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.


Sunday, March 1, 2009

Another Year and Counting

What a difference a year makes. The price of gas has fallen dramatically since last year at this time and interest in leasing and drilling has decreased with it.

Signing bonuses of $25K per acre and 25% royalties are no longer the norm in Tarrant County. Instead, $2k and 20% is the going rate. However, that may be a blessing. It will give us time to consider things and reduce the pressure to join the herd.

In fact, mineral owners may end up getting much more by just waiting. This is due to an interesting development in the way the RRC is handling "forced pooling." It may change but for now the new approach seems to be a significant benefit to the "holdouts" while also providing for the continuation of development that would otherwise be stiffled by the holdouts. According to an article in the Start Telegram --

Baen and John Barber, a Fort Worth lawyer working with a Fort Worth neighborhood group, pointed out that under the ruling, unleased property owners will likely be paid much more than their neighbors who signed leases.

In its order, the commission required two different payments to the unleased parties: One is a standard royalty payment equal to 20 percent of the value of production; the other is a 100 percent working interest on the other 80 percent of production. A working interest is paid only after the costs of drilling, operations and production are recouped, while the standard royalty is paid as soon as production begins.

Barber said he estimates that the Railroad Commission’s terms would produce a total royalty equal to 60 or 65 percent of the value of production.

That means that the holdouts will get a LOT more than those that signed a lease before drilling began. They will forgo the initial signing bonus of about $1000 for a 1/4 acre lot, but eventual royalties will increase from about $50,000 to about $150,000 over the life of the related wells.

That is much more in line with what I think would be a fair split of the value of gas in the area. If they would just offer a 50/50 split of production (50% royalty) and reasonable ($50,000 per acre) signing bonus, both the drillers and the owners would benefit equally. But as long as most owners will settle for less, the development companies, like Chesapeake and Devon, are obligated to maximize profits for their shareholders at the expense of the mineral owners.

I'm sorry if you already signed a lease and would like to get out of it but, for now, a contract is a contract and you got what you negotiated. It's too late unless the lease expires or is terminated per the terms of the lease agreement. But don't be too eager to sign an extension if it is offered in the future. If you do, you will only get the bonus and royalty in the agreement.