RPT-INSIGHT-To cut natural gas costs, Chesapeake pumps up royalty deductions (from Reuters news)
Very interesting article in Reuters today about how Chesapeake is taking folks for a ride on deductions.
Mostly PA but it is happening in Ohio. Do your homework folks when signing a lease. Don't whine later.
Remember these horror stories before you sign a lease.
http://www.reuters.com/article/2013/08/28/chesapeake-marcellus-idUS...
As the natural gas industry struggles to cope with depressed prices, Chesapeake Energy Corp has begun shifting a much larger share of transportation and marketing costs to the owners of Pennsylvania land it leases.
The largest natural gas operator in Pennsylvania's Marcellus shale formation, Chesapeake started this year to take much heavier deductions from royalty checks it sends landowners to help pay to gather, compress, market and transport natural gas, in most cases cutting compensation by more than half.
The deductions, set entirely at the discretion of the company, are permitted under most Pennsylvania drilling leases. Such deductions are made in other states, mainly Texas, where energy companies have had a harder time passing on the costs. An ambiguous Pennsylvania law has allowed Chesapeake and others in the industry to push the practice further there, analysts, politicians and attorneys said in interviews.
For years, landowners said, most of the industry has charged small percentages of their royalties, typically 5 to 10 percent, a step generally accepted with little push-back. Some companies deducted nothing to cover costs.
Starting in January, however, Chesapeake began to deduct 60 percent or more from Pennsylvania royalty checks, according to a review of contracts and more than a dozen interviews.
The deductions, allowed under Pennsylvania's 1979 Guaranteed Minimum Royalty Act, have helped the company cut costs and boost shareholder returns. But inevitably they are upsetting some landowners who overlooked the fine print in their contracts.
"When they take such a large chunk, then you kind of go, 'It's not worth it to have them drill'," said Terry Van Curen, a retired accountant who along with his wife, Diana, owns 17 acres nestled on the side of a misty mountain in Litchfield Township, Pennsylvania. "Why are we paying to have them be on our land?"
Van Curen saw 85 percent of his January 2013 royalty check from Chesapeake deducted, up from 24 percent for December 2012. For May, the most-recent monthly payout he's received, his royalty check came to $122.08, with $274.70 deducted.
The first page of Van Curen's five-page lease agreement includes a clause guaranteeing a royalty of 12.5 percent on all revenue collected from his well, but with "adjustments on production," allowing taxes and other costs to be deducted. It's that small clause that has empowered Chesapeake to ramp up deductions and chip away at that 12.5 percent, attorneys said. Van Curen acknowledged he barely read that clause when a Chesapeake agent came knocking on his door in 2009.
Chesapeake declined several requests to comment for this article. In the past year the energy company has aggressively moved to cut costs and sell underperforming or non-core assets to offset low natural gas prices, which have held back profit.
The low gas prices are a direct result of the development of American shale reserves thanks to hydraulic fracturing, a process known as fracking. The rush to frack in the past four years has boosted domestic natural gas supplies, sharply depressing prices and pressuring Chesapeake and its peers.
Doug Lawler, who became Chesapeake's CEO in June after co-founder Aubrey McClendon was forced out following a governance crisis and liquidity crunch, emphasized the company's efforts to cut costs on a conference call with investors earlier this month. Chesapeake's shares are up nearly 60 percent since January.
Still, the company warned its costs to transport natural gas in Pennsylvania are rising. Pennsylvania's Marcellus shale region holds roughly a quarter of Chesapeake's 10.93 trillion cubicfeet of proven natural gas reserves, enough to supply U.S. needs for nearly three years.
It is not clear how much money Chesapeake has saved by shifting more cost to landowners. Energy companies closely guard specific data on wells, and Wall Street analysts say it is nearly impossible to extrapolate how much the new practice has boosted Chesapeake's bottom line, thanks to constantly changing production volumes and natural gas prices across the company's thousands of Pennsylvania wells.
LEADING THE CHARGE
Chesapeake's new strategy has stirred criticism among the locals.
