Workshop takes mystery out of royalty checks

BY STACI WILSON

The jumble of numbers appearing on natural gas royalty checks is enough to send some property owners’ heads spinning.

In an effort to take some of the mystery out of the checks – and help landowners better determine if they are receiving the proper payments – Penn State Extension held a mineral management workshop addressing the issue, Wednesday, July 31, in Dimock.

About 70 people attended the workshop, about half of those there said they were already receiving natural gas royalty payments; the other half was comprised mainly of leaseholders not yet receiving royalties.

Steve Karabin, a Wealth and Minerals Asset Advisor at Fulton Bank, presented the information meant to help landowners make sense of their royalty money.

Karabin, of Berks County, is a petroleum engineer and registered landman. “I’ve been on the other side,” he said.

“Most landowners feel confused even before the first royalty check,” Karabin said.

Using a sample check from one of his clients, Karabin walked the attendees through the list of codes and numbers included on the checks issued by most natural gas companies.

“Every check looks different,” he said. “A Range (Resources) check looks different than Cabot’s. There is no industry standard.”

But Karabin pointed out to some basic items royalty owners should look for, including the landowners share of the well being paid on – the division unit.

“If that number is smaller than what is on the division order, you’re getting paid less,” Karabin said. “You need to challenge that.”

Defining the letters

Karabin first defined the measurements associated with natural gas which appeared on the example check under the column marked “sales volumes.”
“Mcf” means thousand cubic feet – a volume measurement.

“That’s what’s coming out of the well,” he said.

“MMBTU” means million British Thermal Unit – an energy value measurement.
Karabin said, “MMBTU is the energy content of the gas coming out of the well. The higher the number the more valuable the gas is.”

The “BTU” value of the gas also should appear on the check, he said. A BTU is the amount of energy required to raise the temperature of one pound of water one degree.

According to Karabin, typical BTU amounts in Susquehanna County range from 1.2 – 1.4. “The numbers (on one well) may fluctuate but they shouldn’t fluctuate drastically,” he cautioned.

He advised royalty owners to make sure the MMBTU amount equaled the sum of MCF multiplied by the BTU numbers listed on the check.

The BTU amount of the gas is measured every month. “That’s how gas is sold,” Karabin said.

The price paid for the natural gas also varies based on what major transmission line the gas is going into. According to Karabin, that information does not appear on the royalty checks.

Gross payment

Royalties are determined based on the amount the market paid for that gas.
Under the “Price” column on the example check, the MMBTU amount was listed.

The MMBTU and the MMBTU price are multiplied to arrive at the gross value of the check. And the landowner share is determined by the royalty ownership the person has in the well.

Deductions

If a property owner does not have a “no deduction lease,” the natural gas company can take post-production costs out of the gross royalties.

Karabin listed some deductions routinely taken by the gas companies including costs for marketing, gathering, transmission, compression, dehydration and, sometimes, costs for court settlement distribution.

The cost for gathering is typically the largest deduction, Karabin said. “It’s your proportionate share to put the lines in.”

Landowners are paid what remains after the deductions are taken out.
“People think they are getting a minimum royalty, at the end of the day, they’re not getting that,” Karabin said.

Adding it up

The numbers on the check will never add up perfectly, according to Karabin. Check stubs report at two decimal spaces while gas companies determine their figures out six decimal places – and then round up or down.

“Don’t get frustrated if you’re off a couple of pennies,” he said.

With his background in petroleum engineering, Karabin also discussed how a well typically performs over its lifetime; and the future of the Marcellus play in Susquehanna County.

A royalty owner could expect to receive about $25,000 in royalties per acres over the lifetime of a well, he said. “This county here – it’s going to be more than that.”

There is not enough data yet on this shale play to definitively say how long a well will produce. According to Karabin, the models suggest that in a 10-year period, about 80 percent of the total royalties from a well will be paid out; and 50 percent of the royalties from a well will come during the first three years of initial production.

“Your first year payments are going to be the best year royalties,” he said.
The Marcellus wells, however, can be re-fracked, he said, breathing new life into a well and stimulating high production values. The Utica and Upper Devonian shales could also be tapped in the future.

“The models look good for the wells in this area,” he said.

Cabot’s estimated ultimate recovery (EUR) has already exceeded 10 billion cubic feet and some are projecting the company hits 15 billion cubic feet.
Drilling could go on for the next 50 to 100 years, Karabin said. “It’s going to be here a long time.”

Royalty owner concerns

An audience member receiving royalty payments from Cabot said the checks received were vaguer than the sample check with basically just the gross and net payments reported.

Check information should become more clear as Act 66 of 2013 (SB259) takes effect in another month.

Among other provisions, Act 66 requires specific items be provided on a check stub to interest holders. Requirements include: identification of a well; month/year of production; total volume sold; price received; amount of severance tax, production taxes, and other costs permitted under the lease; net value of sales; percent interest; share of the gross proceeds; share of the net proceeds; and gas company contact information.

A Southwestern leaseholder said that although drilling was taking place and she expected to begin receiving royalties in the next few months; a notification of unitization had not been received.

The metering of the wells was also a concern among audience members. Gas companies self-report meter readings; and no official entity oversees the calibration of those meters. “There’s no way to know what has been taken versus what is reported,” an audience member said.

Karabin suggested that royalty owners check their check stubs against the volume of gas reported to the Dept. of Environmental Protection by the drillers. Gas companies are required to file production reports every six months. January through June 2013 reports will be available soon on the DEP website.