AboutDavid B. McCall Expertise Questions regarding oil and gas exploration and production, the operation and management of oil and gas producing properties, and questions related to mineral ownership, title problems, and oil and gas leases.
Experience I am Board Certified in Oil, Gas and Mineral Law in the state of Texas. I have more than 34 years of experience in the industry as both an in house attorney for major oil companies and as a partner in oil and gas firms. I am also a mineral owner and receive royalties from oil and gas production. I have extensive title examination experience, and have represented clients in many administrative and court proceedings.
Organizations State Bar of Texas, Texas Bar Foundation, and Austin Bar Foundation.
Publications Various state bar seminars on Oil and Gas matters.
Education/Credentials I have a business degree in marketing from McMurry University, 1971, and a JD degree from Texas Tech University in 1974, where I graduated 17th in my class. Board Certified in Oil, Gas and Mineral Law in 1986.
Expert: David B. McCall Date: 7/4/2008 Subject: Excessive deductions from gas royalties
Question QUESTION: Our family owns a 7.5% mineral interest in 5 producing wells in Wise & Cooke County Texas. Our lease is a standard Producers 88 paid up lease with 640 acre pooling provision. Our royalty payments are subjected to a minimum gathering fee and cash calls for "Quarterly volume commitment shortfalls" that sometimes exceed well revenue. Is this legal and/or common in the industry? We do not have a working interest...only royalties. Our relationship with the production company is rapidly deteriorating. Any advice?
ANSWER: Hello Mark. I can understand why your relationship with the operator is going south. Depending upon the wording of your lease, royalty interest owners like yourself have to pay their pro rata part of the actual and reasonable marketing costs incurred after production. So, it is common to see some deduction for marketing costs. However, a minimum marketing fee every month like you described is not commonly seen, at least in my practice. When a fee is so large that it reduces the royalty to nothing then the fee is not reasonable. There should never be an instance where the post production expenses result in royalty owners like yourself having to pay expenses out of pocket.
The quarterly volume committement charge is not usual at all. This kind of expense should be entirely borne by the operator marketing the gas. Unless you are a party to the gas contact and are marketing your gas in kind, the operator should not charge back these costs, unless you have been overpaid royalties as described below.
The volume committment charges agaisnt the operator can arise under a couple of circumstances. If the operator has contractually committed to deliver certain volumes to the purchaser over a certian period of time, and the purchaser makes downstream delivery committments based on this, the gas contract will normally provide for penalty payments by the operator if the contracted gas is not delivered. These penalties are designed to keep the purchaser whole if it can't meet its downstream delivery requirements because of the operator. This should be the problem of the operator, not yours.
The other situation that can arise is that the purchaser will pay the producer every month for volumes that have been "nominated" or promised for delivery, rather than on actual gas volumes delivered. If the producer fails to deliver the promised volumes, then the producer has been "overpaid" by an amout equal to the volume shortfall, and has to make this up at some point. If you, as a royalty owner, have been paid on nominated volumes, rather than actual delivered volumes, then there might be some basis for the operator to make up your share of the overpayments on some basis.
I will say that many operators who are paid on nominated volumes, rather than delivered volumes, will still pay the royalty owners on the delivered volumes, rather than the paid volumes, and will keep the difference in their own pockets. I am not saying that this is your situation, but you need to check this out if possible.
Ask your operator for a complete explanation in writing of these charges and see what they say.
I hope this helps. Let me know if you have any further questions.
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QUESTION: The commitment shortfall is based on a 2yr timetable for the gathering company to recover their costs of installing a gathering system. It is evaluated quarterly and the producer is charged if their is a shortage. The producer passes on our share to us as royalty owners. (I have a copy of the contract and some quarterly statements.) Also the gatherer charges a $500.00 per well per month minimum gathering fee that greatly impacts revenue on 2 of our low volume wells. That is also passed on to the royalty owners. What recourse do we have?
Answer Hello Mark. In my opinion, penalties for volume shortfalls are not proper post production expenses chargeable to the royalty owner. Also, the minimum marketing fee charged per well sounds unreasonable to me.
Depending on the terms of your lease, royalty owners do share in and bear their part of those reasonable post production expenses incurred in transporting, marketing, processing, compressing, etc, as gas is moved to market. These costs have to be reasonable or they can't be charged. Costs of producing gas are borne entirely by the lessee.
I am of the opinion that volume shortfall penalties for failing to deliver gas are not the kind of marketing charges that can be passed along to the royalty owners. If, for example, the well was shut in and there was no production at all, there would still be penalties assessed even though no gas was being marketed. I don't think this would be proper.
if the lessee will not voluntarily stop these deductions, and you are not satisfied with the explanation for the deductions, your only recourse is to file suit to challenge the reasonableness of the deductions. I think you should consult an oil and gas attorny in your area for his opinion about these deductions and to answer any questions you may have regarding legal action. Good luck and let me know if you have any further questions.
