Improper production deductions

I have a contract that explicitly states that there are to be no production costs applied to my royalty check except where there are taxes due on the royalty monies.  I my discussion with the company they reply with a completely incoherent statement that makes absolutely no sense.  Has anyone been successful in dealing with this issue and can provide me some direction.  Thanks for any information.

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Permalink Reply by John on August 20, 2014 at 9:11am
Same boat here. Funny enough when I inquired they blatantly admitted they were taking out production costs that the lease very specifically prohibits. All of this was in email so we have it it writing. Trying to figure out our next step.
0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on August 20, 2014 at 9:24am

John & Andy

Use the directions provided in your lease (Delinquency In Payment is the paragraph in an ALOV Lease) to inform your producer that he has not complied with your lease.

If you need a format/example of how to inform your producer of non-compliance, email me at mrrxtech_yah@yahoo.com.

Anytime a producer ignores your lease you are required to write them a certified letter, return signature required, to remind them that they signed a contract with you.

From  the old leases I've seen the producers don't intend to reference them unless you insist. I believe the wording was "The lessee is not required to abide by the lease unless the lessor notifies the lessee by certified mail, return signature required, within 45 days. The lessee has 60 days to determine if they are going to comply with the lease".

For an O&G company compliance with a lease is optional, along with other optional items such as being fair, or honest.

Producers are required to obey the laws of your state, so check out your laws to see which ones the producer is violating, Theft for instance.

Permalink Reply by The Hiker on August 20, 2014 at 10:03am

Andy and John:  What company?  Thanks.

Permalink Reply by John on August 20, 2014 at 10:19am

Ches

Permalink Reply by Andy Berenty on August 20, 2014 at 2:35pm

Hiker,

My lease addendum reads: Royalties shall be paid without deductions for cost of producing, gathering, storing, separating, treating, dehydrating, compressing transporting, or otherwise making the oil and /or gas produced from the lease premises ready for sale or use.  All oil and/or gas shall be delivered free of cost into the tank or pipeline (for oil) and into the pipeline (for gas), with the exception of Lessor's prorated share of taxes, measured by volume, on the oil and/or gas royalty.

Ultra's reply to my inquiry: The adjustments you see on your check are for lease fuel consumption used on the lease.  These are gas volumes produced from the lease but are consumed as fuel for operations for the benefit of the lease and are not delivered into a pipeline. Ultra's attorney notes that Paragraph 13 does not preclude wellhead price adjustments attributable to volumes produced from the lease but consumed as fuel.

And there you have it, a completely incoherant response to a very concise

statement.

Permalink Reply by INVICTUS on August 21, 2014 at 1:16am

It would stagger you to discover what volumes are consumed as fuel for these operations: One example: the 750, 000 BTU/HR/PER WELL for powering separators. In addition, the compressors on these sites are burning this fuel to power the pads and run the natgasline compressors.

The question as to whether this violates the wellhead pricing language?

Legal precedent should already be established on this point.

In other words, is the purchaser of the product paying for the fuel directly at the wellhead or after SOME processing, at which point it is either  1) in a holding tank or 2) at the sales point entering the pipeline?

I'd like to hear some valid LEGAL opinions on this.

What's "fair" and what the law interprets can often be two separate things.

This issue will be addressed in some detail as royalties begin to flow and leaseholder invoke their audit rights.

IMHO, this is a fundamental starting point for the audit, nearly equivalent in importance to establishing whether or not the production volumes reported to the leaseholder (and the state DNR) are indeed accurate.

Permalink Reply by Andy Berenty on August 21, 2014 at 5:06am

Invictus,

I can appreciate the points you are making which are probably valid for an another discussion, however the company's lawyers obviously signed on to the lease from it's inception and the lease signed by both parties is what it is, a legal obligation to live up to the terms..  There are to be no deductions  as the lease states except for royalty taxes, the language can't be more explecit than this.  Rhetorical question: Can the English language be so vague in this statement that it defies a rudimentary grade school understanding?

