Part 2: Little-Known Truths About Louisiana Royalties Due Under Risk Fee Statutes
This blog entry continues where last week’s entry left off, about to discuss Reason No. 2 for why far too many Louisiana royalty owners never get all of the royalties to which they are entitled, if the owner of their lease opt-out of participating in a new, pooled well. It involves what is called Louisiana Risk Fee Royalties. As a division order analyst who handles North Louisiana producing properties for an exploration and production company in Houston, I have first-hand knowledge of what I’m discussing in this short series of blog entries. The full explanation of Risk Fee Royalties is found in the February 22, 2019 blog, so jump back and read it again if you need to refresh your memory before continuing.
Reason No. 2:
The leases owned by the opt-out Lessee have a clause in them making them a “post-production cost free” lease. The book “Principles of Oil and Gas Lease Analysis: Uncommon Clauses” discusses this type of clause in depth and how it is supposed to be honored by the Lessee. Under Louisiana’s Risk Fee Statutes, the driller is not required to honor those cost-free clauses. Only the Lessee is required to make certain no post-production costs are deducted from the checks for those royalty owners. The opt-out Lessee receives the Risk Fee Royalty payment from the driller with all post-production costs taken out. Why? Because the statutes are very clear that those costs cannot be recouped by the driller as part of the non-participation lump sum of costs incurred for drilling, completing, and producing the well. You see, recoupable expenses stop the moment the oil or gas is severed from the well (produced and saved).
The driller must deduct all post-production costs from the Risk Fee Royalty payment issued each month to the opt-out Lessee, because the Risk Fee Statutes don’t include post-production costs as a type of cost that legally can be recouped. Only the opt-out Lessee’s share of the costs of drilling, completing, and producing the well can be recouped until 100%, 200%, or 300% has been recouped (whichever applies). During the recoupment period, however, all royalty owners are supposed to be paid everything they are owed out of production. The law is clear on that.
That means that the opt-out Lessee must dig into their pocket and add back the post-production cost deductions, before paying the cost-free royalties out to the owners. Are all opt-out Lessees receiving Risk Fee Royalties each month doing that, if post-production costs have been deducted by the driller? Such as marketing, treating, dehydrating, transportation fees? If Reason No. 1 is causing many royalty owners to get paid nothing at all, it’s likely that owners are receiving checks from their opt-out Lessee that shows no deductions taken out, so they think all their money is there. Wrong. The opt-out Lessee simply took the royalty owner’s share of the total dollar amount paid to them by the driller, and paid it to them. It’s very easy to manipulate the unit price (price per mcf or bbl) downward so that when multiplied by the volume of gas or oil, will arrive at the amount shown in the check. It looks like no deductions were taken out, except for severance tax that everyone has to pay regardless.
Chesapeake was sued for reducing the unit price in remittance checks, to deduct post-production costs that aren’t allowed by the terms of their leases. The National Association of Royalty Owners-Texas joined the Texas Land and Mineral Owners Association in writing an Amicus Brief on behalf of the landowners in the case asking the Texas Supreme Court to reverse the appellate decision in favor of the Hyders, in Chesapeake v. Hyder, No. 14-0302 in the Supreme Court of Texas.
What’s worse, how many royalty owners don't know that the owner (Lessee) of their lease didn’t pay their share of the costs of drilling, completing, or producing the well? And the operator must pay the lease royalties to the holder of the lease, now making the holder of their lease just a middle-man? And that it’s up to the middle-man to pay those royalties out to the royalty owners under that lease? Very few if any, most of the time.