Royalty Deductions

Got a proposed lease from EQT. Their thing now is that they won't do leases without some post production deductions. The royalty clause reads.."our percentage"....."after deductions for costs incurred by Leasee or its affiliates for transportation, taxes (including severance taxes), gathering, processing, line loss, and compression."

I have a lease from another company with the same thing, but it says "our proportionate share" of these costs. Isn't that how the deduction "should" read, IF (big if) we were to agree to this? Does anyone know what kind of money we are talking about as to expenses for transportation, processing etc.?

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Permalink Reply by Tony Yurina on January 20, 2015 at 3:12pm

Bear in mind the gas sales is only one component, NGL/Condensate and some oil add revenue stream.  The revenue stream looked good 5-6 months ago.

The fact of the matter is, this business is capital intensive.  Markets fluctuate due to various reasons.  

If you look at the finding and development costs, ongoing production costs and since shale gas in most areas is not marketable at the well head, it must be transported, pumped, treated and processed to achieve a state of marketability, that is a significant cost also.

Most of these companies yield an annual 7% to 17% profit, few on the high side, many on the low side during the good times.  

Gas was nearly $5 per MCF and oil was $100/bbl, NGL's were north of $60 a barrel just a short time ago, there was potential for a nice profit.  Prices are much lower in the interim now, and unfortunately the midstream costs are holding steady due to fixed cost for infrastructure in place.  Therefore the higher % of deductions in relationship to the net royalty.

Drilling budgets are set a year in advance and drilling / service contracts written.

There are few other business ventures where you have to keep finding and developing new reserves with increasing associated costs because the wells you drilled a few months ago, put on line yesterday are declining today, more tomorrow.. and the price is sliding south.  You don't look good as a CEO at the moment !!  These guys know the business is cyclic and turbulent at times. Right now the Micro/Macro crystal ball is murky.   I fear for the debt heavy companies, they have no choice but to try to tighten their respective belts and drill and produce and hope for success and market economics to rebound. Otherwise,they are not going to succeed. 

I hope you are in an older gathering/midstream system, maybe the costs are a little more toward the low side instead of the high side. 

Good Luck.   

Permalink Reply by JL on January 28, 2015 at 6:34am

We sell gas to a company that owns ex-Columbia Gas gathering lines. This Berea gas has a multiplier of 1.2 for conversion between dekatherm to MCF. The last check ended up with 86 cents per MCF.

Permalink Reply by Marcus Huey on January 27, 2015 at 6:45am

My family has a lease with EQT.  "Deducts" on the 1st check were 8%.  Each month after that the "Deducts" have gone up. From our 7th check EQT took 22%.  

Permalink Reply by Mike Fulper on January 28, 2015 at 6:16am

Thanks to Jeff Riggens Land man

 and our Amarado lease.. with NO DEDUCTIONS....!!!

EQT cannot deduct anything from us.....!

Zero deductions on our sheet...

With falling oil prices and OIL production at well heads falling off QUICKLY.....checks are getting

real small quickly.....

Thank you Jeff Riggens  

Mike

Permalink Reply by Marcus Huey on January 28, 2015 at 6:32am

Mike Fulper, our contract with EQT does not permit them to take deductions, but sadly they are...20% last month :  (

Permalink Reply by Mike Fulper on January 28, 2015 at 6:49am

Sorry to hear that....

since we didn't sign with EQT they have to abide by

our Amarado contract....

Just for the heck of it , im gonna check with the neighbors

that signed with EQT and see if the "total volume" OF OIL  for Oct on their statement

jives with what our statement says...

Total volume of oil production per lateral has to be the same....

I don't see how any of the companies can cheat on volume.....all on computers

but still.... be nice to see if the numbers are the 'same"

Clark well is waaaaaaaaaaaaaaaaaaaaaaay  down

and the NCD3 laterals are dropping off quickly also....

Oill prices will climb after the Middle east goes up in smoke  :)

Permalink Reply by Harry E. Rose on January 28, 2015 at 11:34am
Marcus, 8% & 22% of what?
Permalink Reply by Marcus Huey on January 29, 2015 at 11:45am

Our lease is for 12.5%.  EQT takes deductions of between 8% - 22% from our 12.5% of production.

Permalink Reply by Harry E. Rose on January 30, 2015 at 3:57am
Thanks for the reply.
Permalink Reply by tas on January 31, 2015 at 1:49am

rex in butler- relative told me 40% + taken for deductions.

Permalink Reply by Kyle Nuttall on February 2, 2015 at 8:42am

I've gotten that from EQT, too.  I had a client who didn't sign with EQT because of the deductions issue.  That particular client didn't have a large interest, and so didn't have much to lose by not signing.  

If it's a WV property, the lease has to specify deductions and a method for calculating those deductions.  See the Tawney vs. CNR case.  EQT has to be specific, or it won't be allowed to deduct royalties.  

I can't speak to other states' laws, unfortunately.  Just licensed in WV, and haven't done the research for OH or PA.

Permalink Reply by Larry Livengood on February 2, 2015 at 10:15am

My lease allows for no deductions and CHK is still taking up to 23% a month for gathering and transportation.  Called, they said if I felt it was wrong I could arbitrate or sue.  Lovely people.

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