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Deductions From Royalties

Dealing with a class action? Discuss it here

Deductions From Royalties

Postby Angawdd » Fri Nov 25, 2016 7:01 am

My cousins and I own the remainder of our family farm,(and the mineral royalties), 160 acres, in Secs. 25 & 36, T15N, R2E and Sec. 31, T15N, R3E in the Vixen Gas Field, Caldwell Parish, LA. The producers are Samson and Comstock.

My question regards producers' deductions from royalty checks. I gather this is a growing problem, but I have never seen it discussed in these pages. From reading your postings I now know that I should have negotiated a broad "deductions" clause in our lease. This was not done and I am left with the typical, but seemingly contradictory lease language that the producer must pay for all gas "sold or used" off the premises but that it is entitled to "free use of oil & gas...for all operations hereunder". No wells or other production facilities are on our property. There are 3 exceptions to the "sold or used" language, but none of them appears to apply.

Given this, my question is "Is there any limit or "rule of thumb" as to how much gas they can take(for post-production processing), or is this simply unlimited?

According to the producers' own publications, royalty check stubs and answers to inquiries, they use 3 methods for deductions.(1) They hold out a percentage of production for "lease gas" for use in post-production processing.(2)They sell the gas at a discount in order to compensate the purchaser for processing costs.(3) They make deductions from royalties for "services furnished prior to Samson's point of sale" where the "point of sale" is at a "point downstream from the wellhead". Both leases specify sale "at the wellhead".

I understand the need for certain deductions, but the producers appear to getting greedier. For Comstock's Devon Donner 30 #1 well in Sec30, T15N, R3E, for the first 12 months of production, the amount of gas reflected on the royalty statement was the same as reported to SONRIS as produced. In March 2007 however they began to pay us for less then the total produced. The discrepancy started out at about 10% and has grown to over 25%(25,396 MCF out of production of 100,012 MCF). Samson typically deducts about 8.2% as shown in the D.L. Byrd #2 well in Sec36, T15N, R2E.

Samson's price discounts are usually small, and the price is sometimes larger than the reported EIA price for wellhead sales sue to the quality of the gas. Comstock's discounts, however, are very substantial and average about $2.00/MCF less than Samson's prices. While EIA prices have varied from about $5.00 to $7.00/MCF over the past year., Comstock has paid us about $4.00/MCF, with the low being $3.25 in October 2006(when Samson paid $5.94, a difference of 82.7%)! Comstock's own website says it sold gas for an average price of $7.13/MCF in 2006. This appears to be a case of Comstock selling gas to its own subsidiary at a steep discount, and paying royalties on that price, then selling to the pipeline at market price. As far as itemized deductions from royalties paid, Comstock makes none. For the first 50 years of production, Samson made none either. However, starting in February 2006, Samson began deductions of less then 1%.

Lastly, there is the deduction for La. severance taxes. I never have been able to figure out how this was calculated. Samson deducts between 3.3% and 5.2%. Comstock typically deducts between 5.6% and 6.6%. Recently however it zoomed up to 18%! This seems way too high. I don't think Louisiana raised the tax rate.

The producers refuse to respond to inquiries. It seems that we are paying 3 times to process the same gas. If gas is sold "at the wellhead"(and title passes then) why are we paying anything to process someone else's gas? Again, is there any "rule of thumb" or, as Samson's attorney told me, can they take "as much gas as they want, whenever they want it"? I've researched this and there appears to no "transparency". When all data is proprietary, how do we know they need all that gas for "processing" and, for instance, whether my gas is being used to power a compressor that compresses all the gas coming from the field? Normally, would a well blowing 100,000 MCF/month require compression?

Thanks for everything. You do a great job.

ANSWER: I posted a case on my website that deals with this very subject.  http://20oaks.com/case_law_reviews

This is systematic theft.  Royalty checks are deliberately styled so as to confuse the payee.  

Send the company a certified letter and demand payment for the deductions other than severance taxes and see what their response is.  They know that you can only get the information from them through discovery in a lawsuit.  Therefore, they count on the cost of litigation for the average royalty owner to be prohibitive to the extent the owner will not file suit.  In West Virginia, they got enough owners together for a class action suit and prevailed to the tune of over $400 million awarded, with $271 million being punitive damages. I would consult a good oil & gas attorney.

These wells are an operations nightmare for these companies as they make a lot of water and they  require a lot of reworking.  I doubt if they are making much money, but that's not your problem. Royalty oil & gas or the proceeds of the sale of royalty oil & gas is never the property of the company, it is owned by the royalty owner from the time it is produced.  The company has a fiduciary responsibility to account for the oil & gas  produced from a well or pooled unit to every owner involved, royalty or working interest.  They use these monies as if they owned them with arrogance and seeming impunity. It takes a real lawyer and a class action suit to show them the light.

---------- FOLLOW-UP ----------

Another trick I forgot to mention is the "gas balancing" issue. About every two years, we get a revised royalty statement in which all previous figures are zeroed out and negative figures substituted. When questioned about this they say that it is due to the requirements under verious gas balancing agreements they have. From what I can tell, gas balancing agreements are between producers. I know I never signed off on one. If these agreements regard producers' responsibilities, why do royalty owners have to pay for them? Also, shouldn't there come a time when we're on the other side of the deal, that is shouldn't we benefit at some point?
Angawdd
 
Posts: 39
Joined: Wed Feb 12, 2014 6:48 am

Deductions From Royalties

Postby Fonteyne » Wed Nov 30, 2016 2:10 pm

My cousins and I own the remainder of our family farm,(and the mineral royalties), 160 acres, in Secs. 25 & 36, T15N, R2E and Sec. 31, T15N, R3E in the Vixen Gas Field, Caldwell Parish, LA. The producers are Samson and Comstock.

