Deductions from royalty check any Idea????

Does anyone have a Idea.Just got my first check they took almost 50%.

 

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Permalink Reply by joe pierson on August 1, 2012 at 3:23am

"Would someone knowledgeable please post whether (or not) the state of PA does today check the accuracy of meters on gas wells."

No they don't, but state gas leases have audit provisions that resolve this issue by obtaining meter reading and sales records, which must agree, otherwise the lease is terminated. Private landowners should do the same.

read section 8

http://www.dcnr.state.pa.us/forestry/O&G/FY09-10_Tract001_Lease...

Permalink Reply by Jack Straw on August 1, 2012 at 4:50am

Thanks Joe for providing that information and the link to the PA State's standard lease that they have drafted for their State Forest Land.

I have saved it to my laptop, at 71 pages, it will make for some interesting late night reading.

I find it interesting that there is no provision for the spot testing of meters for accuracy. I believe that today honesty is the norm, but suspect that there might still be a few bad apples in the barrel.

JS

2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 30, 2012 at 4:57pm

I've read the Friendsville Lease before John... still don't know what the heck it means or how to interpret it.  Literally no producer in the Marcellus sells "at the wellhead".  The sales point is typically at the interconnect of the gathering/interstate pipeline (or further downstream).  That being said, you tell me what it means when your lease states that the value is "determined at the wellhead".  I realize that your lease states that there is no deduction for gathering, transportation, compression, dehy, line loss, etc... but given the fact that a producer incurs all of these expenses to reach that sales point, why does your lease say the value is determined "at the wellhead".  Why would it not simply say that the proceeds are the proceeds derived at the point of sale without any deduction for these various post production expenses.  Why does the lease specify a wellhead value...  based upon numerous case law results, a wellhead value takes into account that the gas is worth less than what it would fetch at the sales point after a variety of fees and services have been rendered which allow it to be capable of selling at a price that exceeds what the wellhead/untreated value would be. 

Permalink Reply by Frank Walker on July 31, 2012 at 12:49am

Steve your points are very well taken.  I've no disagreement.

In my view, though, the situation was made more complex in PA by the recent Kilmer court decision here.  Most good (good for landowner, that is) PA leases do not insist only finished gas be sold.  You are correct that industry practice, so far virtually without exception, does not include wellhead sales.  Only finished gas is sold.  So good leases today, leases which prohibit deductions, are operative and serve to protect landowners (Lessors) against deductions and give them a higher price.

However, if gas companies began selling gas at the wellhead, these same leases would offer landowners no protections whatsoever.  And there are no legal proscriptions against wellhead sales.  

Kilmer ostensibly was of most concern to Lessors with boiler plate leases.  And of course those folks lost big time when the court decision went against them.  But Kilmer might also negatively impact even Lessors with good leases.  It remains to be seen how this will play out. 

2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 31, 2012 at 3:29am

Thanks Frank. 

I honestly don't see the Kilmer decision being construed to trump what specific private contractual/lease agreements provide for in the way of allowable deductions from landowners royalties.  Its been quite a while since I visited the Kilmer decision but my recollection is that the holding of the court was that deductions did not serve to violate the mandated state minimum royalty provision.  If a lease clearly and specifically disallows deductions of post production expenses then I believe that Kilmer would not change that agreement. 

Permalink Reply by PLOVER on July 31, 2012 at 3:53am

 ... it is my interpretation of "The Sales Price for the Oil  and  Gas shall  be  determined  at  the Wellhead,  adjusted  for  BTU  content" .. means that it is metered on the wellpad .... for BTU content ....

... do I think this metering could be accurate? .... yes, because the state of PA ... I hope, is monitoring such due to their interest. (taxes) .. based on well production

.... but the price associated with 1000 BTU seems to be arbitrary .. since it is not sold at the wellhead, even after it's BTU value is determined ... but some point in TIME (date-hour?) in the future ...

and also at what hub ? ... who bought it and at what price ...

.... I don't think the the state o PA has an interest in this ... they probably are taxing - volume of gas/BTU at the meter ... and what it eventually sells for is not their problem .... but it is the landowner's ...

 .... since it seems impossible for him to know where, when, and what the product from his well pad was sold for ....

.... without an AUDIT BY AN ATTORNEY WHO SPECIALIZES IN SUCH ... and even then ?  ..... it seems the energy companies can literally name the price ...  ...I have no direct knowledge, so the above is conjecture !

2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 31, 2012 at 4:33am

John,

Metering only measures volumetrically, which means it measures Mcf's.  Gas is sampled periodically to determine what the Btu content of the gas stream is.  This sample is analyzed in a lab to determine its makeup/components and its heating value.  The Btu value is then applied to the number of Mcf's that the meter measures.  For example 1350 Btu gas, and 10,000 Mcf's of gas will result in there being 13,500MMbtu's of gas that you would be paid for.  The price received for gas sales might be viewed as being somewhat arbitrary but I can assure you that it is not.  It is a complicated process that I won't go into here but suffice it to say that operators are incentivized to obtain the highest price possible... after all, the producer gets the lion's share of the proceeds.