"I proudly support energy development across our state," Doug McLinko, a Bradford County commissioner, said during an interview at the RiverStone Inn, a popular watering hole for energy industry workers in Towanda, Pennsylvania.
"But these higher deductions are affecting working families and senior citizens."
The fear in Bradford County, a mountainous region on the state's northern border that produces more natural gas than any other Pennsylvania county, is these deductions may get even steeper as energy rivals catch on to the practice.
Talisman Energy Inc, the fourth-largest natural gas producer in the Marcellus, said it is deciding now whether to deduct costs from royalty checks.
"Any decision will be made in a thoughtful manner, taking into account considerations of our landowners," Talisman spokeswoman Phoebe Buckland said.
Royal Dutch Shell PLC, the third-largest producer in the Marcellus, said it takes deductions "on a lease-by-lease" basis and has done so for years at roughly 70 percent of its Pennsylvania wells. Earlier this year, though, Shell began deducting costs from the remaining 30 percent of its Pennsylvania leases, which it acquired as part of its 2010 buyout of East Resources.
"It is already a part of their lease agreement," Shell spokeswoman Kimberly Windon said of the legacy East landowners.
Statoil ASA, which holds a 33 percent interest in many of Chesapeake's Pennsylvania wells, does not deduct any costs.
Southwestern Energy Co and Cabot Oil & Gas Corp already deduct low percentages from royalty payouts to leaseholders, typically no more than 20 percent. The two companies declined to comment when asked if they planned to increase deductions.
WHAT IS A 'ROYALTY'?
In 2008, several Pennsylvania landowners sued Southwestern Energy trying to get their leases invalidated, arguing that the company had no right to deduct any fees under the 1979 law. Two years later the state Supreme Court ruled that energy companies could deduct the fees since the law did not precisely define what a royalty actually is.
The court asked the state legislature to update the law, something it has yet to do.
In the absence of any update, Chesapeake sent letters to its leaseholders in early 2012 saying they would begin deducting costs from royalty checks, and in some cases send retroactive bills for costs dating back to the 2010 ruling.
Some members of the state House of Representatives plan to introduce legislation next month that would update the 1979 law and guarantee landowners a minimum of 12.5 percent royalty payment, regardless of costs.
"Are we as a government not responsible for fair play?" said Representative Tina Pickett, a Republican.
Pickett is responding to constituents like Janet Geiger and her husband, Dick, who own 10 acres leased to Chesapeake. The couple acknowledged they did not read their lease in full before signing it and now realize it allows costs to be deducted.
They have attended several Chesapeake community relations events at local libraries with company staff, but said they always came away frustrated their questions about deductions weren't answered to their satisfaction. Last month the couple received a check from Chesapeake for $45.28, after more than $450 was deducted.
"They take out, oh my God, line after line of deductions," said Janet Geiger, a retired nurse. "I never expected to get rich, but hell we don't get enough in royalties to pay the taxes on our property."
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Replies to This Discussion
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Permalink Reply by Frank Walker on
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Actually it was the PA Supreme Court in Kilmer. That was an absolutely devastating decision for landowners.
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Permalink Reply by Thomas Lilli on
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With deductions a moving target like this, its conceivable that your royalty income could become your royalty liability.
Would that not be the simple irony in this liberal leaning society, with all the talk of the middle class and the one percent by the campaigner in chief, that the one opportunity for the middle class to get a leg up in this screwed up country, that we once again take it in the shorts at their behest.
When PA signed the leases in the northern central tier in 2007 do you think they had verbiage in their leases to guarantee them 12.5%? More like 20% (with three year production clauses).
It's just sickening to see how the state has just walked away from its constituents on this issue.
I watched the state sit back as we all struggled with the onslaught in 05 and 06 with unfair land men raping the rural areas of PA with these nightmare leases. PA knew full well what was going on and waited until the the price got to $5000-7000 per acre. Signed three year leases with 20% royalties and production clauses with penalties. Where was the citizens voice.
