Increasing Oil And Natural Gas Production With Some Help Of Hydraulic Fracking

The oil and Gas production companies have experienced tremendous growth since the inception of Hydraulic Fracturing. Although Fracking has been around for decades but just recently, the process has been simplified by using these revolutionary drilling and extraction technologies which have been benefited the energy and land owners. However, most of these lands that are rich with natural resources are owned by private citizens or by the government. For oil companies to have access to these natural resources, they need to sign lease agreements to allow them to drill wells and in return they pay the mineral owners a percentage of production as royalty.

It has been estimated from the National Association of Royalty Owners about 12 million American landowners collect royalty payments for the extraction of oil and other mineral resources (Sisk & Cusick, 2018). However, over the last decade there have been so many controversies over these royalty’s payments. Most of the landowners have experienced a decrease in their paycheck over the years because some of these energy companies have been charging post production costs and the issue is most of the landowners don’t know anything about these costs. As a result, most of the owners have had to either lawsuits because they found out that the energy companies have been defrauding them or they had to revisit their leases to negotiate better leases.

In 2008, the U.S economy suffered a severe recession and gas prices soared. According to AAA, the national average price for a gallon of gasoline in 2008 increased to $4.086 from $4.079; which was an increase of 2.9% between just two months and 38% increase from 2007 (Ben & Kenneth, 2008). However, the energy producers were experimenting with new drilling technologies and that is when the horizontal drilling and hydraulic fracturing (Fracking) came to save billions of dollars for the U.S economy and consumers. In fact, with the new revolution, it helped the economy to experience high record production in 2009 and was able to sustain this growth for the next seven years at the fasted rate in the U.S. history (Robert Rapier).

Fracking is an oil and natural gas production that involves the injection of millions of gallons of water and chemicals at high pressure, in order to create fractions in the underlying geology to allow natural gas to escape (Perry, 2017). Fracking has helped the U.S in part, to not rely on other countries for instance Saudi Arabia for gas and Russia for natural resources and more so the energy prices have dropped dramatically (Michael, 2018). Both charts below show how the U.S has increased its energy production and have been able to sustain. Also, it has contributed to the creation of new jobs and lowering unemployment, it has been reported that 387 jobs have been created yearly between 2013 to 2018. Finally, with Fracking, so many land owners who live in the rural areas, they believed that with this new chance on the horizon, they will be able to live comfortably in the future and turn their dry lands into high record profits.

The energy companies have been able to have access to the natural resources by signing lease agreements with landowners which it will allow them to drill wells and in return the landowners will get percentage of the production as a royalty. Many of the mineral owners were severely affected by the Great Recession in 2008, so this deal was a dream come that will solve many of their financial problems. In fact, so many of these people were so happy they didn’t consult lawyers to find out their rights and what these leases are comprised of before signing them. Although the Federal government passed a law in 1982 to protect the rights of the mineral owners to ensure the oil and gas manufacturing companies are paying them the exact royalty payments and it was established at 12.5% of the oil and gas sales from their leases (Abraham,2013).

With the new law, many landowners thought they would be able to enrich themselves and their families. For instance, when Barrett signed a lease agreement with Chesapeake Energy to allow them to drill four wells on his farm. He knew that he will finally be able to provide to his family a comfortable life. However, his dream turned to a nightmare when he realized that Chesapeake was charging him post production costs to which was eating up most of his royalty checks.

The Post Production Costs are expenses to move and treat both oil and gas through a network of pipelines, for instance, some of the cost are to gather, dehydrate, process and market the oil and gas and make it readily available to a marketable product. Yet, these costs have been a major highlight of many lawsuits the energy companies are facing. These costs have been used to manipulate royalty payments and energy companies have been able to keep billions of dollars out of the hands of landowners (Marie,2018). Some landowners have agreed to them, others have negotiated leases to disallow these deductions. While many others rushed into signing these agreements without fully understanding the language involved in these leases and basically gave up rights to the oil companies to drill wells for free.

Also, we should point out that at the beginning of fracking, the production was good, and it benefited the energy and economy as whole but there was a disadvantage as well, by 2014 the energy companies were producing so much oil and gas that it resulted to a global oversupply. As a result, energy companies weren’t making as much profit as they had anticipated (Marie, 2018). ProPublica has reported that according to auditors who specialize in production Accounting, energy companies have been using complex accounting to skim off profits off the sale of resources and increase the expenses charged to landowners (Abrahm,2013)

What has been controversial, it is the language used to draft these agreements and some of which have been signed by landowners without realizing what they are getting themselves into. For instance, Bill Seligman, a landowner who allowed Chesapeake Energy Co to drill wells on his farm felt cheated when his royalty share decreased by 90 percent. His royalty check when from $317.57 to $30.96 in just two months (Duane).

