Big Win for Royalty Owner Against Chesapeake

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Chesapeake Energy has gotten something of a reputation for making money any way it can.  That includes cutting down the royalties it pays to mineral and royalty owners, whether the lease allows for that or not.

One Pennsylvania man fought the good fight against Chesapeake and won.

When Paul Sidorek signed a lease he did it with both eyes wide open.  He had seen what companies did with post-production costs, and made sure his lease included a strong clause that prohibited any post-production costs of any kind.

Then his lease was sold to Chesapeake.

Chesapeake deducted post-production costs.

Paul Sidorek arbitrated and won on part of his case.  He’ll be getting a lot of money back from Chesapeake.

I’d encourage anybody who wants to fight against post-production costs to do so.  West Virginia law is very much on your side, even more so than Pennsylvania law.

Another Reason Why You Need a Good Gross Proceeds Clause

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West Virginia University is working on a project, together with a large number of other groups, that would significantly improve the royalties paid to mineral and royalty owners–if it works.

The issue is that West Virginia terrain is so rough that it’s difficult to install pipelines.  The pipelines are needed to transport the produced natural gas to centralized refineries, cracker plants, separation plants, and the like.  Since pipelines are so difficult to build that sometimes they’re not built, leaving gas “stranded”, unable to be transported to a place it can be used.

The U.S. Department of Energy has started a branch of its National Network of Manufacturing Institutes which it calls Rapid Advancement in Process Intensification Deployment, or RAPID.  RAPID will bring together people from academia, industry, government labs, and non-government labs to tackle “process intensification“.

Process intensification in the natural gas fields will combine multiple gas processing steps into one.

The result will be the ability to process gas at the wellpad using small, mobile, modular units.  The processed gas would be turned into products that could be transported in trucks.  The benefit to West Virginia is obvious.

West Virginia royalty owners could expect higher royalty checks, and in some cases where they wouldn’t see any real royalties at all, they would see significant royalties.

Of course, leases would have to be written with the idea of capturing those royalties for the mineral owners.  Companies will, of course, try to pay royalties on the lowest value they possibly can.  Mineral owners should be able to get the highest value they can.

Getting a strong gross proceeds clause into a lease will become even more important for our clients.

2017 Legislation: Force Pooling is Back

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Forced Pooling is back, as everyone expected it to be.  However, the oil and gas companies have realized that they can’t get forced pooling to pass under the name of forced pooling here in West Virginia.  So they’re giving it two new names, “joint development” and “cotenancy”.  Both seem to be created in the same bill.

The new forced pooling bill is Senate Bill 244.  It will change Chapter 37 Article 7 Section 2 of the West Virginia code which deals with a legal concept called “waste”.

The existing paragraph is very short, and says simply that if a cotenant commits waste he’ll be liable to his other cotenants for damages.  The new section is much longer and focused precisely on oil and gas leases.

The new paragraph (b) will make it so that if a majority of the owners of a tract agree to a “lawful use” (a lease), the company will not have to enter into a lease with the other owners.  All the company will have to do is account to (pay) the other owners a proportionate share of the revenues and costs of the “lawful use”.

So when 50.01 percent of the owners agree to lease, the other 49.99 percent of owners will have no say in what kind of lease they enter in to.

Also, the only thing the company will have to do is pay royalties to the 49.99 percent.  But they can deduct post-production costs.  It won’t be more than a minute before that right gets abused.

The new paragraph (c) will give the company the right to use the surface of any tract overlying the “jointly developed leases”.  In other words, when tracts are pooled for development the company can use any of the surface without entering into a surface use agreement with the surface owner.

The stated intent of this legislation is to make it so the companies can pool both old and new existing leases which don’t have pooling language in them.  However, it does a lot more than that.

This is bad legislation for both mineral owners and surface owners.  It only benefits the companies, which will get into leases for far less money than they already do.  Don’t forget, the West Virginia Marcellus Shale is the most economic shale play (in 2013, but not much has changed relative to other plays) in the United States.  We’re already giving up our minerals for less than people in Pennsylvania and Ohio do.  Let’s not let the companies force us into even cheaper leases.

 

Stone Energy Marcellus Shale Leases now Operated by EQT

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Any of our clients who had leases with Stone Energy will now be dealing with EQT.

