How Do We Determine Wellhead Price?

According to the U.S. Energy Information Association the wellhead price is "Price of natural gas calculated by dividing the total reported value at the wellhead by the total quantity produced as reported by the appropriate agencies of individual producing States and the U.S. Bureau of Ocean Energy Management."

That language seems to make it very clear that the wellhead price is a figure determined by a state or regional agency.  Our lease is based on the wellhead price, it says regardless of what the company sells it for.  On the MarcellusShale.org site it says the Wellhead price for Oct1024-Mar. 2015 was $2.80.  If that is the official wellhead price, and our lease is tied to the wellhead price (with no deductions) I assume that meas our royalties should be calculated on that price. Our lease also says if they sell the gas for a higher price, then our royalties are to be based on that (with no deductions)

If a company (like StatOil) uses a price which is half that price, they should be contacted by us to pay the difference.

Is that correct?

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Permalink Reply by INVICTUS on June 13, 2015 at 8:20am

No true arms-length unaffiliated buyer buys anything at the proverbial wellhead. What comes out at the wellhead is nearly worthless. Who buys it?

And, my friends, therein lies the tale and the essence of the royalty dispute.

Also, see "merchantable product" for those who like to get in the weeds "where the snake (Oil and gas) creature liveth. And look for "Net-back" Pricing....There are a wealth of prior discussion on this and other O/gas sites...some good and some very good reading!

Those who care will realize that I just re-opened a "Pandora's box". Nothing new about this exceptionally important discussion, but it should be kept alive and periodically refreshed.

Permalink Reply by HawkDriver on June 16, 2015 at 12:00am
I don't think your statement is entirely true. I recently had the opportunity to tour a plant of one of the major mid-stream companies in our area. The topic came up about how they purchase the gas (by this i mean any substance that can be shipped off of the wellpad via pipeline). He told me that his company purchases the gas at the wellpad and that the price is determined by the btu's. He also told me that the company tests the btu's each month at each wellhead to make sure they are paying the appropriate price. The gas is transported to their plant and broken down into the sub-products. He confirmed that by determining the btu level of the gas stream, they were able to determine quite accurately how much of each sub-product they would end up with. I have had this confirmed by friends of mine who are well tenders. They work for a producer that sells to a different midstream company than I mentioned above. They confirm that their company sells their gas as it leaves the wellpad. I think this information could be revolutionary for the landowner. It would give us a way to accurately price the product as it leaves our property. Just knowing that the btu level can be translated into end product amounts is incredibly insightful. The monthly test would provide an audit trail for some of the information as well. Hopefully there is an industry insider that can confirm what I am saying.
Permalink Reply by Philip Thackray on June 16, 2015 at 12:45am

HawkDriver,

I'm not an industry insider but I am in an XTO and a Rex unit and part of the XTO well pad facility is on my farm.  In the early days I talked to well tenders quite a bit.  The composition and quantities of the output of each well is determined by sensors at the well head.  In fact, this "per well" data is published to the landowners with their monthly royalty check.  I get a breakdown of quantities per month of propane, butane, ethane, and residual gas.  In this XTO field, each well pad is connected to the mother ship by a cell phone like system.  The output data for each well is communicated to the mother ship.  Indeed, the wells can actually be turned ON/OFF from the mother ship.

In my case XTO owns all the gathering lines and the cryogenic plant so they would not establish a well head price.  I don't know how second party buyers do this.

I have also seen the Rex check stubs and the same information about quantities per well is sent to the landowner.  In the case of Rex, all of the well output goes to MarkWest (at least here in Western PA).  MarkWest owns the gathering lines and the cryogenic plant.  From the check stubs it looks like MarkWest sells the products, deducts their costs and pays this amount to Rex.  Rex then computes the landowner royalties from these numbers.  So in effect it is the "wellhead" price.

The PA supreme court established the means of calculating "wellhead" price at least here in PA.  I think the question most of the participants in this discussion have relate to the truthfulness of the numbers that are presented including quantities sold and prices.  And are the sales to true arms length parties.  These issues go way beyond the "wellhead" price.

