Deductions from Royalty Payments

What is the expected deduction from royalty payments?    Does anyone know what the deductions amount too such as compression, dehydration, gathering, transportation, etc?

 

Thanks,

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Permalink Reply by Mike Knapp on December 28, 2010 at 8:52am
I do recall that case, but I'm not familiar with the specifics of it and I doubt I could add anything beyond what is already available via media outlets.
Permalink Reply by Country Bumkin on December 28, 2010 at 7:35am

Mr. Knapp,

 

Again, I don't know how you are arriving at those numbers.  If the lease says 15% net.  It doesn't mean that you are only going to be charged for 15% of the total deductions.  In your case, there is no wording for that.  Deductions are rarely spelled out in a lease b/c they don't know what they are yet, however, they also don't say that lessor is responsible for their proportionate share.  So, since there is no limit spelled out in the lease, it could be staggering the costs that are being deducted.  You also didn't address what happens when the gathering system is paid off.  Doesn't the lessee stop deducting when the it's paid off?  My bet is no...  This is only for the gathering system deductions...What about all the refining costs???  Yikes!

Permalink Reply by Mike Knapp on December 28, 2010 at 9:21am

Mr Bumpkin,

 

That is exactly what it means. 

 

Here is how our lease reads.  I am not going to try to comment on other company's leases.

 

Lessee agrees to pay Lessors a royalty equal to 15%  part of all oil and gas produced, saved
and marketed from a well on the Property, with said royalty to be valued at the
price received by Lessee at the wellhead at the time of production, for said
oil and gas in its natural state after deducting from such proceeds severance,
ad valorem and other applicable taxes, together with the reasonable costs
incurred by Lessee in preparing such oil and gas for market including, but not
limited to, the cost of any necessary treatment or compression and the cost of
transporting such oil and gas to the point of sale. 

 

Pay attention to the key words: "deducting from proceeds".   This means that they are deducting the post production costs from the OVERALL PROCEEDS of the well, not just the 15% that is due to the landowner, creating a gross and net situation. 

 

As you can see, we can only deduct charges that are directly the result of moving YOUR gas to market.   That would not include an entire gathering system.   It could include the spur line from the well to a larger line though, but we're not talking $5 million to run a 4" plastic pipe a quarter mile.  And once it is paid off, they cannot just keep deducting.   They must follow the rules of the lease.  

 

As far as "refining", there could be a charge for dehydration (which shouldn't be much).  If the gas has to be stripped, then the NGL's that are stripped will be sold and you should make more off of the NGLs being sold than it cost to strip the gas. 



The biggest one to watch out for is typically deductions for 3rd party pipelines (aka Transportation fees).    That is not so much of an issue here in Western PA, because we are in very close proximity to the end user (NYC, Boston, Philly, DC. Balt, etc.).   If you lived in Texas and your gas was in a pipeline from Houston to New York, then there's going to be a significant transportation charge.  Think of it as a toll road.    But for a lot of people here in Western PA, your gas is going to feed directly from the well into the market pipeline, so there will be no 3rd party charge at all.  

 

 

 

 



 

 

Permalink Reply by stormangasman on January 4, 2011 at 3:11am

mike

This might be a dumb question,but!

With your lease of 15% ,after all the deductions ,will you,or can you receive less then 12.5%.?

    If by Pa.state law the land owner can not receive less then 12.5% then what is the value of the newer leases with 15 to 20%

 

Permalink Reply by Mike Knapp on December 29, 2010 at 7:55am
the "reasonable costs" are going to include fees for dehydration, compression, transportation, etc.  They should stay fairly consistent, or even go down as more wells are drilled in the area (more wells to spread compression costs across).
Permalink Reply by Country Bumkin on December 30, 2010 at 1:18am

Mr. Knapp,

Do you have a real life example of what a REAL royalty check might look like from your royalty language?  Or any REAL life royalty checks so we can see what the cost actually look like?

Thanks!

Permalink Reply by melvin t morris on December 30, 2010 at 1:53am
I know there are many variables to determine royalties, but to go one step further, would anyone like to disclose typically what the royalty per acre per month is for a decent producing well and at what percentage and size of the drilling unit?
Permalink Reply by Mike Knapp on December 30, 2010 at 5:59am
To be honest with you I don't.  My company just secures the leases, the production company that drills the leases is the one charged with issuing royalty checks.   I have seen many such checks posted on the internet before though, I bet a google search will turn some up.
Permalink Reply by Paul Meko on December 30, 2010 at 3:47pm
Hopefully you have a no deduction clause in your lease to protect you from this, if not it can range from .50 to well over a dollar.
Permalink Reply by Joe Smith on December 31, 2010 at 1:11am
I do not have the article off hand, but I read the same thing.  Post deduction cost has been as high as $1.00 or more per 1,000 btu processed and delivered.  With gas at $4.00 - $5.00 dollar range, we see that cost will impact and take a sizable chunk out of your royalty.
Permalink Reply by bill h on December 31, 2010 at 5:12am
I've been looking at some CHK royalty stubs from a friend, and it looks like the deductions vary, but are on the order of 15% (on gas in the 4-5 dollar range.)  This is in the dry gas region...NE PA
Permalink Reply by R.leo ferraro cpa on December 31, 2010 at 2:22am
It is simple..you do not get what you deserve you get what you negiotate! you signed the lease so get on with life.

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