hazard a guess how successful you would be (in an endeavor to better your return).

Determining the 'wellhead price' to use in your personal calculation is another problem since it (seems to me) would vary with market fluctuations (every new period of calculation; and I don't know and won't guess how often it's calculated by the U. S. E. I. A.; and considering your production is part of the market variable). Seems to me there ought to be some historical data on it for whatever good that might do you / your analysis.

Actually' it seems to me the 'wellhead price' could only be whatever the price is that the producer decides to sell it for.

Good luck - I think we all need it.
Permalink Reply by Dr. Larry A. Maxwell on June 14, 2015 at 12:34am

That is the gist of my question. The government says the wellhead market value is a figure derived from a governmental agency based on total production and total market sales, during the period (not the individual companies sales). My question is where do we get that official figure?

Permalink Reply by Philip Thackray on June 14, 2015 at 12:46am

Invictus - Hello!

Larry,

If you are in PA please see a Gas & Oil lawyer.  Your question has been answered by the PA Supreme Court.  Read the analysis of the decision that I linked to above.

Phil

Permalink Reply by Frank Walker on June 14, 2015 at 12:53am

Here is the most recent data as of 5/29/2015:

"Wellhead price"

Their next data release will come at the end of this month (end of June).

Permalink Reply by Joseph-Ohio on June 14, 2015 at 1:24am
Guessing now that you need to find out what the words 'wellhead price' mean in your personal circumstance / as used in your lease agreement.

I'd guess what your producer would define it as would be the price he decides to sell it for.

Just my guess on it.

Good luck friend.
Permalink Reply by Philip Thackray on June 14, 2015 at 1:36am

From the Hantz article I referenced:

 

Industry leases routinely provide for royalties to be calculated at one of two points of production – “at the point of sale” or “at the wellhead.”  In order to calculate royalty at the wellhead, the gas company subtracts post-production costs, i.e., those costs incurred by the gas company between the point when the gas reaches the wellhead and the point of sale, from the sale price. This calculation is known as the “net-back method” and it results in the payment of royalties which are lesser than if the royalty was calculated at the point of sale.

 

The phrases in quotations are from the PA Supreme Court ruling on Kilmer V. Elexco.  Any reference to “wellhead” pricing will invoke the “net-back method” for calculating royalties unless some other provision in the lease prevails.

 

Phil

Permalink Reply by Joseph-Ohio on June 14, 2015 at 2:44am
I would perhaps agree that the 'net-back' method would render lesser royalty amount (paid to the lessor) excepting the lease containing a 'no deductions' clause.

And that's probably what is meant by 'some other provision in the lease prevailing'.

Just my read / take on it Phil.
Permalink Reply by Philip Thackray on June 14, 2015 at 2:58am

Hi Joe!

This is a very State specific issue.  I know that you are in Ohio and things may be different there.

The PA Supreme Court ruling is strongly industry favorable.  I think that even landowners with "no deduction" clauses in their lease are finding that the O&G company is taking deductions anyway.  The the O&Gs could argue that the Kilmer decision overrides the "no deduction" clause.  Unfortunately, Kilmer has given the O&G companies a plausible reasons to ignore the "no deduction" clause thereby forcing the landowner to take the O&G company to court.

Phil

Permalink Reply by Joseph-Ohio on June 14, 2015 at 3:07am
Wow.

No safe harbor even if contracted to render safe harbor.

Aren't contracts / agreements struck in the 1st place to preclude argument ?

Contract to preclude argument and get forced into it anyway.

Sick situation IMHO.
Permalink Reply by Frank Walker on June 14, 2015 at 3:34am

Phillip

My own reading of Kilmer differs somewhat.  I view the ruling as relating primarily to the PA state-mandated minimum royalty fraction.  The PA Supreme Court ruled that if deductions are permitted by a lease, and if after they are applied to gross royalties the net royalty fraction falls below 12.5%, then there is no violation of law.  But Kilmer does not provide legal basis for deductions which are disallowed by the lease itself.

I do agree, as you stated, that this is an incredibly PA-centric issue.  Principles, practices, and precedents attributable to other states are meaningless in this discussion, and only serve to confuse.

Permalink Reply by Joseph-Ohio on June 14, 2015 at 3:51am
Hailing from Ohio here to be sure.

No intent to confuse.

Only intent is to, if possible, learn.

To avoid any mis-understanding, I'll refrain from making any contributions and read along only.

Good luck to my near neighbors / friends / fellows in Pennsylvania.

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