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Permalink Reply by 0ym9x5ag7ury2 on September 10, 2015 at 4:48pm

Buck Well 1H went into production Feb 2014. We have never had a net positive royalty paid for NGLs. Our percent deduction has ranged from 100% of NGL value to 176% of the NGL value. This can be seen on the CHK Revenue Dept Spreadsheet attached by looking at Product Code 4 then moving across the spreadsheet to the Percent (Deduction) column which is 5th column from the Right.

This was when Propane was $4 a gallon, oil was over $100 per barrel and Natural Gas was at a high.

Things were good for the O&G companies. In 2013 Abrahm Lustgarten of Propublica reported that by his estimate royalties were at 10% of the lease agreed upon royalties for 70% of the landowners. Our O&G producer doesn't share the wealth they agreed to in writing.

Buck Well 6H has no NGLs listed on one landowners Royalty statements. He has been told the NGLs are bad, I say that's impossible.

I've had the NGL Royalty Challenge for over a year. Show me you actually received a royalty from NGLs and I'll give you one month of my royalty on 2 acres which is <$32 this month. NO ONE HAS RESPONDED WITH A POSITIVE ROYALTY FOR NGLS!

The plan as I see it, is and has been to take the NGLs with no royalty payment. The ODNR doesn't track NGLs and Ohio law doesn't require a severance tax on NGLs.

All of Ohio's landowners under production will see that the Negative amounts for the NGL royalties are larger than the Positive amounts for NGL royalties resulting in a negative royalty which is subtracted from the Oil and Gas royalty.

From my memory, on my first royalty statement, I saw +$8,000 paid for NGLs at Buck Well 1H with -$24,000 charged for NGLs. This was a -$16,000 charge against our Oil and Gas Royalty.

I notified the governor and attorney general of this problem, and have since notified all departments of the state of Ohio of the theft in progress with evidence provided and laws being violated. No Response to date.

We just paid 18 cents a gallon to give NGLs away.

Here is where your NGLs are going - Propane: See your local propane company prices. They were 60cents per gallon last time I checked. Pentane: More than likely are being sold at the pump today after processing in Canton as I heard planned some time back. Methane: in liquid form, could be going anywhere. Ethane: is piped and shipped by rail, at a minimum, to Louisiana and possibly other locations where Cracker Plants are located. I'm sure the Ethane isn't cheap when it arrives out of state. Butane: can be used to fill lighters and canned to be used as Refills, which aren't cheap. I'm sure there are other industrial uses for Butane that I'm not aware of.

If you go to propublica.org and read the stories about our producer you will find they have always taken advantage of landowners when O&G was good. When things get tough they take from the landowner royalties to stay afloat. I have an XL spreadsheet that shows how the price paid for our products slowly drop from 90% of fair market value to 40% of fair market value up to Dec 2014. It gets lower in 2015 as oil prices drop.

Attachments:

• CHK Buck Well 1H Spreadsheet.pdf, 2.8 MB

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Permalink Reply by Janice L. Hancharick on September 11, 2015 at 5:15am

It is VERY frustrating to see the term "fair market value" in a leasing document, because it really doesn't nail down the question "Fair to whom?"   I'm guessing fair to big business and fair to lease holders are NOT THE SAME!  We need to insert a better term ... perhaps equal market share?

Note on OGJ site that legislation by both parties to end the our country's ban on exporting oil that's been in existence for 40 yrs..  Supposed to reach the President's desk in December ... a Christmas present perhaps?

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Permalink Reply by Charles Hurlburt on September 18, 2015 at 7:05am

Janice,

The definition of "Fair Market Value" is the value of an object, which results in a sale between an unforced seller and unforced buyer, both having the same level of knowledge concerning valuation. 

In other words it is "fair" to both sides at the time and place where the transaction occurs.  Nobody HAS to buy or sell and everybody involved understands the value represented.

It may well be that if you could have sold it yesterday you'd have gotten more or if you bought it next week it would have been less.  Or if you traded in in Pittsburg, Rather than Chicago the price would have been different.

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Permalink Reply by Undecided About Oil on September 18, 2015 at 8:35am

C.H.

