Thursday, August 11, 2011
Fort Worth Star-Telegram, Texas
by Jack Z. Smith
About 20,000 royalty owners who have Barnett Shale natural gas leases with Chesapeake Energy will likely see their royalty checks slashed by roughly 25 percent after the company deducts expenses associated with post-production, such as gas gathering, compression and transportation.
The actual percentage and dollar amount decreases in royalty checks will vary monthly based on natural gas prices, post-production costs and output from wells.
Affected royalty owners were notified of the new company policy in recent letters. The changes took effect with July royalty checks that were based on May production, according to Julie Wilson, Chesapeake vice president for urban development and the top executive in its Fort Worth regional office.
Chesapeake is the No. 2 producer in the natural gas-rich Barnett Shale, which underlies more than 20 North Texas counties.
Henry Hood, senior vice president and general counsel for Oklahoma City-based Chesapeake, said post-production costs run from 70 cents to $1 per 1,000 cubic feet of gas produced. Natural gas prices have recently been around $4 per 1,000 cubic feet.
At that price, royalty checks will be "about 25 percent lower," Hood said.
Wilson said about 75 percent of Barnett Shale royalty owners with Chesapeake leases received letters advising them of the change.
The royalty owners whose monthly checks won't be affected are those who have lease provisions precluding assessments for post-production costs, Hood said.
As a general rule, large property owners who hired attorneys to help them negotiate leases and residents who are members of neighborhood associations that negotiated carefully crafted leases appear much more likely to have provisions precluding those charges.
Roger Venables, assistant director of community development and planning for the city of Arlington, said it has lease provisions barring Chesapeake from assessing post-production costs.
Representatives for the city of Fort Worth, Tarrant County and Dallas/Fort Worth Airport were not immediately able to confirm late Wednesday whether they have such provisions.
Hood said Chesapeake did an exhaustive internal audit of all its Barnett Shale leases to determine which could be assessed the post-production costs.
The audit took about six months, he said.
The post-production costs are routinely assessed against royalty owners in Texas unless lease provisions prohibit it, he said.
Chesapeake said in its letter to royalty owners that they will not be retroactively assessed any charges for post-production costs that the company incurred before its policy change.
"Please be assured that we do not intend to recoup these charges on past production," the letter said. "However, effective with the July 2011 check, your payments will reflect those charges going forward."
Both in its letters to royalty owners and in an explanation of the new policy on its website, Chesapeake did not provide specific information about how much royalty owners' checks might be reduced as a result of the new policy.
Hood said the company's decision to begin assessing royalty owners for post-production costs was triggered by its agreement with Total, the French oil giant, which paid $2.25 billion for a 25 percent interest in Chesapeake's Barnett Shale operations.
Total was about to begin deducting post-production costs from royalty owners' checks based on its share of the Chesapeake wells' production, so Chesapeake also decided to begin assessing for the costs, Hood said.
Otherwise, payment to royalty owners would have required two separate checks, and "it didn't make any sense to have two different checks from two different companies," Hood said.
Copyright (c) 2011, Fort Worth Star-Telegram, Texas
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