Phil 

Permalink Reply by HawkDriver on June 16, 2015 at 3:40am
Thanks Phil,
That's good to know. I guess my main point I was trying to make is that these companies know the exact value of what has come out of each well. They wouldn't be able to do business if they didn't. Like you said its the honesty part that causes the issues. Someone on here probably knows the most efficient way for landowners to be able to verify if what they are being paid is the correct amount. Like so many other things in life, the system being used now is complicated enough for unscrupulous individuals to take advantage of others. I was just hoping there was a more simple way of verifying the production of a well.
Permalink Reply by Philip Thackray on June 16, 2015 at 4:50am

HawkDriver,

I agree.  They know the numbers and provide information to the landowner that has been filtered through them.  Lots of room for errors or outright deception.

I have taken my residual gas and NGL numbers for a month, converted the NGLs back to mcf (see table) and compared those numbers to the well head mcf numbers that XTO has reported to PA state and they match up ok, so if they are lying to the landowner, they are lying to the state.  How transportation, gathering and processing (the three deductions on an XTO statement) are calculated - who knows?  The prices the commodities sell for - they tell me.  Who are they selling the stuff to - I don't know.  And so on.  Only a full company audit (if successful) would unearth the many pieces of data needed for a full true accounting.

Note: I had to put the table in a full width window to display properly.  The table is a page or two downstream

Phil

Permalink Reply by bo boboski on June 13, 2015 at 8:52am

It comes down to someone ,somewhere, trying to figure out just what is the product worth, "at the wellhead". Since no-one buys it at that point, You are usually left with the seller as the one coming to that price. They sell it, AFTER they separate it, and truck it,or transport it in a pipeline,maybe even after they compress it,and maybe process it. This is how they are getting away with deducting these costs from your royalties. Until someone comes to the wellhead, and brings their checkbook, it's gonna be a sticky situation.

Permalink Reply by Frank Walker on June 13, 2015 at 10:02am

It's important to realize the value of natural gas "at the wellhead" is essentially zero.  Anyone who signs a lease based on wellhead value is making a "beeeeg mistake".

The value of anything, anywhere, is the amount a ready, willing, and able buyer will pay at that location.  There are no buyers of NG at the wellhead.  Gas is sold in finished form at pipeline entry.  What the gas companies do, when they have found a sucker willing to lease based on "wellhead" value, is to impute a wellhead price by working backward from their price at actual point of sale.  This, for Lessors, is like handing the gas company a large mace, called "deductions", to use to beat you over the head and lower your sale price without mercy or concern.  Any lawyer who condoned signing of a "wellhead price" lease needs to be took out behind the shed, hanged by his thumbs for a few days, then forced to find a different line of work. 

Permalink Reply by Philip Thackray on June 13, 2015 at 12:03pm

In PA, the state Supreme decided what is due the landowner in the case of Kilmer V. Elexco Land Services.

Here is an excellent summary of that ruling:

http://www.duqlawblogs.org/blj/wp-content/uploads/2012/05/hantz.pdf

The "Net back" method of calculation was established by the court.  This method supports the system of deductions favored by the O&G companies.

The Net back method will be used to calculate royalties for any lease which uses the term "well head" price as the means of calculating royalties in PA.

In PA, "well head" pricing means all the deductions that the O&G company wants - the Pa Supreme court says so.

Phil 

Permalink Reply by Dr. Larry A. Maxwell on June 13, 2015 at 1:30pm

OK TY for the various responses but they miss my point so far. The government has a standard definition for wellhead value which I provided in my inquiry. It is the quantity produced at the wellhead divided by the reported total value, which is determined by the state or other government agency.  Where does one find the official governmental agency reported value and hence the standard wellhead price.  This has nothing to do with production cost or deductions, that is a separate issue, the wellhead price is a governmental determination. Where does one find the official governmental wellhead price?  The MarcellusShale.org site (the paid portion) states the wellhead price for Oct. 2014-Dec. 2015 is $2.80, what agency reported that figure?  Where can the official governmental figure be found.

