Recently, a San Antonio court of appeals affirmed the decision of a Tarrant County judgement against Chesapeake Exploration, LLC, awarding royalty owners approximately $700,000 for deducting unauthorized post-production/post well-head costs.
The plaintiff (Hyder) claimed Chesapeake deducted improper fees and interests from the royalty, based on specific language in the lease agreement. The Hyder’s royalty clause was not a standard lessee-form lease. It said the following:
“The royalty reserved herein by Lessors shall be free and clear of all production and post-production costs and expenses, including but not limited to, production, gathering, separating, storing, dehydrating, compressing, transporting, processing, treating, marketing, delivering, or any other costs and expenses incurred between the wellhead and Lessee’s point of delivery or sale of such share to a third party. …In no event shall the volume of gas used to calculate Lessors’ royalty be reduced for gas used by Lessee as fuel for lease operations or for compression or dehydration of gas.”
Chesapeake is currently seeking review of the decision by the Texas Supreme Court.
Below are links to further reading material on the case:
Natural gas production in the U.S. was the best it’s ever been in April of 2014 according to estimates from Bentek Energy, an energy market analytics company based in Denver, CO. Production for the onshore Lower 48 last month averaged 67.3 Bcf/d, which was about .5 Bcf/d higher than March of 2014 production levels of 66.8 Bcf/d.
In 2014, Bentek predicts that average U.S. production for natural gas will be 67.5 Bcf/d, due in part to a higher overall price environment for producers and continued growth in liquids-rich plays like the Eagle Ford Shale and dry gas plays like the Marcellus Shale. Currently, natural gas is trading at 4.53/mmbtu, which is a higher price point than some analysts expected due to the increased production volumes.
Jack Wiexel, Bentek director of energy analysis, said in a company statement,”natural gas producers are enjoying a relatively robust price environment despite substantially increased output the past two months.”
Royalty Owner Impact
Natural gas commodity prices are measurably higher than they were two years ago when natural gas fell to around $2/mmbtu. At that price point, many natural gas wells became unprofitable. However, with the increase in overall U.S. natural gas production, thanks in large part to the tight oil and shale gas revolution, and the Energy Information Administration (EIA) predicting record breaking production through October, many royalty owners can expect an increase in their royalty checks.
Record Low Storage Levels of Natural Gas
Despite the record production, the natural gas market is facing record low storage levels. Even with the anticipated production increases, total Lower 48 end-October inventories in 2014 would still be at their lowest level since 2008.
Wiexel said, “U.S. consumers need the production levels seen in March and April to continue throughout the summer to avoid high prices in the winter.”