How much are deductions draining your royalty check?

We seem to hear alot about Chesapeke siphoning off alot of deductions from royalty checks. How are the other gascos treating their landowners? Shell , Range , Hilcorp , Chevron , etc. , etc.?

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Permalink Reply by James T Monyak on July 17, 2013 at 4:32am

I don't know who assessed the deductions, but Consol takes them out of the check.  I am very experience in this type of cost accounting and there could be alot of mistakes in the deductions.   I can't sleep at night because of the potential for errors.   It can get pretty complicated such as volume rebates back from the Mid Stream company.  This would make a huge difference in the cost if not done correctly!

I sent an email to Consol for the backup for the deductions and they never responded to my request.  My next step will be small claims court since I don't have an audit clause in my lease.

 

Permalink Reply by farmgas on July 17, 2013 at 6:21am

Mr. Monyak....are you saying you receive a separate royalty check from Noble Energy for the same well (s)  and they do not list any deductions?  

Permalink Reply by James T Monyak on July 17, 2013 at 6:37am

Yes.  They are a different E&P so they do things differently.

Permalink Reply by RAYMOND bAUMAN on July 16, 2013 at 8:23am

Low offers for cash  bonus and royalty differs you must also check the lease some people signed leases that allow the costs of gathering and marketing to be deducted from their royalty. If the lease is silent on this costs to gather and market the costs are allowable.   Let say  income is $100 and royalty is 20 % so  gross is 20 then gathering and marketing is 30 % so net is 12 dollars a  equivalent of a 12 % royalty.  Landowners should ask for a royalty  rate that does not allow deductions for gathering  and marketing since the incremental ( cost per unite) to gather and market a small royalty  gas  is small compared with the cost to market the working interest  oil & gas ( 100% - royalty).  Dollars up front delay rentals and royalty are not independent  costs to an oil company.

As always the lease must be read and understood to compare apples to apples  not apples to oranges.

In an known producing area Royalty (with out costs) may be better than high delay rentals.

A group of landowners with the help of a good Oil & Gas Accountant ( good luck finding one) can request that the gathering and marketing costs( including the overhead charges be audited) and or then negotiated with a company.  You may also be able to modify the lease for a lower royalty rate to include gathering and marketing costs.

Another lease clause would require that comparable prices be used at the gathering system lease "sale point" be used for comparison. Also with wet gas an issue could be the value of the wet portion of the stream and how that value is determined. 

From a small oilman in Ohio.

Permalink Reply by Trapper on July 18, 2013 at 6:11am

My lease is with Shell and I am not produced yet. My lease addendum pertaining to royalties reads:

Royalties Without Deduction:

Royalties shall be paid without deductions for the costs of producing,gathering,storing,separating,treating,dehydrating,compressing,transporting,or otherwise making the oil and/or gas produced from the leased premises ready for sale or use.All oil and/or gas royalty shall be delivered free of cost into the tank or pipeline (for oil) and into the pipeline (for gas),with the exception of Lessor's prorated share of taxes,measured by volume,on the oil and/or gas royalty.

Sounds good to me....Has anyone with this same wording been nailed for costs anyhow? If so ,how does your company rationalize the deductions?

Permalink Reply by Larry Livengood on July 18, 2013 at 8:40am

I wish I had yours!  

Mine says “As royalty, Lessee covenants and agrees: (a) To deliver to the credit of Lessor, in the pipeline to which lessee may connect its wells, the equal one-eighth part of all oil produced  and saved by lessee from said land, or from time to time, at the option of the lessee, to pay lessor the average posted  market price of such one-eighth part of such oil at the wells as of the day it is run to the pipeline or storage tanks, (b)  To pay Lessor on gas and casing head gas produced from said land when sold by lessee, one eighth of the amount realized by lessee,  computed at the mouth of the well.”   This allows deductions and gathering fees.

