Wednesday, March 4, 2009

Are You Surprised?

The D/FW Airport is at odds with Chesapeake. The Airport believes that royalties are not being computed properly (are too low) and that hiring practices at Chesapeake have not lived up to the terms of the lease agreement. For more details read the article by Trebor Banstetter at the Star Telegram.

Are you surprised? I'm not. The oil and gas business has had a less than stellar record for fair and honest dealings. Why would they change now?

Shaving funds from royalties is not a new concept. The terms of most leases are unclear on exactly what prices are to be used in calculating royalties. They often use terms like "similar" or "comparable" that are subject to interpretation (and legal disputes). If you have a lease, what does it say (please post a comment)?

According to Trebor,

Under the lease, Chesapeake is required to pay a 25 percent royalty based on the highest market price paid for gas from a field comparable to D/FW, or based on the actual proceeds received from the gas sale, whichever is greater.

Note that Chesapeake and other developers do not have any trouble reporting the worth of their gas leases and proven reserves to shareholders based on Nymex prices but they don't want to use those prices in paying royalties. Wonder why? Could it be that they want to obfuscate royalties so that they can "adjust" them appropriately to "wellhead" prices that are difficult to pin down?

If they will shave royalties to huge mineral owners with deep pockets like the D/FW airport, what will they do to small property owners in residential areas? The development companies say, "just trust us." If you think they will be on your side, think again.

The state could protect mineral owners rights and insist that all royalty agreements be based on public commodity market prices, not on some black, off-the-record, closed-door market that is subject to relatively easy manipulation and "management." But, not unlike many issues, it takes time for the consensus to form and government officials to do the job for which they are elected.

So it is up to us. Public pressure is required to move the pendulum in the direction of the public good. You get what you bargain for ... not what you deserve. Let your city, county and state officials know how you feel.

I know it is not easy to make a change. I know it takes effort and persistence to pursue and communicate with lawmakers. However, if you want the public to be protected, it is time for action. No one else will do your part. If you do nothing, the developers just get richer and smile all the way to your bank to cash your check.


1 comment:

Paul Eckert said...

Just some information from my gas lease:
We were among the first to sign up in 2006.
Harding was the originator of the lease at that time (it was later sold off to Exxon), and the terms were:
$800 an acre signing bonus.
20.5% royalty.

Our lease quietly expired on 3/1/2009 and no wells have been drilled.

I think your advice about holding on to your mineral rights is absolutely right. It can only go up in the future.