Royalty Question

Hi everyone. New to the group. Nice site. I have a question. My grandmother owns full mineral interests on a 75 acre piece of land in Wetzel County. Chesapeake had made her an offer. My question concerns the royalty payments. They say they will not pay "gross royalties". I assume this means that they can deduct certain expenses from the percentage they offered. Could someone explain to me what they can deduct? Also, does anyone have experience with this company and know if this is actually their position? Not sure if I am saying all this correctly. From going over this site, it seems like what they are proposing is a no no.....

Thanks

G

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0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 6, 2012 at 8:15am

Chesapeake has signed thousands of leases in Ohio with a gross royalty.  Deduction can be for transportation and treatment, meaning they can charge you a fee for pipelines and any fractionation of condensate, etc.  Don't allow deductions in the lease, you are correct, it is a no no.

Permalink Reply by bungalow_steve on June 6, 2012 at 11:03am

 

"Chesapeake has signed thousands of leases in Ohio with a gross royalty"

Gross royalties based off the market selling price or the wellhead price?

If you don't know, posting the lease language would help me understand.

 

thanks!

 

Permalink Reply by Shower Bath on June 7, 2012 at 5:11am

Matthew, Do they itemize what the charges are for? I can understand transmission and compression charges for dry gas, but what else are they doing? 21.4% sounds way high for methane deductions. From what I've read, I would have to agree with Fang, that 2-5% deduction would be the range. However, this is the landowner's biggest gripe with Chesapeake.

Randy

Jim ShoosPermalink Reply by Jim Shoos on June 7, 2012 at 7:27am

Since you stated you are in a "dry gas area", gathering/transport, possibly compression and dehydration is all you should be getting hit with in terms of post production expenses.  I'd argue till hell freezes over that "Marketing" isn't an enhancement to the value per se and isn't an expense properly allocatable to the lessor.

While the amount of deductions seems inordinately high in terms of a percentage of the overall revenues, keep in mind that gathering fees are almost ALWAYS a fixed $ amount per Mcf.  When the gas sales price is $2.00 or less then that fixed gathering fee is going to represent a much higher percentage than if gas prices were $4.00. 

Permalink Reply by Shower Bath on June 7, 2012 at 2:08pm

Jim, Good info for all concerned. Landowners, myself included, struggle with all of the variables relating to gross/net, production expenses, market enhancement clauses, paid at well-head vs point of sale, etc. All too often the landowner feels they end up paying expenses when they thought they had a gross/no cost lease.

Randy

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 11, 2012 at 4:39pm

Jim, in a Range presentation they pegged transportation costs at $1/mcf.  Does that seem right to you?

Jim ShoosPermalink Reply by Jim Shoos on June 12, 2012 at 3:09am

Marcus... $1/Mcf seems exorbitant but there might be more to "transportation" than meets the eye.  Range could be throwing all "field gathering" and "firm transport" on interstate pipelines into the same basket.  Some producers with enough critical mass to justify their own marketing departments will subscribe to firm transport in order to "control their own destiny" in terms of reaching a market that will pay a higher price, thus avoiding the many intermediaries that will all "broker firm transport" and take a bite out of the revenue stream. 

To complicate things further, two nearly identical wells that could be half a mile from each other might possibly have drastically different gathering/transport fees associated with them.  For example, if these two wells were to be separated geographically by the Susquehanna River, and if there was no existing pipeline which crosses the river then its conceivable that one operator might be required to lay far more pipeline and incur far more expense in order to get his product to market.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 12, 2012 at 3:13am

Jim, I looked at the presentation again and that $1/mcf accounts for gathering, transportation and compression.  

Jim ShoosPermalink Reply by Jim Shoos on June 12, 2012 at 3:57am

Marcus,  That being the case then I would say that their figure is reasonable.  Compression is an expensive proposition. 

Permalink Reply by PHILIP ANGELO on June 12, 2012 at 3:08pm

Third party is the 2% for the CEO

 

 

Permalink Reply by Judy Walter on June 6, 2012 at 1:03pm
If the lease is one drawn up by the oil/gas company, it benefits them. Better to see an attorney who specializes in this field. Good luck.
Permalink Reply by Kathleen on June 7, 2012 at 1:23am
But are they now digging in their heels and not giving gross due to their obvious financial issues?

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