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!

Oil Company Cheating Me Out Of Money!

This is amazing and a caution for those who own mineral rights. Not once, but THREE times last week, I discovered that an oil company operator is either not paying me right or not paying me at all! I have many properties all over the USA which I have accumulated over a long period of time. Here are the stories.

Story 1 -- A lady called me and wanted to buy her mineral rights in Colorado. We came to an agreement and I bought her out. I sent the paperwork to the operator (a very large global company), and they began paying me. No problems. Then, months later, the brother decided he wanted to sell. We made a deal, I bought him out and sent the operator the papers. But this time, it had changed hands and was owned by a small operator. After about three months, it dawned on me that I was not receiving royalties for the brother's part. I notified them and found out that they had been continuing to send the royalties to the brother! He didn't tell me and they didn't either. If I had not caught it, they would STILL be sending him the checks. I showed them copies of my letter from months ago. Oops, she said, okay, we'll start paying you. I said, Fine, but you have to pay me my back royalties, too, you made the mistake! She said, Well, we can't pay you for what somebody else has already received. I said Au Contrare! Yes, you can and yes, you will, that's MY money! Just because your company goofed up is not my concern! So, now we have a battle going on. I'll get the money.

Story 2 -- Similar situation. Somebody in Texas wanted me to buy them out. I did so, sent the papers to the operator. That was months ago. This past week, another member of the seller's family notified me that he had received his first check. I told him I had not even received a division order! So, I notified the company, another huge company. Oops, the landman said, I guess we made a mistake and missed that deed. So, they had sent a division order and check to the previous owner!

Story 3 -- About five years ago, I bought an interest in Louisiana. About three years ago, they drilled the tract and I have been receiving royalties ever since. Now, the operator notifies me that they had missed a deed where I sold part of my interest. (I sent them copies way back when.) So, all of this time, they have been overpaying me. Reason I didn't catch it is because the title on that deal is a can of worms, it's complicated. But it's simple for them to simply transfer a portion of whatever I owned to the man I sold part of my interest to. But, they missed it. I own a lot of properties, it's hard to keep up with all of this! But, I do try to monitor things. Bottom line is they are going to have to deduct years of royalties from my account because I want them to pay my grantee what he is owed and make him whole. Good news is they agreed to do so.

So, lesson learned is that one has to be careful! As for me, just more proof that managing producing minerals is a never-ending battle to be paid correctly!

Oil & Gas Royalty Rights (Royalties)

In the United States and in some parts of Canada, those who own mineral rights usually own the royalty rights to their proportionate share to the oil and gas production revenue from oil and gas wells. The owner of the executive right is the one who has the right to explore for oil and gas on the property or lease it to an oil company. In return, he will enjoy a royalty, a share of the production. The royalties are usually a minimum of one-eighth (1/8th) of the well's production, multiplied by his share of acreage within the production unit.

For as long as there has been oil and gas production in the USA and Canada, royalties have been bought and sold. One can readily sell royalties in any oil and gas producing region, it's just a matter of finding a willing and reputable buyer. The oil rights or gas rights value varies widely. If you wish to sell oil rights or sell gas rights, bear in mind that if the royalties are paying from a well that is a good producer, obviously, the royalties will be worth more than those from a poor producer. The value is calculated from the projected income stream from future production. The value is also dependent on whether or not the income is declining.

There are many reasons why owners choose to sell oil or gas royalties. Perhaps they wish to buy something or provide for children's education. Maybe the owner just wishes to enjoy life more or to enjoy retirement more with sure-thing cash settlement. If one keeps the royalties, it may take many years to achieve the same amount of cash income that a sale of royalties will produce. And, some owners sell because the royalty interest is small and the paperwork is burdensome. It just might not be worth the hassle of keeping it. A lot of owners find it complicated and just wish to simplify their life and leave it up to a buyer to monitor the production and revenue. Increasingly, older generations who own royalty rights are dying off and children and grandchildren inherit the royalties; the royalty interests are diluted by the number of heirs and many would just rather sell something they know nothing about.

The oil and gas business is daunting, complicated to the royalty owner, but selling royalty rights is not difficult with an experienced royalty buyer. A sale of royalty rights can be accomplished fairly quickly but it can't happen in a day or two. It does take a little bit of time but a good royalty buyer makes the process easy, as he will do most all of the work, making sure that the royalty interest is transferred properly with the county and also the oil and gas company which operates the oil or gas well. Whether you wish to sell oil rights or sell gas rights, you can enjoy a lump sum settlement payment for your royalties.

For more information about selling oil and gas rights, read this site about selling royalties or contact this blogger.