  Except, Chesapeake does not sell to any MARKET. Chesapeake only sells to it's "sister" company -> CEMI. CEMI gives Chesapeake a low ball price. Because CEMI deducts the COSTS. And CEMI skims their own ROYALTY. Then CEMI sells HIGHER to the real MARKET. CEMI makes a profit and Chesapeake claims a LOSS. The Land Owner's royalties are computed on Chesapeake's so-called LOSS. Even though the lease states that Chesapeake cannot sell to any "sister" company.

  The landowner can now sue Chesapeake and give 40% of the recovered Royalties to the lawyer. This is a Lose-Lose situation for the Land Owner unless a Class Action lawsuit is won and ALL Royalties PLUS DAMAGES go back the Land Owners  and Chesapeake is forced pay ALL lawyer fees. A Class Action Law Suite may be possible since large groups of ALOV landowner signed the exact same lease.

This law suit:

Law_Suit

is the exact same issue that ALOV landowners are experiencing.

CHPK is cheating everyone.

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Permalink Reply by Joseph-Ohio on September 18, 2015 at 10:00am

U D A O,

If all the alleged is true and proven it's all good to know - good to know.

If that's what's cooking I see it as an incredible waste of time and resources when all of us should be recovering and growing.

If that's the game, shame on them all for putting all of us and the rest of the citizenry through it.

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Permalink Reply by Charles Hurlburt on September 18, 2015 at 10:07am

That doesn't change the "fair market value" one iota.

What you're talking about is the difference in value "at the wellhead" versus the value at a downstream sales point.

Most leases call for royalty to be based on value "at the wellhead".  There are good reasons for the lessor (you) to prefer that, not least of which is that any losses downstream of the "wellhead" (actually the lease meter) automatically becomes "somebody else's problem".

But many lessee have sales contracts which require them to bear the liability for loss farther downstream, as well as bearing the cost to treat, dehydrate, compress, and do anything else needed to condition gas for sale.  All of this costs money and, to get the value "at the wellhead"  there has to be a "netback" or cost deduction from the price at the sales point..

Now the fact that Chesapeake Producing is selling gas through a subsidiary adds another wrinkle, but not an insurmountable one.  The lease contract should provide for an "arms length" price.  Does that mean that the lessee cannot sell to its gathering subsidiary?

No; if that were the case, and X Producing was selling to X Gathering it could be argued that the lessee would owe no royalty since there was no arms length transaction.  What has developed to prevent that interpretation is defining  "arms length" so the transaction (if less than arms length) is compared to similar transactions where there IS an arms length circumstance. 

Did CEMI charge the same (or nearly the same) fees to another gas producer?  If yes then you are probably OK, if no, then mybe you have a case.

This is the biggest controversy I know concerning lessee/lessor relations and when it goes to court, sometime the lessee wins but sometimes the lessor wins, as well.  As far as I can tell, of the cases that actually went to Court and a judgment made, Chesapeake has won more than they have lost.  Of course they have settled more than they have tried again as far as I can tell, 

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Permalink Reply by Joseph-Ohio on September 18, 2015 at 1:43pm

Wow.

So, I'm interpretting (that in order to be certain that a positive royalty is paid to the lessor) the lease language must be written specifying that the royalty will be / is calculated in the same manner that would be used for calculating royalty earnings for 'an arm's length transaction' ?

Incredible - but if you say so.

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Permalink Reply by Charles Hurlburt on September 18, 2015 at 3:08pm

Joseph,

You probably DON'T want that language unless you're prepared to assume the risk of loss.  Say you have royalty coming in, and right now you re getting $1000.-00 per month.  Now say the  lessee is selling the gas in Pittsburg, and he is getting $5.00 per mcf, but the netback (to you) is only $ 2.50 per mcf (I am making these numbers up, you understand, so they probably are way off).  So you are getting 50% of the "retail" price.

Now assume that there is a pipeline leak, and all your gas is lost.  What are you owed?  If you based royalty on the "wellhead" price (custody transfer is at the lease) you are owed $1000.00.  If you took the "sales point" price (custody transfer at some downstream sales point, you are owed zero.  Royalty is defined as a percentage of "gross proceeds from removal and sale of natural gas" or similar language and while they "removed" the gas, it didn't get "sold".,

The whole, "the lessee gets a higher price so the lessor is being cheated" argument was explained away by Charley-KY on an earlier thread/  He used a milk analogy--the price a dairy gets for milk is less than the price Ben & Jerry's get for the part of the butterfat that they used to make ice cream, but that doesn't mean the dairy farmer was cheated; it means the Ben & Jerry's added value.