Previously, Tug Hill had entered into an offer to purchase Stone Energy’s leases, but EQT came along and offered more money so Stone sold to EQT.

While Tug Hill is still rather new and we don’t have a real feel for what kind of company they are, we do know that EQT has a bad reputation with pretty much everybody in the industry.  We would have preferred to have Tug Hill as the operator.

The Case Against Eminent Domain

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The very large pipelines that will be cutting through West Virginia are using federal eminent domain to acquire property from people who don’t want to sell to them.  The only reason the pipelines can use federal eminent domain is because the pipeline is considered to be a “public use”.

This article by David McMahon, a West Virginia attorney and founder of the West Virginia Surface Owners’ Rights Organization, points out why a pipeline shouldn’t be considered a “public use”.  I fully agree with him.  The full article is worth the read, so I won’t summarize it here.

He also points out how West Virginians “are poor because we cede too often and too much to the drillers and pipeline companies”.  Well said, Dave.  Well said.

FERC Won’t Stop the Pipelines, but the States Might

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There are several very big pipelines that are proposed for West Virginia, including the Atlantic Coast Pipeline, the Mountain Valley Pipeline, the Mountaineer Xpress, and others.  There’s a lot of debate over whether these pipelines are good, with most of the lines being drawn over environmental/economic arguments.  Basically, if the environment is more important to you, then you oppose the pipelines and if the economy is more important to you then you support the pipelines.

If you oppose the pipelines, then this article in the Register Herald holds a tasty tidbit for your consumption.

Autumn Crowe with the West Virginia Rivers Coalition said that even if the FERC green lights [the pipeline], if West Virginia fails to issue one of the permits, the project comes to a halt.

That’s something I had not realized until now, and I think a lot of other people hadn’t realized, either.

When I first started researching the pipelines it took about two seconds to discover that they would have the power of federal eminent domain.  In other words, once the FERC gave permission for the project to proceed, any property the pipeline wanted to cross automatically and immediately belonged to them.

I didn’t think there was any way to stop that from happening.

FERC, after all, has only turned down a small handful of projects in its 39 years of existence.  One Atlantic Coast Pipeline official I talked to said only four.

However, if you can show that the West Virginia Department of Environmental Protection shouldn’t issue one of the permits that the pipeline requires, it seems you can actually stop the process.

As I have become more opposed to the pipeline (not on environmental grounds) this gives me and my clients some hope.

The State of Oil and Gas: March 3, 2017

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Natural gas prices continue to plummet.  Today, Feb 21, prices have dropped 27 cents down to $2.57/MMBtu.  The reason is simple.  We haven’t used as much gas as investors expected.  The positive way of looking at this is that we’re still a dollar higher than we were this time last year, and we have less gas in storage than we did this time last year.  Andrew Hecht over at Seeking Alpha thinks that there is reason to believe that prices will be pretty volatile in the next few weeks.

What will really be interesting is to watch the rig count in the Utica/Marcellus area.  Prices below $3.00/MMBtu will discourage new drilling.  Producers have been ramping up drilling in the last six months or so.  It will be interesting to see how quickly they slow drilling down.

Oil prices are doing well, which is unfortunate for natural gas prices. Oil production will continue to climb, and the gas produced with oil will compete with our Marcellus/Utica wells, keeping prices and development down.

RB Energy did an excellent breakdown of why natural gas prices have dropped so much and how the market compares to last year and the five year average.  Most of you don’t have a subscription to RB Energy, so here’s a very condensed summary: this winter hasn’t been cold enough.  That’s really it.  Production has been picking up a little, but not enough to make the difference.  Storage levels aren’t ridiculously high.  If you plug in last year’s winter weather into this year’s winter weather you end up with very low storage levels and, consequently, higher natural gas prices.  It’s that simple.

Oil prices remain above $50.00/bbl.  In fact, it’s better to say they are around $55/bbl.  The main cause is the production cut set in place by OPEC in November.  OPEC has said they have about 70% compliance with the agreement.  Pretty impressive, especially considering past performance.  More importantly, the non-OPEC countries that agreed to cut production were at about 66% compliance.

