Co-author Brittany Blakey

Zehentbauer Family Land, LP v. TotalEnergies E&P USA, Inc. is a story we’ve heard before: Royalty owners contend they are not getting a big enough slice of the hydrocarbon pie, which presents a question courts must answer: Where is the valuation point for royalty calculation?

Under the oil and gas leases at issue, royalties are to be paid:

“based upon the gross proceeds paid to Lessee for the gas marketed and used off the leased premises, including casinghead gas or other gaseous substance… computed at the wellhead from the sale of such gas substances so sold by Lessee.”

The midstream arrangements and the “netback method”

Chesapeake and Total sell their production at the wellhead to their respective midstream affiliates, CEMLLC and TGPNA, each of which sells the transported product to unaffiliated downstream companies. The affiliates account for the gas using the “netback” method, which “takes a weighted average of prices at which the midstream affiliates sell the oil and gas at various downstream locations and adjusts for the midstream company’s [various costs (including transportation)] to move the raw oil and gas from the wellhead to downstream resale locations.” The netback method accounts for these midstream (post-production) costs. The midstream affiliates pay this reduced amount to the producers, who use this netback price as the base for calculating the plaintiffs’ royalty payments.
Continue Reading Ohio Royalty Owners Burdened with Post-Production Costs