Deductions

I have a gas well in Bradford Co. Pa that was been brought on line last October. I received my first royalty check in Feb. The check stub shows deductions for gathering. My lease states no deductions for gathering , there is a clause for enhancement. I contacted CHK , and was told that gathering was "enhancing" the value of the gas. They told me they can't sell gas at the well head and sending it down the line "enhanced' the value. I don't agree, it seems to me that gathering lines are part of production not enhancement. It looks like they are taking 20%.  Has anyone seen this and is there anything that can be done about it. Thank's Keith.

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Permalink Reply by wyalusing jim on April 22, 2013 at 5:54am

keith, you have what is most commonly referred to as the "market enhancement clause".

chk likes to tell folks that their lawyers are responsible for that clause being

in their leases, there is some truth to their claim.

when chk told you, " They told me they can't sell gas at the well head and sending it down the line "enhanced' the value." they were half right...sorta.

the fact is that chk's first point of sale is at the wellhead in many if not all cases. they don't have a commercial market at the wellhead, i.e. con edison doesnt buy there, but they sell it to chesapeake energy marketing inc. themselves essentially, since c.e.m.i. is an affiliated 3rd party owned by chk energy, the parent company also, of chk appalachia...your lessee.

i'm sure that you can see the possibilities arising from that situation.

since your lease contains an arbitration clause, whereby you relinquished your right to litigate your claims against chk, you are not allowed to take them to court, or participate in class action suits except under certain circumstances.

doug clark is attempting to establish a mass arbitration class in lieu of a class action for that reason.

one interesting part of chk's statement to you, ", and was told that gathering was "enhancing" the value of the gas.", is true from a certain perspective. moving gas closer to its' commercial market, does increase its' value, however the gas itself remains unchanged, thus there is ambiguity. ambiguity can work in a lessors' favor and so, dougs' arbitration case, if well enough presented may prevail.

another interesting aspect is, if chk bases their sales price for royalty calulations on that wellhead figure, the gathering costs would be occurring after the gas has left the possession of chk appalachia...your lessor. you have no lease with c.e.m.i., and therefore they cannot charge you for anything, unless it is back through chk appalachia, the one to whom you leased and are paid by.

probably that all sounds kinda complicated, and it is, and it's gonna be hard to win against chk, but as you can see by the amount of your deductions, it'll be a worthwhile fight.

wj

Permalink Reply by Keith Palmer on April 22, 2013 at 6:27am

Thank's Jim. There is also a deduction for 3rd party. Wonder who that is? Keith

Permalink Reply by Jack Straw on April 28, 2013 at 8:42am

Remember the old Shell Game; the one with three half walnut shells and a pea.

Funny how it is a “game” that you never seem able to win.

 

It would appear that a type of modern version of the old Shell Game involves the setting up of “third party affiliates”.

The Upstream energy company sells their product to a (wholly owned) Midstream subsidiary. The Upstream energy company sells the product to their “partner” at a low price. The Midstream subsidiary charges back to the Upstream energy company (unrealistically high?) marketing costs.

And, in this fashion, both short changes the Royalty holder and, at the same time, transfers (excessive?, questionable?) expenses back upon the Royalty holder. 

 

All without giving the Royalty holder so much as a tube of K-Y Jelly to alleviate any resultant discomfort.

 

Welcome to the Chesapeake Shell Game; this time "played" with Shell Companies.

 

Chesapeake Energy Marketing Inc., (CEMI)

http://www.chk.com/affiliates/CEMI/Pages/default.aspx

 

All IMHO,

                     JS

Permalink Reply by Dan on April 29, 2013 at 4:46am

This is not a new game in the play.  Electric producers owning the coal company and asking for a rate increase because the price of coal went up?  Columbia Gas asking for a hefty consumer rate increase just last year because the transmission costs increased passing thru Columbia Transmission midstream?  Who is paying for all the new midstream? the company or the consumer?  In the end it is always the mineral rights owners and/or the consumer that bears the costs or there would be no profit thus what motive to harvest or do anything.  The question, "is the allocation of costs fair to all involved?" and "what is fair?"  Bigger questions are who should determine what is fair, the courts? or the ever growing piles of legislation?  The cost of CHK and others questionable practices fuel the increase of the legal and goverment systems ultimatly raising costs even more.

Permalink Reply by Keith Palmer on April 22, 2013 at 6:23am

Thank's Matt

Permalink Reply by wyalusing jim on April 22, 2013 at 8:57am

keith, i dont have deductions so i dont know. i have no standing to ask chk about it since it doesnt involve me.

the main reason that i made inquiries regarding wellhead sales was so that folks like yourself could begin to better understand your situations.

i do know that some of my neighbors have the 3rd party deduction also.

chk isnt the only company selling to their affiliate at the wellhead either, and interestingly, anadarko told me that they were not required to give me that info.

wj

Permalink Reply by Frank Walker on April 22, 2013 at 9:31am

wj I appreciate your clarification that CHK wellhead sales are to an affiliate.  I did not pick that up when I read you on another thread.  The stuff I was concerned about, relating to wellhead sales, would not apply in the instance of sales to an affiliated company, only to a third party.  Gotta tell you, I am relieved, and I'm really happy I read what you have written here.  I'm gonna enjoy my dinner more tonight on account of this.  :-)      

Permalink Reply by wyalusing jim on April 22, 2013 at 9:36am

actually frank, that is exactly what i said when you read it before.

c.e.m.i. is an affiliated third party.

upon consumation of that sale, chk appalachia no longer owns the gas. c.e.m.i. does.

easiest thing for you to do, is call your lessee and find out where they are selling.

and as always...inquiring minds wanna hear back from ya when ya find out!

wj

Permalink Reply by Frank Walker on April 22, 2013 at 11:14am

Yes, yes, understood and agreed.  All CHK "inside baseball" stuff to me, all the abbreviations and so forth.  Not leased to CHK, not at all deep into their workings . . . . or abbreviations.  My lease, like many, has protections against sales to affiliated companies . . . . . regardless where they occur.

Focus item for me would be sale to non-affiliated company . . at the wellhead. This is not happening anywhere AFAIK.  I thought your report was an exception.  I was in error . . . thank goodness!!!

Permalink Reply by Tico on April 22, 2013 at 10:22am
Your lucky my deductions are over 30% with Chesapeake,, good luck
Permalink Reply by wyalusing jim on April 22, 2013 at 10:34am

of course though the percentage of royalties paid back in deductions changes with the price, since deductions are per mcf.

i saw some statements when prices were lower that lost between 40-45% of royalties to deductions.

wj

Permalink Reply by Tico on April 22, 2013 at 12:42pm
Wyalusing jim, Are you saying that the higher the price of gas is the lower the deductions will be??

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