What Is A Non-Participating Royalty Interest (NPRI)?

The oil and gas business is certainly a challenge! It's a very complex business. For mineral owners, it's quite daunting to understand mineral rights, especially, since many mineral rights owners inherited their rights and really do not know what they have. Daddy or Grandpa might have bought something 50 years ago, then passed and didn't really keep ideal records. This is quite common! So, say you found some papers and you know it has something to do with mineral rights. What, exactly, do you have?

Do you find a reference to a non-participating royalty interest? For short, it may be called NPRI. A non-participating royalty interest is the right to receive oil royalties or gas royalties, pure and simple. It does not include some rights that a mineral rights owner enjoys. Such as, the right to explore for oil and gas. (This is moot unless you are Bill Gates, as oil and gas wells cost a small fortune to drill.) More apropos, a mineral rights owner has the right to lease the lands to an oil and gas company (grant an oil & gas lease) and let the oil company (who has big bucks) drill and explore. And, if a mineral rights owner did, in fact, own the royalty rights, the oil or gas company will pay him royalty if a well hits. Lastly, a mineral owner enjoys the rights to a lease bonus (lease signing bonus) and annual rentals (rentals are uncommon these days). So, a non-participating royalty interest is just basically the right to receive oil checks or gas checks (royalties). Almost all sales of mineral rights these days are just that but in decades past, sometimes an NPRI was carved out of the mineral rights.

Perhaps you have discovered that you inherited an NPRI. Maybe some day you will be contacted by an oil company saying that they have drilled a well and they wish for you to ratify an oil & gas lease that the mineral rights owner has signed. The document is called just that -- ratification. This is quite common. Once you ratify and are put in "pay" status, you can then enjoy royalty checks when oil/gas production occurs. Hopefully, the oil or gas company will hit something good and you'll get regular checks. If for any reason you wish to sell these rights, it is possible to do so. Here is more info about the non-participating royalty interest (NPRI), or just contact me for help.

Oil & Gas Operators Deducting Too Many Fees

Oil and gas exploration entered a new era in 2008 with the announcement of the discovery of the Haynesville shale play in Louisiana (and later Texas). The Barnett shale, Fayetteville shale and other shale plays had seen some development before that but the Haynesville broke it wide open.

This post is about deductions from royalty checks to the mineral owners. Prior to 2008, in my opinion, all was pretty much well. Operators did not make many deductions to oil and gas royalty checks. We are primarily talking about deductions pertinent to natural gas, not crude oil or condensate. The problem for royalty owners has surfaced in the past few years. The two worst companies operating in the Haynesville shale which I have seen are Chesapeake and Samson. Wow, they are socking it to the royalty owners. Instead of a few percent, I've seen it as high as 33%. Say your check's gross amount due you is $1,000; they deduct up to $330 for fees. And often, exactly what these fees are is impossible to determine. This isn't right. Some operators don't even show deductions at all, they just pay the royalty owner a lower price for each unit of natural gas. Something should be done about this. And, in fact, something is being done about it in some cases, as numerous lawsuits have occurred. What a shame. The governing authorities should step in here and protect royalty owners. But, who knows if that will ever happen. And, in some states, a class action lawsuit, where a lot of mineral/royalty owners could band together in a class action, it just isn't possible due to the way the laws are in that state. I hope things will improve.

I have had people contact me wishing to sell their mineral and royalty rights because it's just not worth dealing with it due to excessive deductions and fees reducing their royalty check amount. These regular oil and gas checks sure come in handy for people but you sure hate to be "taken." I understand their thinking and regret that operators put people in this position. And as I said, this only started happening in the past few years. For anyone thinking along these lines (about selling royalties), here is more info: selling mineral rights.

How much will my royalty check decline? (Oil royalty / gas royalty)

Mineral rights owners usually own the right to the royalty right -- royalties. There is a provision in an oil and gas lease for this. It's commonly a minimum of one-eighth of the well's production, multiplied times their share in the production unit. (In modern wells, they are usually pooled with neighboring parcels into a production unit. Average production unit size is 640 acres, but it can be larger, say 960 acres or 1,280 acres.

Let's take a hypothetical royalty owner who has sufficient acreage in a production unit such that when the well first comes in, it is paying him $1,000 per month. Nice! How long will it stay at $1,000/month? Impossible to say, it might be one month, three or four months, or more. Usually a month or two. (This also depends on how the operator is producing the well. They might keep the well production up for a few months using different choke sizes at the wellhead. Anyway, at some point, it will start to decline. In today's resource plays and shale plays such as the Bakken, Barnett, Haynesville, Eagle Ford, Tuscaloosa Marine Shale, Marceullus, Utica, Niobrara, Cline, etc., like the tight sands drilling of the past couple of decades, these reservoir rocks are very tight (dense) and they must be fracked to get the oil or gas out. The word "frack" is short for "hydraulic fracture" and this (along with horizontal drilling) is what makes modern oil and gas exploration tick. And since these shales or tight sands are not very permeable, the nature of the beast is that production drops off much more rapidly than in a conventional (say, permeable sandstone, limestone or dolomite) reservoir.

