Oil Price vs Gas Price on Royalty Statements

Given the amount of discussion there has been recently on the amount people are receiving in their royalty payments i was wondering how people who are getting paid royalties for oil compare to those getting royalties for natural gas.

Seems as though natural gas companies are paying out at about $1.50 per mmbtu (plus or minus $0.50) when the Henry hub price has been between 2.45 and 2.65 for a good while now.  

I don't think any mineral rights owners think that it is reasonable to be getting paid based on 60% of the market value of the product, but i don't really have a basis for what the royalty price should be based on or what it has been based on in the past.  Has it been this way since they first started drilling in the marcellus area (pa for me) 8 or so years ago?  When prices were high were people still only getting paid 60% of the index prices?  Is this a new practice in which the gas companies are just selling to a sister company at a reduced price or has it always been this way?

As a comparison i was wondering if anyone getting royalty payments on oil has seen the same issue in which they are getting paid well below the index prices for oil, or if the payments have always been based on a price below index prices.

For future considerations when leasing could it be written in to a lease that the payments would be based on Henry hub prices to ensure you are getting full market value for your resources?  Or would that just get thrown out as unreasonable by the gas companies?

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Permalink Reply by James on October 15, 2015 at 7:52am

In before Ron goes on diatribe about NGLs and the Buck 1H

Mike MurphyPermalink Reply by Mike Murphy on October 15, 2015 at 11:54am

I GOT HERE SECOND BEFORE RONGOT TO BOO HOO

one f these days maybe they will plug  Buck1H lol

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on October 15, 2015 at 4:20pm

James & Mike,

      This is serious to those who are being stolen from.

Since you got in first & 2nd, how about answering the man's question.

I've taken more action in this O&G theft than either of you could take in your dreams.

In fact I'm typically much more action than talk. 

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on October 15, 2015 at 4:22pm

Chris,

    You are being stolen from.

Permalink Reply by rmc on October 16, 2015 at 12:13am
Four replys over 16 hours and 180 something views puts this number one.
0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on October 16, 2015 at 2:37am

Below are a couple of documents that show what would happen if you had the best No Deduction, Arms Length Transaction sale at Fair Market Price, Gross Royalty Lease, with 18 pages of protection and were leased to a company that doesn't like to deal with all those wordy leases.

Besides as they were quoted as saying:  "It's a good business practice not to pay landowner royalties, then go to court and only pay what the judge orders". Check out the Demchak out of court settlement to see how that works.

Now lets see, if I steal from you then go to court, then settle out of court and get it approved, then I can continue to steal from you with a minor rate of theft reduction of 27% as the Demchak Settlement is doing.

This O&G business is a great way to take someone else's money, legally. Wish they would have allowed us to study this in school. I could have retired at 25 for sure.

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Permalink Reply by James on October 16, 2015 at 7:32am

1. Where are you pulling your "Fair Market" prices from specific to oil? Surely you are assuming that CHK is paid what WTI is traded at for a monthly average for product from the well head. 

2. The % Difference column you did not use a formula? Was this done on purpose to misrepresent your numbers? Maybe you need to go back and redo your numbers. 

Permalink Reply by Jason Cooper on October 16, 2015 at 9:04am

How on earth is he coming up with $4.00-5.00/Mcf as fair market value?  Am I missing something?  Everything I've seen is a lot closer to $1.50-$2.00 

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on October 16, 2015 at 3:07pm

James,

    I did the math for the %Diff column since I got tired of trying to find a formula to do it automatically.

You appear to be brilliant, how about passing the formula on to me when you find one that works.

You get all of my work free, minus the %Diff info.

As far as the WTI price for oil. I figure if I'm paying all of those deductions while having a No Deductions lease, I should get the Fair Market Value when the oil is sold as my lease calls for.

James, what have you done to help the landowners figure out if they are getting a fair share of the products being taken from their wells?

Permalink Reply by Sylvester Deal on October 17, 2015 at 7:16am

Ron,

Your calculation shows paid as a % of Fair Market.  For %difference, divide the difference by Fair Market times 100 for percent, this will work on prices too. Use gross value divided by volume to represent paid price without deductions and compare to sites below for Appalachian indexed prices..

Look at Gatherco.com  (CHK unfortunately) as a listing for monthly Appalachian index prices.  I've used this site for years for monthly closing prices.  Check out Ergon Oil Purchasing website for oil price postings in the OH-WV-PA-NY region, monthly for trailing 12mo and daily back to 20040709.  Different prices for different areas, load size, oil type.  Appalachian Oil Purchasing, now a subsidiary of EnLink Midstream, also posts prices for WV & PA.

OH Oil & Gas Association has a market report (link at front page bottom) that shows daily trends for oil and gas but no history.

Permalink Reply by James on October 17, 2015 at 8:01am

=I2/H2 for your % difference column and the same thereafter. 

First off, At one time I was buying around 10,000 bbl/d in the Appalachian basin. 

All crude oil/condensate is trucked in the Utica. The entity buying it whether it is Marathon, Shell, or Ergon pays based on gravity and volume of the load. Ergon publicly posts their prices here: http://ergon.com/prices (They also provide previous months historical prices. May want to go back and plug the prices into your spreadsheet for a more accurate "Fair Market" valuation) In my experience the big three in the Appalachian Basin pay close to the same. 

This may explain the different prices for your oil. 

The thing about the Utica condensate is that it is not consistent. You will see one lease that has 70 API Gravity and an RVP of 14 or higher and another lease a mile away that has 50 API gravity and an RVP well below 12. 

The very high API Gravity condensate is much less valuable to a downstream refiner as they cannot refine as many products hence the steep discount on Ergon's pricing. 

As you can imagine, trucking is very expensive vs. pipeline and can contribute to getting a price much lower than what is traded on the futures market. 

Permalink Reply by LERRET on October 16, 2015 at 6:36am

Local gas prices relate to pipeline capacity and the end user. If a contract cannot be had at Henry Hub prices (and is not getting to be marketed in that hub) then you take what you can get.  And that applies to the operator.  Gas in the Fayetteville is cheap because the Marcellus gas is selling below the cost to buy and transport gas from Arkansas. And the Marcellus is in such a glut, some gas is selling for $1.10.

The price on your check stub is the price of the product that the operator got. They are not selling gas or oil at higher prices and simply telling you that the price is something else.  Now, deducting all sorts of post-production expenses...that's a different matter.

NYMEX or any hub price as well as West Texas Intermediate is just a benchmark.  A premium benchmark at that and refineries pay the local market in oil the same way.  So just because your West Texas Intermediate is selling for $50/bbl does not mean that Oklahoma Sour is going to fetch anywhere close to that.

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