Reduced royalty payments by chesap due to "enhancement"?

Although most in our area have not received a nickle in royalties thus far but if in the future might want to be prepared for some tricks by chesapeake again.  Has anyone heard of them reducing your royalty payments due to "enhancement"?  This despite the leases saying that the price is to be at the well head.  Seems as though it is an issue with some landowners.  See article below.

 

Steep declines in Chesapeake Energy royalty payments to landowners

Currently Chesapeake Energy is leading the way in taking the position with Pennsylvania leaseholders it has the right to deduct certain post production costs from a landowner’s royalty check payments if it can show such costs “enhance” the value of the shale gas. The company’s position is the cost of gathering and transporting the gas from well head to the point of entry into the large natural gas hubs makes the gas more valuable thus “enhancing” its value which Chesapeake claims allows it to deduct these moving costs from landowners.

This has left Pennsylvania landowners starching their heads as they understood and insist their royalty payments agreements were represented to them by Chesapeake to be based on the volume of the gas produced at the well head. Some state courts outside of Pennsylvania have declared this practice by Chesapeake to be legal.

Dory Hippauf, who has followed the development of the shale gas industry in the northeast since its early days recently reported that, “Bradford County Commissioners Doug McLinko and Daryl Miller said at the end of their regular meeting on Aug. 2 that they have been fielding concerns from county residents, who have leases with natural gas companies, that mounting post-production costs are eroding their royalties. This, paired with the low market price of natural gas right now, has dropped some monthly payments by landowners by as much as 90 percent.”

Doug Clark of the Clark Law Firm recently stated Chesapeake Energy’s position it’s allowed to make such “enhancement cost” deductions to royalty checks appears to be the exception in the industry. He further stated, “It appears that legal action may ultimately be necessary to obtain a definitive answer as to the proper interpretation of the Market Enhancement language and its impact on landowner royalties. This issue simply involves too much money not to be addressed.”

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Replies to This Discussion

Permalink Reply by Frank Nesmith on December 29, 2012 at 5:09am

I've heard this is yet another dirty trick by Chesapeake. Perhaps you should ask some of the landowners in Bradford County who this has already happened to. Stories are coming out of there about landowners who were getting decent royalties prior to them using this tactic, only to have them reduced to almost nothing because of CHK taking post production costs out. So the landowners that settled for a smaller signing bonus and were banking on good royalty payments are royally screwed. There was an article a couple of days ago in Reuters that said, now some of the vendors for CHK are not receiving payments for services such as pipelines and are placing mechanics liens on the landowners properties. As if CHK hasn't already screwed them enough, now they have liens and cannot sell or even refinance their properties if they wanted to.

Permalink Reply by Trapper on December 29, 2012 at 6:38am

Sounds pretty disgusting to me. Companies like this give Capitalism a bad name. It is time the Industry begins policing it's ranks and deals with this "maverik" type of behavior now before the Government feels the need to step in and regulate them out of existence! A simple boycott of Chesapeke's product would snap them out of it and return some sense of decency to the industry. God knows we do not need any more Government regulation and this behavior begs for it! It's suicidal for everyone if it continues.Surely the rest of the industry must view this type of roughshod raping of the royalty owners as wrong and unethical and a threat to their existence........?

Permalink Reply by mlb on December 29, 2012 at 11:25am

Yes, if this is going on/true then it makes you wonder if how much in your iron clad lease is actually worth the paper it's written on.  If so ( and not sure how to really find out ), then I'd personally rather not have their pad nor lines on my land.  So far they have done zip other than tell me about some tenative plans but those have been canceled over and over. 

I've thought for a long time I don't need nor want a pad but im not opposed to it if all is on the up and up so I went ahead with allowing surface rights.  Now I'm thinking if this info is true why let them put a pad down.  I can turn in plans for a house, get a permit and build right in the only spot they can put a pad on me.  Let them find somewhere else to drill from.  At least in addition to getting zip on royalties I won't have to contend with a pad that pays only a spud fee.  I'm considering this actually.  I've got set backs and a new house would end their attempts to drill on my place.  Just a thought given their shady tactics ( or apparently ), but best to do a bit more digging.

