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 Brian Day on June 14, 2015 at 4:01am

I have tried for a long time to keep my mouth shut on this issue, bur ultimately have to add a bit of my own opinion. I feel that many of us feel like the victims of fraud by the O/G industry to begin with. Way back when we signed these leases, we were led to believe that "at the wellhead" was a great term to have in a lease because it actually meant "priced before deductions." This was actively done by landmen who were representatives of their respective companies. It was done by representatives of various land groups - and the lawyers contracted to represent them. Now, if the same company even still owns the leases, it states that the landmen were independently contracted and were not direct representatives of that company. The same lawyers who represented the landowners groups plead ignorance, even though they themselves very carefully avoided this term in their personal contracts. They will smugly point this out in conferences had with them. And the topper is, we are told that we should not be ignorant of the law and its magical language. If we hadn't spent years studying that law, then it is not the O/G companies' fault that we signed bad leases. They are not responsible to maintain any kind of ethical code what- so-ever. So... what one discovers is that any word in a gas and oil lease is now subject to being twisted into the complete opposite of its common meaning. If "black" is in the text of your lease, then Black is really a very, very, very, dark shade of "white" and it is you the land owner's fault not to have realized this corruption to be possible.

Permalink Reply by Philip Thackray on June 14, 2015 at 4:24am

Frank said:

But Kilmer does not provide legal basis for deductions which are disallowed by the lease itself.

I agree - but it is happening.  The essence of the Kilmer case is exactly as you describe in fact, the Kilmer lease was a modern lease which allowed for processing, gathering and transportation.  The argument was that deducting all this stuff put the landowner below the PA minimum royalty as you stated.  But that brings up the question of what is the price that the royalty is calculated from.  This is when the court put the "net-back" concept in stone.

As I said, the Kilmer case gives the O&G companies plausibility when over riding a "no deductions" clause.  They just take out the deductions, most landowners grumble and go away and a few landowners file a law suit , O&G sites Kilmer and it all goes before a judge who could well rule against the landowner.  If they rule in favor of the landowner, O&G sites Kilmer and appeals.  I have seen this happen!

Phil

Permalink Reply by Frank Walker on June 14, 2015 at 4:37am

Phil I appreciate this input as I was not aware.  Do circumstances allow you to be more specific in terms of where this is happening (which gascos) and to whom (regions, not individual persons).

I confess I am having some problem understanding your thesis.  Where you write:

"But that brings up the question of what is the price that the royalty is calculated from."

My own lease, for example, states the royalty is paid based upon the final arm's length sale price of my gas, once it is finished.  There is no so-called "wellhead" reference anywhere.  Whatever the gasco gets, I get.  So I'm not understanding how a "net back" assault could be mounted.

Conceded, if the lease is not specific as to these matters, then there is no impediment to "net back" pricing.  But I still do not understand how this court ruling, or any other, can supersede a lease which very specifically and carefully states basis for royalty payment is at point of sale only.

ETA

I probably should add that if this is a Chesapeake thing to which you are making reference, then all bets are off.  Chesapeake is not an honest company.  They will use any excuse at all to take anything whatsoever to court . . at the drop of a hat.  Chesapeake is a special case and anything you say they are doing I will believe . . because they are capable of literally any conceivable bad deeds.

But if it is other companies then that would be important news.

Permalink Reply by Brian Day on June 14, 2015 at 5:56am

I realize that I am on a different tangent here, but it is related.  I had a bite of late breakfast and did a couple of yard chore, then popped back in to see if anyone had any more thoughts on those of my own.  I don't really see that and that is okay.

    Continuing anyway, a question might be raised as to how do you sue a lawyer or a head of a land consortium to prove they intentionally misrepresented the term "at the wellhead" or any other term (held by production) to their clients.  Well, if their leases on their own possessions or those of any other clients of theirs are dated earlier than the injured land owners' and those leases do not contain the words "at the wellhead," this should be a good indication that those representatives did in fact know about the true definition of such terms.  I guess reparations could then be taken from those individuals. 

My wife is an attorney.  She does not practice in Pa. nor does she practice in anything even remotely related to oil and gas.  ( She certainly does not make anything close to what is expected as an attorney's regular salary)  I asked her about suing a lawyer for malpractice.  She said there is generally a statue of limitations on such a things and it is not very long.  Of course I say,"Bull pucky!"  If the dates are on the leases and the language is in one and not the other the law has been corrupted and penalties need to be paid.

    As for the gas companies saying that they are not responsible for the ethics of the landmen that they hire, let me use a different analogy.  If I contract to install a heating system in a house and discover that I need to hire an extra man temporarily, I am responsible to make sure that this man is qualified and to inspect the work that he does.  If he drills a hole through a wall and hits an electrical wire and tells no one that the breaker tripped and later that evening the home owner resets the breaker and the house burns down, I am liable.  this is why I pay business insurance.  what is the difference whith an independent landman? 