Permalink Reply by Alan Bowers on August 22, 2014 at 7:24am

Invictus,

Check out the Forbes article, "Screwing Royalty Owners Means Chesapeake Is Stealing Cash", 2014-03-17, by Christopher Helman,

http://www.forbes.com/sites/christopherhelman/2014/03/17/screwing-royalty-owners-means-chesapeake-is-stealing-cash/ 

In the article he points out that the Office of Natural Resources Revenue (ONRR) which collects payments for the Department of the Interior, assessed CHK a $428,400.00 penalty for "knowing and willful submission of inaccurate royalty reports." The article also points out that a year prior ONRR had fined CHK $765,000.00 for doing the same thing.

If Chesapeake is willing to file inaccurate reports with ONRR who else are they willing to file inaccurate reports with?  ODNR in Ohio?  The DNR in PA and WV?

Permalink Reply by Zack Smith, Geologist/Appraiser on August 21, 2014 at 2:48am

In PA there is a legal precedent distinguishing between market enhancement and operations/production expenses; however, in your case it does not sound like this is a relevant distinction. The company stated use of "fuel for operations" which is clearly an operating expense, but they are hedging with the phrase "for the benefit of the lease", which is similar to the terminology used to justify market enhancement expenses. The company is trying to cover its bases with that statement, but I would doubt those deductions would stand stand any legal or judicial scrutiny.

Did you work with an attorney to put together your lease? If you're in NE Pennsylvania, Attorney Sam Lewis in Montrose is a very good source for Oil and Gas law.

Permalink Reply by Andy Berenty on August 21, 2014 at 4:38am

Zack,

Thank you for your response, I really appreciate your input and suggestion.  Yes, I was part of a landowners group and attorneys created the lease and gave it their stamp of approval, then again, I don't know if that really means much since I spoke to one of the attorneys and he first said that I don't have a case, he quoted some vague language from the main body of the lease, I pointed out to him that the addendum stipulations supersedes the reference he was referring to and he said oh yes, you do have a valid issue.  Thanks again Zack.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on August 21, 2014 at 3:59pm

I was off looking at the other Shale Play websites today. I found something on Gohaynesvilleshale that everyone needs to see. Haynesville Shale Chesapeake Activity:

MORE LAWSUITS AGAINST CHESAPEAKE FOR UNDERPAYING ROYALTIES

Several larger landowners have recently filed new lawsuits against Chesapeake for underpayment of royalties. Chesapeake continues to underpay royalties to all of its royalty owners by $1.00 to $1.50 per/mcf, as compared to Petrohawk, Exco, etc. For all of us smaller landowners who don't have enough acreage to afford attorneys, somehow the Justice Department needs to get involved to investigate Chesapeake's accounting practices when dealing with pricing and deductions!!! They are stealing $$$$ from ALL of its royalty owners!!!! Everyone needs to somehow get mad and involved!!! IF you have check stubs that show how Chesapeake is underpaying you and/or not abiding by the lease clauses in your lease, please send letters to newspapers, legislators, TV stations, etc and show how you are getting screwed!!

Reply by bullbayou on June 18, 2013 at 11:45am

Most of the people replying to this discussion are missing the point here.  In all of the lawsuits filed against CHK, the leases involved in the lawsuits contained some of the strongest "no cost" provisions imaginable!!  IT DOES NOT MATTER!!!!!  Hell, it does not matter about anything you put in your leases!!  Chesapeake does not abide by anything.  And then you send them a demand letter about the problems with the lease, and they don't even respond!!  They are the operators of the well, and receiving the proceeds from the sale of the gas, and they don't care what the lease says!!  Chesapeake is doing this to the big sophisticated landowners, as well as its partners.  The little guy has NO chance!!  That is why there needs to be a public uprising against Chesapeake, so that the legislators, attorney general and the Justice Department may take note!!!  And I wouldn't be surprised, that at some point in the future, it is going to be discovered that what Chesapeake is doing is not only illegal, but fraudulent as well.  So all these comments about what you should or should not include in a lease is fine, but it has no bearing in this discussion group.

Permalink Reply by Alan Bowers on August 22, 2014 at 7:27am

Andy,

What name of the well you are receiving royalties from?  What state, county, and township is the well located in?

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