cost deductions being removed from royalties

Hello. Our gas was originally leased over 15 years ago and my family received royalties from natural wells according to the amount of gas taken, never having any costs removed. Since Chevron bought the rights, they have begun taking a substantial percentage of our royalties. This is from the Marcellus shale wells. I have a copy of the original lease and it gives no rights to do this. As well, we never signed another lease since then; as I understand the original lease - we have agreed to sell any gas, at any depth. I doubt we are unique in this problem, but I am not sure what we can do about this. Appreciate any guidance. Added note: As I understand it, this deduction makes our payment below the minimum amount the gas company is allowed to pay us for our gas, according to the law.

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Jim ShoosPermalink Reply by Jim Shoos on June 5, 2012 at 11:17am

It's possible that Chevron simply made a mistake in deducting post production costs from your royalty share, but I doubt it.  More likely you simply aren't interpreting the royalty provision correctly.  Does it say you get paid based upon gross proceeds, net proceeds, or does it simply say that you get "X" % of the proceeds received?  The exact wording is extremely important.

The PA Supreme Court has already ruled on the issue of whether or not the deduction of post production expenses renders the lease void for failure to pay the statutory 1/8th royalty... they said it did not violate state law. 

Permalink Reply by Chartist on June 5, 2012 at 12:10pm

I have a gross proceeds contract with Chevron and will be watching this thread.....You can't deduct costs from gross so it seems they're just aching for a class action lawsuit.

Jim ShoosPermalink Reply by Jim Shoos on June 5, 2012 at 1:04pm
Well Matt, that's an entirely different topic with entirely different facts.
Permalink Reply by Jack Straw on June 5, 2012 at 1:14pm

CR, is there an Addendum or Modification to the Lease?

If so, could it have wording that might conflict with the Gross noted in the Lease?

Just a thought, sometimes things get slipped in by such a back door.

 

JS

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on June 5, 2012 at 5:02pm

CR, can you scan your original lease and post it on here?  Just the portion that talks about royalty payments.  It never hurts to have more eyeballs on it.

Permalink Reply by CR-FayetteCounty on June 6, 2012 at 7:59am

I probably could scan and post, if more information is needed to help. I am not home where my regular office is.

Permalink Reply by CR-FayetteCounty on June 6, 2012 at 7:57am

Appreciate each reply; the nature of your replies has helped me to better begin understanding this. To answer your questions, the lease reads "X" % of the proceeds received; there is nothing regarding the gross amount. Chevron is removing approximately 16% from each royalty payment. No company has ever removed anything in the past, so is this a "loophole" that Chevron is claiming? Towards the end of our initial 1998 lease with Viking,  it states that "This lease shall extend to and be binding on all heirs, successors and assigns of Lessor and Lessee." This initial lease has never been modified, although it has been transferred by company several times. Thank you so much to each who has offered input.

Permalink Reply by bungalow_steve on June 6, 2012 at 11:17am

If it doesn't expressly say gross proceeds, they may assume net, per the definition below. Anything about wellhead in the lease?

"Net Proceeds"

The term "'net proceeds' is by definition the sum remaining from gross proceeds of sale minus payment of expenses." (23) The term "' [n]et proceeds' expressly contemplates deductions." (24) Net proceeds calculated from the mouth of the well, therefore, would allow for the deduction of all post-production costs when calculating royalty [i.e., use of the "net-back" method]. (25)

Permalink Reply by Calla on June 6, 2012 at 1:06pm

Does anybody have an exact definition of "field market price"? I have a lease from 1976 with that term. I'm assuming that it's somewhere in between gross and net.

Permalink Reply by Jack Straw on June 6, 2012 at 1:52pm

CW and Calla, I came across “Pennsylvania Landowner Handbook for Leasing Oil and Gas”: http://www.donaldsaxtonlaw.com/Handbook.pdf

I cannot attest to its accuracy, but it may help explain some matters.

Calla, if you go down to the bottom of page 18, there is a subject entitled “Calculation of the Amount of Royalty to be Paid”; this discussion contains a definition of "field market price".

CW, you too might find this subject helpful.

 

All IMHO,

                  JS

Permalink Reply by Jack Straw on June 6, 2012 at 1:22pm

CR, Bungalow_Steve stated that “If it doesn't expressly say gross proceeds, they may assume net” -  Chevron might have made such an assumption; but, that does not mean that they are correct in their actions.

It has been many years since I have had dealings with Chevron; but when I did have dealings with them, my personal opinion was such that I was not impressed by the ethical standards of a number of the Chevron people that I dealt with. Again, this is my personal opinion, others may have a quite different view of Chevron.

We would like to look at corporations as being “human like” in their behavior – looking for them to behave in a “moral” fashion.

In actuality, corporations are by nature amoral; they exist to make money for their shareholders.

I believe that a significant amount of money might be at risk, certainly more than the $100-$200 that it might cost for an Attorney to review the matter and advise you. With luck, a letter from an Attorney to Chevron might favorably resolve matters.

People (such as I) can give opinions, but proper legal advice and representation might very well be what you truly need.

I would suggest that you might benefit from the services of a local Attorney who has past experience in Oil & Gas matters.

 

All IMHO,

                     JS

Permalink Reply by CR-FayetteCounty on June 6, 2012 at 3:34pm

Yes; this is what we are thinking. Contacting Chevron personally has not been fruitful. They seem to have a "fixed" set of replies. Do you - or anyone - have a thought in regards to finding an attorney qualified to handle this? The amount they have deducted in a seemingly unilateral fashion is very substantial to us. So very grateful for your input. I will be faithful to keep all posted as this thing progresses; I cannot think we are alone in this.

Appreciative.

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