Chesapeake Accused Of Underpaying Natual Gas Royalities

Updates

  
March 12, 2014: WallStreetCheatSheet is reporting:

In February, Pennsylvania Gov. Tom Corbett wrote an open letter to Chesapeake Energy Corp. CEO Doug Lawler, questioning and criticizing the firm for its failure to resolve complaints of unfair and possibly illegal deductions of post-production costs from natural gas production royalties owed to private landowners in the state.

“Despite communicating these concerns several times, I remain disappointed that the complaints of my constituents continue to go unheeded,” wrote Corbett. “It defies logic that, in some cases, leaseholders are being advised that they may actually owe money rather than receive the fair and just royalty to which they are entitled.”

Actually, that does not defy logic. Lynn Helms discusses it almost every month in his annual Director's Cut. 
 

Original Post

The Wall Street Journal is reporting:

Pennsylvanians who embraced the natural-gas drilling boom that has swept the state are starting to sour on one of the biggest names in the business: Chesapeake Energy Corp.  

Some property owners are accusing Chesapeake of shortchanging them on royalty payments for pumping oil and gas from their land. The public outcry has grown so loud that Republican Gov. Tom Corbett, a longtime industry supporter who has received campaign contributions from the company, wrote an open letter last month asking the state attorney general to investigate.

Chesapeake declined to comment on the royalty disputes, but said in a recent letter to the governor that it is abiding by the terms of its contracts with landowners. In Bradford County, a rural area in northern Pennsylvania where a lot of the drilling has taken place, anti-Chesapeake sentiment is running high, said Doug McLinko, a county commissioner. "Bradford County is a pro-gas part of the country where we support hydrocarbons 100%," he said, "but we don't support everyone who's doing it."

I remember blogging about Chesapeake natural gas shenanigans when I first started blogging. See link here.

For Investors Only: CHK To Deduct Expenses From Royalty Checks -- Folks Could See Barnett Shale Royalty Checks Decreased By As Much as 25%

Update

March 12, 2014: royalty owners being charged for transportation costs, post-production costs that exceed value of natural gas. Some say that defies logic. Not really.

August 21, 2011: I first posted the story below on August 11, 2011. Google "Chesapeake deducts 25% royalties" to see the number of posts about Chesapeake's decision.

Original Post

Link here.

This has to be one of the stranger stories I've read in a long time. CHK would hate to see royalty owners get two checks for same well, so CHK decides just to cut royalties by 25%.

Let's see, two options: a) send me two checks for a partial cut; or, b) send me one check with a full cut.

Hmmmm.

Here's the story, as I understand it:

1. Total, the French oil giant, recently paid $2.25 billion for a 25 percent interest in Chesapeake's Barnett Shale operations. 

2. There are costs associated with gathering, processing, and distributing (GPD) natural gas once it comes to the surface.  Chesapeake has historically not charged the royalty owners for the costs associated with GPD.

3. However, Total, the French company has routinely done that (gee, why does that not surprise me?).

4. So, a royalty owner in the Barnett, now has two companies to work with: CHK, which controls 75% and Total, which controls 25% of the natural gas that comes to the surface on their leases. 

5. CHK/Total could work out a deal where royalty owners would get two checks -- one from CHK which would not deduct costs associated with GPD, and one check from Total which would deduct those costs. Or CHK/Total could work out a deal where royalty owners would get a single check: one in which the entire amount would be subject to the GPD costs. 

6. CHK asked themselves: would their royalty owners like two checks for a bit less money, or one check for a lot less money.

Here is the first part of the story in case the link is broken:

About 20,000 royalty owners who have Barnett Shale natural gas leases with Chesapeake Energy will likely see their royalty checks slashed by roughly 25 percent after the company deducts expenses associated with post-production, such as gas gathering, compression and transportation.

The actual percentage and dollar amount decreases in royalty checks will vary monthly based on natural gas prices, post-production costs and output from wells.

Chesapeake is the No. 2 producer in the natural gas-rich Barnett Shale, which underlies more than 20 North Texas counties. 

This is the reason for the single check and 25% cut in royalties:

[A company spokesman] said the company's decision to begin assessing royalty owners for post-production costs was triggered by its agreement with Total, the French oil giant, which paid $2.25 billion for a 25 percent interest in Chesapeake's Barnett Shale operations.

Total was about to begin deducting post-production costs from royalty owners' checks based on its share of the Chesapeake wells' production, so Chesapeake also decided to begin assessing for the costs, Hood said.

Otherwise, payment to royalty owners would have required two separate checks, and "it didn't make any sense to have two different checks from two different companies," [the company spokesman] said. 

This sounds so incredible, I may have the story wrong, but that's how I read it.

If it's accurate, it falls under the category: I can't make this stuff up. 

I don't know how much it costs to find and produce natural gas, but it seems incredible that once brought to the surface, it costs 25% of its value to gather, process, and ship. What makes me think
that buyers of compressed natural gas are also charged for gathering, compressing and shipping?

This is like the potato farmer being charged for the costs associated with "compressing" the potatoes into French fries and for the shipping of the French fries to McDonald's. And, of course, the customer buying those French fries is still paying for the value-added processing from raw potatoes to finished products.