How fast? Generally these modern wells will drop 50-85% during the first year. Then, say, 35-50% the second year. It will flatten out some after that but it will always be decreasing over time. Bottom line is that 2-3 years later, one's royalty check is usually only about 5 to 10% of what it was in the beginning. So, plan accordingly and do not get used to the big checks for any oil or gas well, because they will NOT last! Enjoy it while you got it!

Here is a production chart from a well I looked at recently that is actually pretty good. Two years later, it's producing 20% of it's initial rate. That's good for these type wells! This is a Haynesville shale well.

WELL #1

This next Haynesville shale well exhibits a more normal production decline shape where it declines rapidly in year 1 and flattens out. Two years later, it is only producing a small fraction of its initial production rate.

WELL #2

We don't know how long these wells will produce because these new resource plays are pretty new. Operators say they'll produce for decades and I hope that's true but operators love to toot their horns because they are trying to please stockholders. We just don't know. I do know that I have looked at quite a few wells that dropped off like a rock and they will not last but a few years. There is no way they can continue much longer, as they are barely scraping a profit right now, and still declining. I am hoping that in the "sweet spots," where production is good, the wells will behave as operators predict and last for a long time once they start their flattened decline rate. Time will tell! Welcome to the oil patch, risk is everywhere! Including risks such as the reservoir rock fractures closing once the reservoir pressure is reduced to a certain point. If the fractures close, gas entry to the wellbore could largely shut down and it would be over. (They'd have to plug and abandon the well.) Scary! (Scary because we don't know!)

But, we also have the benefit of being in an amazing technological revolution, so, who knows what they will come up with twenty years from now!

As for one's particular royalty check income stream, if the income is sufficient, one can just hold what they got. But, if one ever gets to the point that he doesn't want to deal with the paperwork or deal with small checks and would just rather cash out and get a lump sum, or perhaps he needs money for whatever reason, an option is sell for a lump sum cash settlement. For info, here is a website for selling royalty rights.

Good luck, I hope they hit a gusher on your place and you get rich as Jed Clampett!

Sell Mineral Rights In Tuscaloosa Shale Play

If you have any interest in selling all or part of your mineral rights and royalty rights, and own property in the following Louisiana parishes or Mississippi counties, contact this mineral rights buyer site -- Payday Minerals, LLC. They speculate in various parts of the USA, including Central Louisiana and South Mississippi. Tuscaloosa shale play buy area: Louisiana parishes -- West Feliciana parish, East Feliciana parish, St. Helena parish. Mississippi counties -- Wilkinson county, Amite county. The area may expand or contract at any time.

Value Of Mineral Rights

There are many factors in a mineral rights valuation. There is no simple answer. For purposes of this blog, we will deal only with the value of oil and gas. If you have coal in your area, that's a another subject.

As for oil and gas, are your mineral rights in a region where oil and gas production has been found? If not, the value of your minerals is not very much at all. If you're minerals are in an oil or gas producing region, it could be substantial. In some areas where there is a shale play going on, you could reap a large payday, indeed. Mineral rights buyers such as Payday Minerals have paid out millions of dollars to some lucky mineral owners.

Another factor is whether you have an existing oil and gas lease on your property. And, if you are already receiving a royalty production check, that can affect value, in either direction. It's quite a complicated formula but the good news is that mineral owner doesn't have to figure it out. Here is one explanation of how to sell minerals.

Mineral rights buyers are gamblers. Oil and gas exploration is a very risky business and it's quite a roller coaster ride. If the price of crude oil and/or natural gas goes down, the income or potential income from mineral rights will go down, as well. So, other than cash, nothing is a sure thing. Companies who assemble a mineral rights or a royalties portfolio spread their risk by buying thousands of acres across many tracts. This way, if one goes bad, it doesn't hurt them so much.

And again, if your mineral rights are in one of the shale plays, such as the Haynesville shale, Eagle Ford shale, Colony Granite Wash, Niobrara shale, Marcellus shale, Fayetteville shale or Bakken shale, your minerals could be worth a small fortune, or a large fortune, depending on how many acres you have.

In future posts, other aspects will be covered. There is quite a lot to it!