I'm leased but currently not in a unit. I cringe to think that in my dying days on this earth, I will watch the state of PA (with republican governor) pat, possibly a foreign oil company, on the back as they reap massive profits at the expense of the sometimes centuries old land owner interests in our state because our representatives did not have the commitment to their constituents to stand behind a law written over thirty years ago intending to guarantee land owners a MINIMAL SHARE of profit from a natural resource.
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Permalink Reply by Inchworm antenna on
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There is a traditional understanding with Net Rotalty leases about deductions. Like the article says, up to 15%.
When the land mans pitch to landowners and communities is that horizontal drilling maximizes efficiencies, and then to deduct upwards of 85% seems to me like taking advantage of farmers and families. It just doesn't quite jive with with the sales pitch.
I generally can't stand new laws, but unfortunately when common sense and content is being neglected i guess laws are sometimes necessary.
PENNSYLVANIA, you might want to share this with your legislatures and Governor-
there might have been changes to this statute over the past couple years, but last I checked, here's the first half:
SOUNDS LIKE PA NEEDS TO GET ON BOARD WITH WEST VIRGINIA CODE (WVC 22-6-8):
(a) The Legislature hereby finds and declares:
(1) That a significant portion of the oil and gas underlying this state is subject to development pursuant
to leases or other continuing contractual agreements wherein the owners of such oil and gas are paid
upon a royalty or rental basis known in the industry as the annual flat well royalty basis, in which the
royalty is based solely on the existence of a producing well, and thus is not inherently related to the
volume of the oil and gas produced or marketed;
(2) That continued exploitation of the natural resources of this state in exchange for such wholly
inadequate compensation is unfair, oppressive, works an unjust hardship on the owners of the oil and gas
in place, and unreasonably deprives the economy of the state of West Virginia of the just benefit of the
natural wealth of this state;
(3) That a great portion, if not all, of such leases or other continuing contracts based upon or calling for
an annual flat well royalty, have been in existence for a great many years and were entered into at a time
when the techniques by which oil and gas are currently extracted, produced or marketed, were not
known or contemplated by the parties, nor was it contemplated by the parties that oil and gas would be
recovered or extracted or produced or marketed from the depths and horizons currently being developed
by the well operators
(4) That while being fully cognizant that the provisions of section 10, article I of the United States
Constitution and of section 4, article III of the Constitution of West Virginia, proscribe the enactment of
any law impairing the obligation of a contract, the Legislature further finds that it is a valid exercise of
the police powers of this state and in the interest of the state of West Virginia and in furtherance of the
welfare of its citizens, to discourage as far as constitutionally possible the production and marketing of
oil and gas located in this state under the type of leases or other continuing contracts described above.
(b) In the light of the foregoing findings, the Legislature hereby declares that it is the policy of this state,
to the extent possible, to prevent the extraction, production or marketing of oil or gas under a lease or
leases or other continuing contract or contracts providing a flat well royalty or any similar provisions for
compensation to the owner of the oil and gas in place, which is not inherently related to the volume of
oil or gas produced or marketed, and toward these ends, the Legislature further declares that it is the
obligation of this state to prohibit the issuance of any permit required by it for the development of oil or
gas where the right to develop, extract, produce or market the same is based upon such leases or other
continuing contractual agreements.
(c) In addition to any requirements contained in this article with respect to the issuance of any permit
required for the drilling, redrilling, deepening, fracturing, stimulating, pressuring, converting, combining
or physically changing to allow the migration of fluid from one formation to another, no such permit
shall be hereafter issued unless the lease or leases or other continuing contract or contracts by which the
right to extract, produce or market the oil or gas is filed with the application for such permit. In lieu of
filing the lease or leases or other continuing contract or contracts, the applicant for a permit described
herein may file the following:
(1) A brief description of the tract of land including the district and county wherein the tract is located;
(2) The identification of all parties to all leases or other continuing contractual agreements by which the
right to extract, produce or market the oil or gas is claimed;
(3) The book and page number wherein each such lease orcontract by which the right to extract, produce
or market the oil or gas is recorded; and
(4) A brief description of the royalty provisions of each such lease or contract.
