How do you lose 3000 Barrels of Oil?

Frequently on revenue checks you will see a negative production volume for a prior month followed by a positive production volume for the same amount/same time period.  It looks like this on a "lease" side of the CHK stub:

1213   1   95.00   2   02   -9000.10   ......

1213   1   95.00   2   02    9000.10   ......

 114    1   92.03   2   02    8502.90   ......

In this example of a January check stub, the production for December was apparently subject to an "internal audit" with no changes.  The December production balances out and there is no effect on the royalty owners bottom line.  The royalty owner is paid their percentage of the 8502.90 barrels of oil produced in January.

However, at times there is "internal auditing" or adjustment that makes a HUGE difference in the royalty owners bottom line.  To date, no one has been able to explain these adjustments.  They would look like this:

1213   1   95.00   2   02   -9000.10  ......

1213   1   95.00   2   02    6000.00  ......

114     1   92.03   2   02    8502.90  ......

In this example 3000.10 Barrels of oil has just been "un-produced" leaving the royalty owner with a reduction in the current month's check.  So instead of getting paid their share of the 8502.90 barrels of oil, they get paid their share of the 8502.90 minus their share of the 3000.10 barrels of missing oil.  Last month's check could have been $40000, but this month's may only be $2000 - not because of a decline in production, but because CHK took back $38,000 in previously paid royalties.

Production numbers filed with the state are adjusted as well.  For example, production reported for the month of June 2013 for a certain well might have been 7000 Barrels.  Six months or a year later, looking back at production numbers for June 2013, they might show that only 4500 Barrels were produced from that well.  It seems that CHK has found a way to report high levels of production to the state, pay royalty owners large sums of money for the products produced, and then "adjust" the production amounts months down the road and take the money back from the royalty owners.  How can this happen?  How can a company consistently mis-report production numbers?  How can anyone know whether the well produced 9000 barrels as originally reported or 6000 barrels as later adjusted? 

Another issue with this is that the royalty owner pays a hefty income tax bill on the mineral production from the previous year. CHK sends out a 1099 reporting that it paid royalty owner John Doe X amount of dollars in 2013.  Now, in the middle of 2014, CHK is taking back a very large chunk of money that Mr. Doe already paid taxes on. Mr. Doe would likely have been in a lower tax bracket if the amounts had been properly reported. 

Has anyone hired an auditor to verify that CHK is paying royalty owners the proper amounts?  How much did it cost and who did this for you?  Were errors discovered? Has CHK offered any explanation as to why they consistently miscalculate the amount of oil they actually produce? You would think that the oil would be metered at the wellhead, reported, and then royalties paid appropriately.  How do you find out 6 or 10 months later that you didn't produce as much as you thought you did? (This happens with NGL and NG also.)

Thank you for your comments!

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Replies to This Discussion

Permalink Reply by INVICTUS on August 7, 2014 at 11:28am

I have exactly these same concerns and experiences: However,

- There is not one firm in Ohio that knows how to audit Shale O/G (Not same as traditional oil/gas).

- The ODNR WILL NOT assist anyone in verifying production report, including for themselves in verifying proper severance tax deductions. Not under the current administration.

These are unpleasant facts.

So, it is incumbent upon shale leaseholders to take initiative and find our own facts.

I'm familiar with Hill Barth and King. They currently have no actionable experience in Auditing Shale production. I wish it were otherwise.

I expect, when I do connect with the right firm, a $30k bill for the audit.

Permalink Reply by Cheryl on August 8, 2014 at 2:01pm

Let me know if you locate someone with this experience. 

Permalink Reply by Steven Kacerski on August 11, 2014 at 9:01am

I work for Packer Thomas in Canfield and we focus on providing landowners with royalty verification services.  We have someone on staff who spent part of their career with an oil & gas producer so she is very familiar with the "games" these companies can play.

Permalink Reply by Dexter Green on August 8, 2014 at 5:18pm

"I'm familiar with Hill Barth and King. They currently have no actionable experience in Auditing Shale production."

I'm going to make an unpopular argument here: shale production is not materially different than conventional production in:re to royalty audits.  Production is reported, sales exist and receipts are generated, royalty is paid out.  Yes, untangling the web of pipeline deals that shift costs from the midstream entity to the producer--one in the same in many instances--is a difficulty, but that does not change the underlying accounting for LOR.  If HBK can't do this right now they better learn how to and fast.  This is a business that will be booming for a generation.

Permalink Reply by INVICTUS on August 8, 2014 at 11:56pm

I'm in complete agreement with this statement.

Permalink Reply by bo boboski on August 9, 2014 at 1:26am

Every  landowner in ohio getting royalties who suspect theft should be on the phone to, or writing letters to the attorney general. If he gets enough,he may look into it and see that not only are they stealing from landowners, but from the state of Ohio, in the form of taxes.

Permalink Reply by Dexter Green on August 9, 2014 at 1:57am

You're right Bo.  We want to be a producer-friendly state (and we are) but we also need to make sure that the companies are accountable to landowners and to taxpayers, and that means trust but verify.  This boom is revitalizing Ohio's economy.  Let's make sure everyone is being paid what they're owed and hardworking landowners can reap the rewards of this bounty.  I'm happy for the E&P companies to make truckloads of money, but I want the landowners on that train as well.

Permalink Reply by bo boboski on August 9, 2014 at 3:32am

Yea, if our present state powers that be are not going to do something about it, election time will be coming up!. 

Permalink Reply by Kathi Albertson on August 11, 2014 at 6:01am
That is exactly right. States like Texas and others audit the production from gas and oil wells. Our current legislators have discussed doing so but it has not happened yet. It is time to make this an issue in the November elections. Public policy team leaders from Ohio Farm Bureau will be working to get this done but it will take a lot of pressure from land owners as well.
Permalink Reply by Paul Martinelli on August 11, 2014 at 9:18am

The State has a vested interest in Landowners being paid fairly......more so when they consider they want to take part of it in the form of Taxes.

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