My question regards producers' deductions from royalty checks. I gather this is a growing problem, but I have never seen it discussed in these pages. From reading your postings I now know that I should have negotiated a broad "deductions" clause in our lease. This was not done and I am left with the typical, but seemingly contradictory lease language that the producer must pay for all gas "sold or used" off the premises but that it is entitled to "free use of oil & gas...for all operations hereunder". No wells or other production facilities are on our property. There are 3 exceptions to the "sold or used" language, but none of them appears to apply.

Given this, my question is "Is there any limit or "rule of thumb" as to how much gas they can take(for post-production processing), or is this simply unlimited?

According to the producers' own publications, royalty check stubs and answers to inquiries, they use 3 methods for deductions.(1) They hold out a percentage of production for "lease gas" for use in post-production processing.(2)They sell the gas at a discount in order to compensate the purchaser for processing costs.(3) They make deductions from royalties for "services furnished prior to Samson's point of sale" where the "point of sale" is at a "point downstream from the wellhead". Both leases specify sale "at the wellhead".

I understand the need for certain deductions, but the producers appear to getting greedier. For Comstock's Devon Donner 30 #1 well in Sec30, T15N, R3E, for the first 12 months of production, the amount of gas reflected on the royalty statement was the same as reported to SONRIS as produced. In March 2007 however they began to pay us for less then the total produced. The discrepancy started out at about 10% and has grown to over 25%(25,396 MCF out of production of 100,012 MCF). Samson typically deducts about 8.2% as shown in the D.L. Byrd #2 well in Sec36, T15N, R2E.

Samson's price discounts are usually small, and the price is sometimes larger than the reported EIA price for wellhead sales sue to the quality of the gas. Comstock's discounts, however, are very substantial and average about $2.00/MCF less than Samson's prices. While EIA prices have varied from about $5.00 to $7.00/MCF over the past year., Comstock has paid us about $4.00/MCF, with the low being $3.25 in October 2006(when Samson paid $5.94, a difference of 82.7%)! Comstock's own website says it sold gas for an average price of $7.13/MCF in 2006. This appears to be a case of Comstock selling gas to its own subsidiary at a steep discount, and paying royalties on that price, then selling to the pipeline at market price. As far as itemized deductions from royalties paid, Comstock makes none. For the first 50 years of production, Samson made none either. However, starting in February 2006, Samson began deductions of less then 1%.

Lastly, there is the deduction for La. severance taxes. I never have been able to figure out how this was calculated. Samson deducts between 3.3% and 5.2%. Comstock typically deducts between 5.6% and 6.6%. Recently however it zoomed up to 18%! This seems way too high. I don't think Louisiana raised the tax rate.

The producers refuse to respond to inquiries. It seems that we are paying 3 times to process the same gas. If gas is sold "at the wellhead"(and title passes then) why are we paying anything to process someone else's gas? Again, is there any "rule of thumb" or, as Samson's attorney told me, can they take "as much gas as they want, whenever they want it"? I've researched this and there appears to no "transparency". When all data is proprietary, how do we know they need all that gas for "processing" and, for instance, whether my gas is being used to power a compressor that compresses all the gas coming from the field? Normally, would a well blowing 100,000 MCF/month require compression?

Thanks for everything. You do a great job.

ANSWER: I posted a case on my website that deals with this very subject.  http://20oaks.com/case_law_reviews

This is systematic theft.  Royalty checks are deliberately styled so as to confuse the payee.  

Send the company a certified letter and demand payment for the deductions other than severance taxes and see what their response is.  They know that you can only get the information from them through discovery in a lawsuit.  Therefore, they count on the cost of litigation for the average royalty owner to be prohibitive to the extent the owner will not file suit.  In West Virginia, they got enough owners together for a class action suit and prevailed to the tune of over $400 million awarded, with $271 million being punitive damages. I would consult a good oil & gas attorney.

These wells are an operations nightmare for these companies as they make a lot of water and they  require a lot of reworking.  I doubt if they are making much money, but that's not your problem. Royalty oil & gas or the proceeds of the sale of royalty oil & gas is never the property of the company, it is owned by the royalty owner from the time it is produced.  The company has a fiduciary responsibility to account for the oil & gas  produced from a well or pooled unit to every owner involved, royalty or working interest.  They use these monies as if they owned them with arrogance and seeming impunity. It takes a real lawyer and a class action suit to show them the light.

---------- FOLLOW-UP ----------

Another trick I forgot to mention is the "gas balancing" issue. About every two years, we get a revised royalty statement in which all previous figures are zeroed out and negative figures substituted. When questioned about this they say that it is due to the requirements under verious gas balancing agreements they have. From what I can tell, gas balancing agreements are between producers. I know I never signed off on one. If these agreements regard producers' responsibilities, why do royalty owners have to pay for them? Also, shouldn't there come a time when we're on the other side of the deal, that is shouldn't we benefit at some point?
Fonteyne
 
Posts: 45
Joined: Sun Jan 19, 2014 9:27 pm

Deductions From Royalties

Postby teithi71 » Wed Nov 30, 2016 11:52 pm

Your royalty is not owned by the company, subject to the agreements or otherwise affected by their relations with other parties.  If they sell your product, they owe you your portion of the revenues of that sale.  They didn't put the gas back in the ground.
teithi71
 
Posts: 54
Joined: Fri Apr 01, 2011 2:49 am


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