(d) Unless the provisions of subsection (e) are met, no such permit shall be hereafter issued for the
drilling of a new oil or gas well, or for the redrilling, deepening, fracturing, stimulating, pressuring,
converting, combining or physically changing to allow the migration of fluid from one formation to
another, of an existing oil or gas production well, where or if the right to extract, produce or market the
oil or gas is based upon a lease or leases or other continuing contract or contracts providing for flat well
royalty or any similar provision for compensation to the owner of the oil or gas in place which is not
inherently related to the volume of oil and gas so extracted, produced and marketed.
(e) To avoid the permit prohibition of subsection (d), the applicant may file with such application an
affidavit which certifies that the affiant is authorized by the owner of the working interest in the well to
state that it shall tender to the owner of the oil or gas in place not less than one eighth of the total amount paid to or received by or allowed to the owner of the working interest at the wellhead for the oil or gas so extracted, produced or marketed before deducting the amount to be paid to or set aside for the owner of the oil or gas in place, on all such oil or gas to be extracted, produced or marketed from the well. If such affidavit be filed with such application, then such application for permit shall be treated as if such lease or leases or other continuing contract or contracts comply with the provisions of this section.GOOD LUCK!
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Permalink Reply by Inchworm antenna on
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It all really comes down to how people treat each other. In reading the article above it appears there are vast differences among those companies in regard to how they treat people. These are values issues, and I don't want to sound like a kook, but these are the kinds of qualities passed along by God fearing grandmothers. I'm thankful mine lived long enough for me to get to know them.
I feel sad for those who did not have a chance to get to know theirs.
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Permalink Reply by Mike Kelly on
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Is Reuters and stat in bed together. Check your Rotalty checks. Stat Does take deductions. More then Chesapeake.
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Permalink Reply by marilyn ascani on
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I thought CHK and Stat were partners
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Permalink Reply by Tom R on
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I'm looking at my royalty check stubs. Statoil takes no deductions and shows the highest prices for the gas sold. CHK takes ~17% of my royalty in deductions. The worst is Anadarko, lowest prices for the gas ( $0.41 /mcf less than Stat and $0.26 less than CHK for June gas) and highest deductions, both on a per mcf basis and even more as a percentage (due to low price). I have the Market Enhancement clause on my lease and had seen an article a while back where Stat was given as one who honored the landowner favorable interpretation of that language.
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Permalink Reply by Billy Park Whyde on
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Isnt this about the same as what busted up the Standard Oil Company? http://en.wikipedia.org/wiki/Standard_Oil Now I could be wrong as H but who are the ones that are transporting, the compression and inhancement?
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Permalink Reply by Mickie Byrd on
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I have been warning ya'll for years that they were the biggest corporate thieves out there. I will bet that they have done ya'll like they did in Texas. Create an affiliate company which they sell the gas to cheap and then the affiliate charges very high deducts. I am finally suing them in Texas. I have several other royalties from other companies in same area as our CHK and they would have paid us up to 3 times as much with their deducts. Its just stealing. Worst of all my leases even say they can not charge deducts and they still do it. So many suits here in Texas for this same thing.
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Permalink Reply by Thomas Lilli on
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Years?
I never heard of this site until three years after we signed (at the horrible advice of woefully inadequate legal council from Wellsboro)
There just was no information in the mid 2000's up in central PA.
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Permalink Reply by Inchworm antenna on
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In WVA the courts ruled in favor of property owners who sued CNR (Chesapeake Natural Resources) as they were still paying lessors flate royalty rates (just $100 or $200 per year) despite the WVA's 1982 minimum royalty law of 12.5%. (posted above).
The case was called: Tawney v. CNR
The case was appealed to WVA Supreme Court who also ruled in favor of the Lessors.
This was approximately 5-6 years ago.
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Permalink Reply by Thomas Lilli on
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Thanks!
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