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Permalink Reply by Joseph-Ohio on September 18, 2015 at 3:24pm

However, I'm getting (or it's reading to me like that many complain) that the 'value added' is at the expense of the lessor / landowner - hence the well head price solution with royalty calculated on the basis of an 'arm's length sale' (as presented by yourself in your earlier reply).

Another problem would be that once a method is specified in the lease the lessor / lessee are bound by it. Unless the lease could be written to pay royalty on the basis of that which is most favorable to the lessor / landowner ? Has that ever prevailed in a lease agreement I wonder ?

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Permalink Reply by Charles Hurlburt on September 18, 2015 at 5:05pm

Joseph,

What appears to be happening at least to me is that the condition Ron Hale was so exercised over; that the lessor wasn't participating in the NGLs, is no correct.  It looks to me that they MAY be getting a "share", but the cost of extracting them is more than the value of the product,

And yes as a potential lessor you can demand ANYTHING;  100% royalty  $1,000,000.00 per acre bonus--whatever you want is on the table, PROVIDED you understand that you can price yourself out of business.

Let me share a story with you.  My old boss used to brag about a certain lease he helped sell.  Somebody had drilled  well for oil got a good gas well but didn't have the gas rights, so our group set up an auction with a set bonus and royalty to be set by bid.  When the dust settled, the royalty was 52%,  and no primary term (production had been established) and my old boss used to bring that up constantly.

One day, I asked him just how long that lease produced.  He started looking all embarrassed until he admitted the lease only lasted about three weeks before it quit producing in paying quantities.  Total royalty (at 52%) was about $1000.00.

After THAT fiasco we were able to re-sell the lease for a reasonable royalty (18.75%) get the well going again and make another few thousand dollars over the next five or ten years.

You can definitely kill the golden goose.

Permalink Reply by Joseph-Ohio on September 20, 2015 at 1:36am

Don't get me wrong, we would not want to kill the golden goose.

We would only want a share of the golden egg - without paying expenses for sales decisions (that would be made by the lessee which cause the lessor's / landowner's contracted share to diminish / evaporate) while the lessee and / or the lessee's affiliated (and / or non-affiliated) 'client purchaser' glean positive earnings / profit.

If that couldn't be accommodated, then as 1st partner, we would vote against any contrary sale and to not extract / to sell at all - until a return in step with the landowner's / lessor's contribution (the raw resource) could be accommodated.

Is it possible to write such 'voting rights' into a 'lease' - that would be to say, that a 'sale' of production would not occur unless both the 'landowner / lessor' and the developer 1st agree to the sale ?

Whatever lease language that would be needed to get that job done would be the language we would sign off on.

Don't forget that all earnings / profits are only made possible in the 1st place by extracting resources owned by the lessor / landowner. To extract them, and render them valueless to the lessor / landowner; while the extractor / others downstream see earnings / profit from their sale, would be patently unfair, and smacks of crookery to me, and as I'm reading here to many others.

JMHO

Permalink Reply by Undecided About Oil on September 20, 2015 at 3:43pm

Like I said before , "Chesapeake does not sell to any MARKET". So your definition of a "fair market " is irrelevant because there is no "Market" between Chesapeake and itself / CEMI . Chesapeake sells the oil and gas to ITSELF (CEMI). Chesapeake created a PAPER / SISTER company called CEMI, (Chesapeake Energy Marketing, Inc) which is NOT allowed per the ALOV lease and most other leases. The only purpose for CEMI is make every lease a NET Lease even if you have a GROSS Lease. And finally the Judges / Court System are agreeing  with the landowners that CEMI is just a shell company, created by CHPK, just to cheat the landowners out of there royalties. CEMI is taking deductions that are NOT allowed by any lease.

Law_Suit

There is no "Golden Goose".

The landowners oil and gas is being stolen by CHPK ...

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