It's not a "name your price" process at all.  There are publications that publish posted prices for natural gas sales occurring in various regions all over the U.S.

Gas measurement is not "monitored" by the state of PA as they do not collect any production taxes in PA.  Even in states that do have production taxes, the states do not oversee or monitor the metering process, they take the operators word for what has been produced. 

Permalink Reply by joe pierson on July 31, 2012 at 4:00am

later on the Friendville states

"Sales Price shall mean the price received by Lessee for its Oil and Gas sold in an arms-length transaction."

So there is a conflict in the lease.

Permalink Reply by PLOVER on July 31, 2012 at 5:48am

... it still seems that inclusive of the above ... no deductions for whatever reason is in the "Friendsville" lease "...."adjusted  for  BTU  content,  without  deductions  for,  gathering,separation, transportation, marketing, compression, dehydration, line loss, Production Taxes of whatever type and kind, compression fuel, pumping costs or other costs of the Lessee, of whatever type or kind, associated with the production of the Oil and Gas."   ...

 

do you agree?

 

.... I am closing in on 69 years of age ... and I have found that most humans (and companies) will take advantage of any situation that allows such - "show me an honest man and I'll show you a man who lacked opportunity"    ....the fact that states do not monitor gas production, trusting in the numbers given them seems amazing .... good business requires checks and balances, the age of the handshake has past ... but I digress ....

 

.... whatever figures the energy companies show on my royalty statements for gas volume, BTU's, price, etc.  is not what the original question was, and still not answered - what does -

code - UA - Line Variance mean ?.... I've called and emailed Chesapeake I should know soon .. there also will be a meeting in our area initiated by Chesapeake to disseminate the latest developments in our Township  .... so I should have the answer, and I will respond ... if it has not already been answered  .... here, first ...

 

.... Steve you state,

Metering only measures volumetrically, which means it measures Mcf's.  Gas is sampled periodically to determine what the Btu content of the gas stream is.  This sample is analyzed in a lab to determine its makeup/components and its heating value.  The Btu value is then applied to the number of Mcf's that the meter measures.  For example 1350 Btu gas, and 10,000 Mcf's of gas will result in there being 13,500MMbtu's of gas that you would be paid for."

 

How can the BTU value of an individual well by evaluated once it enters a collection pipeline?  .... I thought the price of the gas from a well was adjusted for BTU's above and below 1000 cu. ft. ? ... or are you saying that this is done at the originating well pad ?

 

Permalink Reply by PLOVER on July 31, 2012 at 6:35am

... in addition ...  I receive royalty checks from two energy companies for the same well pad ... their price for each month is

             Company A      Company B

March          2.545            2.28

April            2.267            2.05

May             2.131            1.94

..... ???

Permalink Reply by joe pierson on July 31, 2012 at 6:57am

John,

Wellhead price implies you take the sale price and "net back" to  calculate the wellhead price. So they sell the gas for $3, cost $.50 to process, so the price at the wellhead is $2.50 Then one could argue the lease states no deductions are made from the calculated wellhead price of $2.50. Historically companies were caught double deducting, deducting again from the wellhead price. So this was added to the lease to stop that. Again the lease has conflicting terms, a judge would need to decide.

As far as the state monitoring production volume is concerned the state does not regulate leases so it doesn't confirm your getting what you should be getting as far as royalities are concerned, but they do require (in most cases) not only production data from gas companies but also sales receipts to 3rd party who purchased the gas (utility company for instance or a pipeline). These must agree.

Line variance can be losses to pipeline leaks or other losses incurred during the post processing phase, so they deduct the loss from your check. In rare instances it can also be a gain, so if the BTU output of the well is so high the pipeline can't handle it, they have to dilute the gas so the volume going into the pipeline is greater then volume coming out of the wellhead. If the BTU content is too high the gas will liquify inside the pipeline causing problems (the dew point is lower for high BTU Gas so it condenses into liquid at lower temperatures). The pipeline company has strict limits on what it will take. In the old days gas was sold by the MCF, and still is at some gathering lines today, but mostly gas is sold by the BTU, so some of this gets confusing. Some leases specifically state MCF. So again it all depends on your particular lease.

joe

2pwt9ru4672sqPermalink Reply by 2pwt9ru4672sq on July 31, 2012 at 7:45am

That's a whole lot of question John... in reverse order the answers are:

I have a friend that also has a Friendsville lease, he gets 4 different checks and they all reflect different sales prices.  He doesn't know why, and I can only speculate as to why that is.  All four companies sell their respective shares of gas differently.  Although they are in the same "ballpark" price wise, they are nonetheless different.  Maybe some of them are calculating the royalty with deductions while others are not. 

Yes, Btu's are derived by catching samples at the wellhead, and it is this sampling that determines your Btu value. 

Line variance, has already been explained below. "UA" likely stands for Un-Accounted for, and its a line gain or loss as explained by the other poster.

As I said previously, the Friendsville Lease is confusing when trying to sort out exactly what the royalty provision means... and as noted, perhaps the confusing language is why some companies are netting you lower prices... because they deduct post production expenses. 

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