If I purchase a smaller HVAC company along with their impending installation contracts, I had better inspect those contracts carefully and any work that has already been done on them before I purchaser the smaller company.  if those contracts need to be canceled or renegotiated to meet the standards of my company, this needs to be done before my purchase goes through - or I have assumed the faults and responsibilities of those contracts as they are.  If the house doesn't heat or the smaller company's work burns it down, even if a temporary laborer did the work for them, I am probably responsible.  If not me then the insurance company who held the business insurance on the previous company is, or perhaps the owners of the old company.  Courts solve these problems all of the time.  My point is, fraudulent representation does not dissolve because a larger company bought out a smaller one.  Somebody lied and made a lot of money at it.  They can be caught and made to pay restitution.

Permalink Reply by Philip Thackray on June 14, 2015 at 6:32am

Brian,

When was your lease written?

Phil

Permalink Reply by Rich on June 14, 2015 at 8:50am
All I have to say is good luck finding one attorney to try and sue another attorney!! I live in PA and was outright lied to by an attorney and could not find one to file a case against him and I even had the State Attorney Genaral office involved and they couldn't find someone for me!! Politicians and lawyers are all the same DIRTY!!
Permalink Reply by David Allen Lilly on June 15, 2015 at 1:22am

I will hire a law firm to audit my royalty checks and verify they are what the lease says they are. I want nothing more and nothing less then my lease terms and will pay money to provide for that end.

Just curious, with so many horror stories about being ripped off on royalties, has anyone retained legal help to verify they are being properly paid according to their lease terms ?

Permalink Reply by INVICTUS on June 15, 2015 at 10:45am

Yes, I am in that very position right now, anticipate very large legal/forensic accounting actions regarding my producer and am willing to privately discuss this with only very serious leaseholders (probably in Ohio) who are willing to commit themselves wholeheartedly to this enormous process, probably litigation of some kind.

Most legal firms and most accountants will be eaten alive by the hydrahead producer I refer to.

Therefore, I will not entertain working with most of these otherwise very fine firms and professionals.

Expect to spend between $500k-$1MM to do a good deep forensic audit. It's god-awful horribly expensive.

Then we talk about the Lawyer's cut. It is, after all, business.

Well worth it, only if one is serious about auditing a producer in a meaningful way.

Lawyers will either work with a fairly large group of individuals, or possible file for class action status.

Nothing is set in stone, yet, on anything, just conversation.

Any Interest? Serious inquiries only. Very serious.

Permalink Reply by David Allen Lilly on June 16, 2015 at 3:22am

I assure you I am serious when I tell you that I will not stand to be ripped off in my royalties as they pertain to the lease I have.

I am drilled but not yet fracked and only 12.5 acres of my total is applicable to that.

The remainder will be in an Eclipse unit when the time comes for that.

I am in Ohio, Guernsey county as well.

My thought is to have my checks sent straight to a legal representative under my hire and have them verify that the lease terms were abided by, before I deposit the check. Many times the remittance of a check is the final legal step in a transaction and by cashing you are agreeing to the accuracy of the transaction.

It is far too early for me to enter into a class action type suit but if circumstances down the road dictate the need I will do it eagerly.

If you wish to discuss matters further you can friend request me and I will get you my contact information, I have done this previously with another serious and mature landowner who had matters similar to mine at the time.

Best of luck to you, this is a blessing and a burden, I can only tell you that for me I refuse to lower myself to the level of the industry in its dishonesty. I have higher power I will answer to. And I absolutely am not going to have a stroke over any of it.

Thank you,

David

Permalink Reply by Joseph-Ohio on June 16, 2015 at 2:15am
A parting shot on "Pennsylvania Centric".

This post appears on the GMS General Forum pages and is open to comment by any member concerned or trying to learn about issues common to leasing issues (the way I see it).

Trying to be polite I chose to refrain from replying deferring to another member regarding confusing the issue.

So sad too bad.

Don't care to be told to but out of a public form.

Put that in your pipe and smoke it.
Permalink Reply by Joseph-Ohio on June 16, 2015 at 3:44am
BTW, confusing are the lease agreements (to begin with) and so-called precedents (that are not really precedents).

Personally, I find (most of the time) that the direct inquiries between members here are less confusing by far.

Peace out.

J-O
Permalink Reply by Kyle Nuttall on June 16, 2015 at 3:12am

I don't think the U.S. Energy Information Association is the controlling entity in this kind of case.  If you're getting stiffed on royalties, you're going to be applying state law even if you end up in federal court.  The federal court will apply the statutes and legal decisions of the state, just like the state court would.  If the state you're in does not have a ruling exactly on point, your lawyer might point to what the US EIA says about royalties, but the court will only look at it as persuasive, not compelling.  The court will look at the state's statutes and previous rulings, look at other states' rulings, apply some reasoning, and give a ruling.

If what you need is a price point for the royalties, check out the hubs near you.  This article (on the EIA web site of all places) shows a number of the hubs in the Appalachian region.  You'll have to figure out which hub the companies were selling gas to, and then figure out how much that (or those) hubs were paying for the time period in question.  That's the figure that the courts would most likely use to start figuring out damages in a royalty case.

Hope that's helpful.

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