Permalink Reply by Frank Walker on June 13, 2015 at 11:51pm

Unlike pros here, I've only been into the NG thing intensely since about 2008.  I got in because I needed to lease my land and I knew nothing about the entire matter.  Since 2008 I have remained deeply involved even though I leased several years later.  So that makes seven years of having followed this entire NG mess, but only as a landowner . . not as a pro.  However:

Throughout those years of participation I've not anywhere run across the term "standard wellhead price".  Prior to seeing your post, had you asked me about such a thing, I'd have just laughed.  But you appear to have signed a lease containing such wording and I respect that fact.  Hence, I strongly suggest you have a heart to heart discussion with your lawyer, the one who guided you on this, at your very earliest convenience.  Your lawyer obviously knows more about this than many of us here, certainly myself included.

If you signed a lease without assistance of a lawyer, unlikely as that is, I would venture to say you were hornswoggled.  I can tell you, with or without legal counsel, I'd never have signed such a thing.  Never!

Permalink Reply by Dr. Larry A. Maxwell on June 14, 2015 at 12:52am

We did have an attorney, we were part of a very large group of landowners in Bradford County who made our lease with Fortuna. Our lease has been called one of the best leases out there because of all the provisions which were included, such as the high royalty and no deductions allowed.

Our lease is now owned by Chesepeake, Anadarko, StatOil and Mitsui.

Chesapeake has been amazingly good, honoring all the terms and paying the highest prices.

Anadarko has been the most unethical, disregarding the terms of the lease saying they do not have to follow them, and not paying us yet, even though the others have been paying for 2 months.

StatOil, as others have observed, are also unethical. Their "base sales price" is 1/3 of market value. When asked for documentation they said they do not provide that. We informed them our lease requires them to provide that.

Mitsui took deductions but when we called them and had them look at the lease, they apologized and said they will reimburse them.

As far as the terminology in the lease, the Lessee is to pay a royalty "equal to the current market value at the wellhead." 

According to the U.S. Energy Information Association the wellhead price is "Price of natural gas calculated by dividing the total reported value at the wellhead by the total quantity produced as reported by the appropriate agencies of individual producing States and the U.S. Bureau of Ocean Energy Management."

That is not based on what the company sells it for but on a figure, determined by a governmental agency for all production and sales.  The U.S.E.I.A. says, in absence of a governmental agency providing that figure, an average of the sales price on NYMEX, the  Henry HUB and 5 other hubs shall be taken to provide wellhead price.value. That of course will vary each day, but the end product is a monthly average and an "official standard" to base a lease upon. That eliminates the arbitrary "we sold it for such and such a price claims."

I just want to know where the MarcellusShale.org paid portion of this site came up with their figure for the wellhead price they include n their reports. Is there a governmental agency in Pennsylvania coming up with that price? And where do I find that, Or...does the paid portion of this site, for their reports use the above formula?

Permalink Reply by Frank Walker on June 14, 2015 at 1:09am

Larry

OK, got it.  Now I understand much better.  I was thinking you were acting alone.

Well, as you must be aware, you're just one of a large number of Lessors being cheated by Chesapeake . . and possibly other gas companies.  The Bradford County Commissioners, as announced only within the last few days, are considering joining a lawsuit on behalf of landowners such as yourself:

Sue 'em!!

There are (AFAIK) several lawsuits currently underway, each brought by differing (groups of) parties.  Not really sure where you're going with (possible) individual action.  Wish you well.

ETA

On the "wellhead price" thing:

I stand by what I wrote earlier.  I think the term "wellhead price" does appear even in my own lease.  However, any such reference, or use of that price, is completely overridden by a substantive Addenda provision which bases my royalty on the actual sale price of finished gas at point of sale to an unaffiliated third party.  

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