Permalink Reply by 0llbnp780fs53 on December 30, 2012 at 11:13am

If you don't want to cover the expense of an entire house, put up a barn or two.

Permalink Reply by Kathleen on December 29, 2012 at 12:30pm
What I don't understand is how come a mathematician can't easily look at the checks before and after the enhancement costs were deducted to see if the mineral owner received more due to the enhancement?
If the lease clearly states this can't happen or the gas was not worth more isn't this fraud?
If it is fraud why shouldn't it be sent to the attorney generals office to be looked at.
I get CHK has lawyers to fight it all, I've read summaries from lawsuits where shockingly the judge sided against the landowners, so I do get its not easy to just have someone look at something and declare CHK is wrong when a judge can say they are right. I think the whole thing stinks!
One thing I would really like to look into next is are these appointed judges or elected judges.
Permalink Reply by mlb on December 29, 2012 at 12:50pm

I think what CHK is arguing is that " judge without our hauling this gas and processing

 

Not wanting to be tossing rumors about I think it needs some study to see how widespread and what type of leases they have applied it to.  I may call the clark law firm just to see what they say.  If its a loser for the landowners I see little reason for any of us to have allowed surface rights at all to them unless we get yet another addendum to their many addendums.

Permalink Reply by 0llbnp780fs53 on December 30, 2012 at 11:26am

Are these on leases where gathering costs were explicitly excluded?

Permalink Reply by mlb on December 30, 2012 at 12:50pm

Not sure thats why I think it needs looked into.  Yes a barn or pole barn works for my place although I'd been thinkin off an on about a small house also.  But the point is if they don't drill and they won't agree not to add addendums I'd rather not have the spud fee UNLESS they will honor the lease and pay the 15% in royalties from the well head.

 

I'll call the clark law firm.  I've spoke to them in the past and they are helpful.  Im sure they can shed some light on what prob they have seen and if one should do to prevent this if it is indeed something they are doing.

 

Permalink Reply by Carol on January 3, 2013 at 8:58am

Chesapeake is NOT the only company taking these deductions.  Others are too.  Where does it stop?   I've been tracking the natural gas prices that royalties are being paid on - I haven't seen any benefit from their "enhancements."  They are charging royalty owners just to get the gas to the pipelines.  I can't believe this has been declared a "legal enhancement" in any state.  It should not be legal.

Permalink Reply by time will tell on January 3, 2013 at 10:51am

I hope this leads to a class action suit against these crooks .

This has been one of the biggest reasons we have held out on leasing some of 

our land .

Take note for those who think they can go it alone you better get the largest

iron skillet you can find and put it over your backside .

Also , don't sign a lease with the arbitration clause in it for there is not a big

enough skillet to protect your a_s .Once this come to a head , the crap they

are pulling you wont be able to afford the legal costs to fight them

that will follow .

Time .

Permalink Reply by Jeffrey L kerr on January 3, 2013 at 12:35pm

IF the enhancement is to make the gas worth more and we are paying for it we should get some more off our investment not less. We signed with Chesp. the land man said it would be pennies on the dollar or no more than 2.5 %. I told him I did not like any one having the right to take my money when no amount could be told to me as of how much it would be. thats when he said pennies on the dollar or no more than 2.5%. think I got screwed. It should be looked in too. I have read post where they take like 38% off the top of royalties that is rape as far as I see. Clark law firm will be getting a call from me if this holds true for me. they make millions and we get our royalties cut its not right. The judge must be in Chesp. pocket to let this stand.

Permalink Reply by time will tell on January 3, 2013 at 2:14pm

Jeffrey , does your lease have the arbitration clause in it for disputes ?

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