U.S. oil drillers, however, have increased production since last summer.  That increase is not as much as the decrease by OPEC, but you can bet there is a lot more U.S. production planned in the very near future.

Sorry for the late and short nature of this post.  I’ve been sick again this week.

Pipeline Explosion in Texas

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About two weeks ago there was a pipeline explosion in Texas.

The pipeline was a 36-inch natural gas line.  The explosion was felt for 60 miles, and could be seen for 175 miles.  Sure, that part of Texas is pretty flat, but that’s still pretty big.

Here’s some video from ABC13.

The pipeline is owned by Kinder-Morgan.  The area was very rural, so no lives or property were threatened by this one.

The FERC is Hamstrung!

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As part of the changing of the guard that always accompanies a new Presidential administration, the FERC’s chairmanship was switched.  The previous chairman was Norman Bay, and the new one is Cherly LaFleur.

Chairmen are also commission members, and remain on the commission both before and after serving as the chairman.

When the change in chairmanship was announced, Mr. Bay decided to resign from the commission.

That wouldn’t usually be a big deal.  However, the FERC has five seats on its commission, and two were already vacant.

Mr. Bay resigning from the FERC left only two voting members.

The commission needs three voting members in order to make decisions.

Therefore, the FERC can no longer approve natural gas pipeline projects, large natural gas company mergers, and liquefaction plant projects.

The speculation is that it will take at least a few months, maybe a year, to get a new member on the commission.

That could seriously slow down the approval process for the Atlantic Coast Pipeline and the Mountain Valley Pipeline.

The State of Oil and Gas: February 15, 2017

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Well, look at that.  Don’t pay attention to natural gas prices for a week or so (sick and catching up from being sick) and prices drop below $3.00/MMBtu.  That’s both good news and bad news.  How is that good news?  Well, because it’s bad news.  Let me explain.

Drilling has been picking up recently.  That’s the natural reaction of the industry when prices rise.  We got down to 404 total rigs in the U.S. in May of 2016 as a result of low prices, and we’re already up over 700 in the second week of February 2017 as a result of climbing prices.  When drilling picks up we get more natural gas of course.  More natural gas means lower prices.  Lower prices means less drilling and fewer rigs.  It’s a cycle that repeats itself constantly, with some extreme highs an some extreme lows.

The extreme highs and the extreme lows are bad for everyone.  During the lows workers get laid off, royalty owners are paid less, and consumers get excited about paying a little less for their gas.  During the extreme highs, workers go back to work, royalty owners get excited about bigger royalty checks and consumers hate looking at their monthly bills.  What’s better is to have slow and steady growth or at least lower highs and higher lows.

The fact that natural gas prices couldn’t break $4.00/MMBtu means that we probably won’t see really high highs in the near future.  If we don’t see really high highs, we won’t see a huge boom in drilling and development work.  If we don’t see a boom, we won’t see an oversupply of natural gas.  If we don’t see an oversupply we won’t see a bust.  No high highs, no low lows.

What will probably happen with gas prices at or below $3.00/MMBtu is that producers will kill some of the short-term programs they have planned.  That will bring less gas into the market in the near future, so we should see fewer new rigs, and maybe even fewer rigs overall.  That would result in less production and bring prices back up.

What I expect to see in the near future is that we’ll have something of a hard cap at around $4.00/MMBtu.  That cap will slowly climb due to population growth and liquefaction plants being completed.  Because drillers will start new drilling programs over $3.00/MMBtu, and it doesn’t take a long time to get new wells online, by the time prices hit $4.00 we’ll be looking at an oversupply of gas.  Drillers will stop new programs, supply will drop, prices will drop, but by the time prices get significantly below $3.00 everyone will start drilling again.  Hopefully the boom/bust cycle of natural gas will be greatly shortened.  The oil and gas industry is going to respond quickly to the market, instead of slowly like it used to.

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Seeking Alpha is predicting natural gas prices will be $3.50/MMBtu in the next 8-12 months. That’s a good healthy price for the industry.

The rest of February is going to be warmer than usual.  Demand for natural gas is going to go way down.  We’ll have more gas in storage than we expected.

Gas prices have stabilized at about $2.84/MMBtu.  It will be interesting to see how prices change moving into the storage season.