Permalink Reply by Trapper on July 18, 2013 at 9:09am
To my land man's credit, this wording was added voluntarily by him without me having to negotiate it. Maybe Shell is just a little more landowner friendly than others.
Permalink Reply by David Allen Lilly on August 28, 2016 at 1:57am

I signed with Antero and am in Millwood township Guernsey county Ohio. My lease is as or more specific as to deductions, first stating NONE are allowed and then including specifically what is not allowed, just as yours Trapper.

I also have the Market Enhancement Clause, which states that IF the producer can do things to my gas to get a better price for said gas I will pay a portion of the cost and receive my royalty share on the ENHANCED (read more valuable) end product. The clause further states that in NO MANNER am I to receive a lower royalty after ME than I would have without it.

Permalink Reply by Henry on July 19, 2013 at 12:12am

I am not a regular poster on this site, but I post a lot on the companion site, GoHaynesvilleShale.com.  A couple of years ago I collected data from mineral owners in the Haynesville Shale on just this issue.  I asked people what price were they getting for their gas (gross) and how much was being taken out for expenses such as marketing, transportation, dehydration, etc.  The findings were disconcerting.  We found that CHK deducted significantly more for these expenses than the other companies.  The other Haynesville operators - SWEPI, HK (now BHP), EnCana - tended to deduct about 35 - 50 cents per mcfe.  CHK often deducted as much as $1.

 I found people were willing to share their data readily.  However, it was a lot of work to collect data because people did not receive their information in a consistent manner from the gas companies.  So I often had to go back and forth with people to understand their numbers so I could make a fair presentation.  I would suggest, Glenn, that you put out a request, and see how many people send you their information.  It would not take many to see if the same trend emerges here that emerged in the Haynesville Shale.

Good luck.

Permalink Reply by James T Monyak on July 19, 2013 at 1:20am

Henry,

Consol can duducted $1 per mcfe per the lease.  However, I don't understand how that relates to the actual marketing cost.  Should they not deducted the actual marketing expenses?  As stated before, this is a 30% deduction!!  Can we talk?

Permalink Reply by Henry on July 19, 2013 at 3:29am

Mr. Monyak,

I don't think I can help you.  I don't know anything about Consol, and their operations in the Marcellus Shale.  The only think I'll offer up is not to look at the deductions as a percentage of what you get.  Rather, look at them as a fixed deduction.  In other words, they would deduct $1 per mcfe, regardless of the price of your gas.  If gas is selling for $3, then the $1 deduction is a huge fraction.  When gas sold for $6, it was a much smaller fraction.  The real issue is whether or not Consol (or any other operator) is doing something that might artificially raise the amount they deduct.  Some companies have been accused of selling gas to affiliates who charge higher-than-usual prices for transportation and marketing.  The company doesn't care, because it just has one hand paying the other.  But the landowner cares greatly, because he gets screwed.  I have no idea what is going on here, so I do not want to venture an uninformed guess.

Permalink Reply by James T Monyak on July 19, 2013 at 6:24am

Henery,

There is nothing they can do to artificially raise the amount since as you stated" it's a fix cost, $1 per mcfe.

 

The issues is the lease states "reasonable" and $1 is way too much to cover the actual expense of marketing.

 

The second issue is most lease are now under 12.5% and that is required by law until the court decide otherwise recently. 

 

I am going to take them to small claims court and force them to calculate the actual marketing cost since I believe it's not reasonable,

 

Deductions are calculated using MCFs instead of MMBtu but can be converted using theBTU factor. On the 6/20 check paid to ARS (first line), the BTU factor is 1.090. Multiply that number by your owner mcf of 98.44, total is 107.2996 which is the owner ded taking in consideration rounding of the BTU factor. To arrive at the percentage deducted; add theowner ded ($333.60) and divide it by theowner rev (1342.56); percentage is 24.85%. Fortunately for the owners in this specific area, the gas is considered wet and price is higher than dry gas!

 

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