The tables below are couple of examples of lawsuits filed in Pennsylvania between Chesapeake Energy and landowners, revenues were calculated using prices that were filed on Chesapeake’s 10-K to the Securities and Exchange Commission. The fist column displays the S.E.C prices per MCF and the second column are the amount on the royalty payments that were sent to Buck and Paige (both are landowners); finally, on the last column are the figures that should been sent to both Buck and Paige as their share of the production.

Moreover, the last table below was taken from the same lawsuit and it is deduction’ statements that Buck received with his royalty check, these deductions belong to third parties and he was never provided with an explanation who were these third parties and why were portions of his royalties was going to them. In fact, Chesapeake has reached a settlement of $7.75 million this past August for defrauding about two-thirds of its natural gas royalty owners in Pennsylvania. The land owners accused Chesapeake of pumping up the transportation and marketing costs, it is a representation of about 8% of past deductions taken from the landowners’ royalties (Laura, 2018)

Furthermore, the energy companies have been setting up subsidiaries or limited partnerships to sell oil and gas at a lower price but gaining full value of the resources when their subsidiaries resell, and the royalty payments are mostly based on the initial transaction. According to documents filed to the SEC, Chesapeake Energy Co sold most of its pipelines to smaller companies that had evolved out of Chesapeake itself , but they had retained a share in the gathering process while charging fees to the landowners to cover for most of the costs to gather and move the gas (Abraham, 2014).

There have been so many changes after these allegations against the energy companies, for instance, the governor of West Virginia Jim Justice signed a law that prohibits the deductions of these PPD. Also New York Governor has also banned Fracking in 2014. But most importantly, most of these landowners had to revisit their leases to either renegotiate the terms on their leases or terminate them once and for all.

References:

Abrahm Lustgarten, “How Oil and Gas Drillers Avoid Paying Royalties to Landowners”. August 2013. https://www.propublica.org/article/unfair-share-how-oil-and-gas-drillers-avoid-paying-royalties.
Abrahm Lustgarten, “Chesapeake Energy’s $5 Billion Shuffle”, “The energy giant raised the cash it needed to survive by slashing royalties it paid property owners to drill on their land”. March 2014. https://www.propublica.org/article/chesapeake-energys-5-billion-shuffle.
Ben Rooney, Kenneth Musante, “Oil touches record but ends lower”. June 2008. Accessed 11/30/2018. https://money.cnn.com/2008/06/30/news/economy/gas/index.htm.
Duane Nichols, “Royalty Check$ Reduced by Post Production Cost$”. December 2017. Accessed 11/25/2018. http://www.frackcheckwv.net/2017/12/27/royalty-check-reduced-by-post-production-cost/
Marie Cusick, Amy Sisk, “Millions Own Gas and Oil Under Their Land. Here’s why Only Some Strike It Rich. March 2018. Accessed 11/27/2018. https://www.npr.org/2018/03/15/592890524/millions-own-gas-and-oil-under-their-land-heres-why-only-some-strike-it-rich.
Mark J. Perry. “The Shale Revolution Is A Made-In-America Success Story” February 2018, accessed 12/01/2018. https://www.investors.com/politics/commentary/the-shale-revolution-is-a-made-in-america-success-story/.
Laura Legere, “Chesapeake reaches settlement with large class of Pa. Landowners in royalty dispute”. August 2018. https://www.post-gazette.com/business/powersource/2018/08/10/chesapeake-reaches-settlement-with-large-class-of-pa-landowners-in-royalty-dispute/stories/201808100164Accessed 11/27/2018.
https://www.noia.org/united-states-now-largest-global-crude-oil-producer/
https://www.forbes.com/sites/ucenergy/2018/02/20/fracking-has-its-costs-and-benefits-the-trick-is-balancing-them/#10167e5819b4
https://stateimpact.npr.org/pennsylvania/2018/02/28/why-some-strike-it-rich-in-the-gas-patch-and-others-strike-out/
https://www.forbes.com/sites/rrapier/2018/07/22/how-the-fracking-revolution-broke-opecs-hold-on-oil-prices/#519eef1248ef