warning: new rip-off a-borning

With all the various means employed to rip off royalty holders, a new and most serious one is developing.

Oil and gas producers contract well ahead of time to sell their anticipated production downstream at a guaranteed price. With current prices falling as much as 50%, it would be in their interest to pay royalty holders only on the current price. Of course, if market prices rose over the contracted price, they could take the opposite tack and pay on the contracted price. Only an audit of the producer's contracts could reveal this scam. If your lease calls for royalties to be paid on the revenue actually received, it might be a good idea to invoke your audit rights. Only my opinion.

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0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on December 13, 2014 at 12:51pm

Frank Speaker,

      Now I know why CHK is selling the well products to themselves, they have a much larger payday waiting after the landowners are paid a royalty on the bogus CEMI self sale.

I figured they were getting at least market value, now I see why they don't want to share.

They have reduced our rationed royalties on products taken and sold several months ago before the market was at the lower price they have based our royalty pay out on.

Thanks for the information.

Permalink Reply by frank speaker on December 14, 2014 at 2:56am

Ron,

I don't state that they are doing that scam but that the opportunity exists. We will never know until we have access to all their relevant transactions and see whether they maintain a consistent policy or switch as it suits them. Maybe a good course of action would be to visit our state representatives and ask them to sponsor legislation requiring an annual state audit of all O&G producers/distributors.

Permalink Reply by bungalow_steve on December 14, 2014 at 3:00pm

Doesn't really work like that, they buy hedges on "vitural oil" on the futures market. So if they buy a $100/barrel futures contract for 1000 barrels and the price drops to $50, they make $50,000 whether they sell any oil or not.

Permalink Reply by frank speaker on December 15, 2014 at 3:29am

This is not paranoia, sorry. CHK has settled lawsuits involving finagling of prices. As I stated, if a consistent policy is maintained, that is one thing. The problem comes when the basis of payment is switched to whatever is the advantage of the lessee and the royalty holder is kept in the dark. People are not after you. They are after your money.

Permalink Reply by Leigh S on December 15, 2014 at 10:00am

Ok, here's a scenario we just entered into. We are contracted with CHK and are to get royalties from Chief wells.  We have 43 acres, 39.xx acres are in the 675 acre unit, and the division order from CHK says we'll get paid royalties based upon 26.963acres. What happened to the other 13 acres of the 39.xx in the unit?

Permalink Reply by M on January 4, 2015 at 3:58am

my lawyer said if they go under me they use the full pool of your land  even if its one leg  on  a small part, they pay in full I just won my family $800,000 on hbp land  over a small well on pooling unit size my unit was 160 acres witch I owned   they reslesed to make a 1280 pooling unit , if they use any of my 160 I get paid in full use

Permalink Reply by william george allison on January 3, 2015 at 12:43pm

OK THIS HAPPENED TO ME ALSO THE LANDMAN PROBABLY TOLD YOU THAT YOU WOULD GET ROYALTYS ON ALL 43 ACRES .GO TO THE COURTHOUSE AND GET A COPY OF THE POOL DECLARATION LOOK AT TITLE ACRES (THAT IS WHAT YOU OWN) THEN LOOK AT CONTRACT ACRES THAT IS WHAT YOU HAVE IN THE UNIT AND WHAT YOU WILL GET ROYALTIES ON IF YOU GET A PLAT MAP ALSO YOU WILL SEE THAT

Permalink Reply by Leigh S on January 3, 2015 at 1:26pm

Ok, There are 39.x acres in the unit.  I spoke to a rep at Chesapeake and she told me that Chesapeake holds a 57.5% interest in the unit and Stat oil holds the other 42.5% interest.  Hence the 26.x acres on the Chesapeake Division Order Sheets. So not only should I get division orders from Chesapeake, but I should get division orders from Stat Oil for their interest.  There is also one well that is Pelican instead of Stat Oil, so I need to contact them and get them off of dead center.  I have copies of all the units/plats which I went down and printed out at the courthouse.   As for the "Pugh Clause"  I'm not sure what that looks like or what to look for in my actual lease contract.

Permalink Reply by Ronald Robinette on December 15, 2014 at 12:59pm

Royalty should be 1/8, or the agreed royalty price to be paid, off the top of the actual money received.  Any other thing would be a violation of the covenants of the lease agreement and would give cause for the lessor to claim the wells in full.

Permalink Reply by Cicero on December 16, 2014 at 8:35am

The royalty will be whatever your lease requires by virtue of its express terms. Standard "boiler plate" leases are weighted heavily in favor of the producer when it comes to the language governing royalty payments due landowners unless you can get them clearly and properly changed to govern payment. This can be accomplished either within the body of the lease or in an addendum containing language that expressly supersedes the lease provisions. The initial leases offered are intrinsically replete with royalty traps and pitfalls.  Major considerations include post production expense deductions, which you want eliminated altogether, whether royalty is calculated at the wellhead, which sounds good but really isn't because the producer can still use the "work back" or "net back" method to deduct post production expenses incurred downstream from the wellhead. "Actual money received" even if construed to mean "all gross proceeds" can still reflect only bargain priced, sweetheart sales to wholly owned subsidiaries or affiliated companies who then sell product for it's real FMV farther downstream in a genuine arms length transaction. Royalty sections must be expressly and precisely drafted to get the Lessor a square deal. 

Finally, violation of a"covenant" does not result in the producer's forfeiture of its lease interests. The remedy for breach of a covenant is strictly limited to money damages that can be proven. It follows that breach of any lease covenant does not vest ownership of any wells in the Lessor, much less their entire production. Outright termination and forfeiture of the Lessee's oil and gas estate/rights would have to be based on breach of a lease provision that constitutes a legal "condition," or the occurrence of some event that constitutes the operative limiting event of a "special limitation" to which the lease is subject. This is quite basic.  Landowners want the Lessee's obligation under the lease to be designated as conditions or special limitations, not as covenants. The companies already know all this, are keen to perceive it and generally insist on their obligations being construed as mere covenants so they never stand to lose the lease by forfeiture.

All the above is based on currently controlling PA law. Jurisdictions can vary but this is pretty fundamental and I expect it's basically the same in most jurisdictions.

Permalink Reply by frank speaker on December 16, 2014 at 9:42am

Thanks for your lengthy informed post. I agree with all you write except the part about sweetheart sales being acceptable barring a clause demanding arms length transactions. Self-dealing is prohibited by civil case law if not outright fraudulent, as my lessee will surely learn.

Permalink Reply by bo boboski on December 16, 2014 at 10:58am

They can sell to themselves "at arms length". What needs to be stated is "sold to a non-affiliated Third Party at a fair market price." Then you got to beware that when a landowner gets so smart,that they want this or that in the lease ,or not in the lease. They just wont lease your minerals until there's just nowhere left to drill. Or just drill all around you! OR  just force-pool you and make you take a lease like your neighbors signedwho didn't know any better.

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