Thursday, September 29, 2016

Royalty Deduction Ripoffs

Royalty Deductions, Circa 2016

Chesapeake, Samson, Memorial Resources, and other oil and gas operators have taken on some shady accounting methods. Mineral and royalty owners are losing a lot of money! Here's how.

Let's say Henry Hub natural gas price is $3.00. Let's assume that your operator's natural gas price is equivalent to the Henry Hub price. It might be higher or lower but we'll use that for simplicity. On your check stub, the oil company might show the gross price as $2.40. Well, guess what. By the stroke of a pen, $.60 just evaporated. And nobody even knows it unless they examine their check stub. $.60 divided by $3.00 is 20%. You just lost 20% right there. And then they have the audacity to make deductions on the stub beyond that. They might charge you for severe compression, dehydration or "transportation" charges. You may end up losing 1/3, 40%, even more by their shady accounting deductions. It didn’t use to be this way! Prior to the "shale revolution," operators might make minor deductions on natural gas checks... a few percent. It's getting worse with these modern-day royalty deductions. With some of this stuff, it is out and out fraud. And now, numerous lawsuits abound, and with good reason.

Some mineral owners / royalty owners have a "cost-free" clause in the oil & gas lease. This is a good thing, but still, companies like Chesapeake might just ignore it and make you sue them. Bad company! If you sign a new lease, make sure to get a good oil & gas attorney that practices oil and gas law IN YOUR STATE and have him/her draw up the strongest "cost-free royalty" clause one can devise! And hope they honor it.

Now, beyond that rant, realize that the Henry Hub is a broad generalization of what regional gas prices could be. The company might have a contract that is somewhat different. It is not simple, but believe me, CHK and other companies are ripping off mineral owners. In some states, one can join a class action suit, and that can be a good thing. Nobody likes lawsuits but these companies are ripping people off. We are being "pencil-whipped" with these bogus "transportation charges."

So far, I haven't noticed such royalty deductions with oil production, it's just for natural gas. Here is to hope that they don't start ripping us off with deductions on our oil checks!

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