Anybody with Experience in Well Audits?

Started February 3, 2017 at 07:08 am by @Billy Ray in Marcellus Shale

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Billy Ray
02/03/17 07:08:53AM

Anyone have experience with the outcome of a CHK well audit. These cost several $1000 dollars to perform which may never pay off. 

David Allen Lilly
02/03/17 07:27:09AM @david-allen-lilly:

The only way in which it would be economical is for the unit landowners to pool resources and share the cost.

I have never heard of this being done.

I am very doubtful in this current day that the producers are cheating on the numbers. Think of the conspiracy this would require, just one disgruntled former employer could put a producer out of business with proof of the level of fraud that would be necessary to pull this off.

Not to mention the potential for blackmailing. 

I am not saying it is impossible or has never happened, it would be far more likely to have occurred in years back.

Still, I would be so very interested to see an actual hard audit occur.

frank speaker
02/08/17 06:25:46PM @frank-speaker:

David, do you happen to know the name of the law firm which represents Hope Fellowship Church? Also, if you have some knowledge of this, just where does Chesapeake sell its O&G, and on what basis do they give a price to Chesapeake Operating. I've looked up historical prices of gas at the Leidy hub, the Ten Zone 4, and Dominion South, but can't see a relationship. Royalties went way down for October, while prices went up. Thanks for any help.

David Allen Lilly
02/09/17 06:40:42AM @david-allen-lilly:

I don't know the name of the law firm but I should because we were endlessly told of the lawsuit many times under every single thread on this site.

If you are asking me about Chesapeake fudging sales numbers to a skeleton company they share a roof with you have a point. But the truth is that proving the conspiracy and the shortage of royalties are not likely to be found in a well audit.

Proving these sales are illegitimate would be a different  legal matter, in my opinion, as it would be outside of the well audit that is offered in my lease.

Anything is possible and I am not naive enough to think that the oil and gas companies are a tribute to fair play but one can only go so far down the hole in trying to prove matters otherwise.

I feel like I have done as well as is feasibly possible to assure we are paid according to our lease terms and the market conditions, if you feel otherwise we can agree to disagree. If you or anyone can prove otherwise I would eagerly listen to your information and act accordingly.

frank speaker
02/09/17 09:11:35AM @frank-speaker:

You are making some assumptions about my question that are not accurate or warranted. I never said that any one is fudging the numbers. I and everyone else seems to be denied the simple explanation of which market hub and on what basis the sales are made. Companies don't need to 'fudge' any figures if they can simply make them up according to their whim. I take from your response that you also do not know how these prices are determined. If you do know the method, have you checked them against your royalties?

David Allen Lilly
02/09/17 12:45:51PM @david-allen-lilly:

Apparently you did not understand my answer any better than I understood the question. A well audit may not and in my opinion will not show what occurs after the sale, maybe I am wrong. The thread we are using is concerning well audits, thus my response to you. There is likely only one person who can answer the question you pose as to who and/or what they sell the product to, possibly a well audit will show that, maybe not and in either case I doubt would go any further to proving these sales as legitimate or not.

Again, I have done all I can reasonably do to verify my royalties as accurate to the lease terms. 

If there is some conspiracy to defraud landowners at or after the point of sale I wonder how large the conspiracy would need to be and how long it would take before some disgruntled person either blows a whistle or uses his knowledge as blackmail against the producer. Either way I am not ready to chase that tail yet.

frank speaker
02/10/17 09:28:06AM @frank-speaker:

I ask these questions to you as part of the well audit discussion only because this website is not quite able to deliver in the manner in which it had previously. I asked the same question as part of a new discussion about a week ago, and know that I got six responses, but could not open them.

Now, as for the value of an audit revealing some sort of conspiracy, I agree with you that looking to see if the reported numbers have been fraudulent or inaccurate will bear no fruit. Chesapeake is very careful in reporting exactly how much was produced and at what price.

It seems from what I know so far, that no land lessor knows either what market these products are sold at or at what real price, and what are the actual prices, or whether they are based on contracted prices, spot markets or futures markets, or are they just arbitrary prices, enough to provide the subsidiary the revenue to operate. This is an absurd situation that no-one should put up with for even a month. A proper audit would reveal these facts. If you, or anyone is refused the facts needed to verify an account and they have a right to audit and a right to arbitration, they can arbitrate this issue, and take their complaint to an arbiter without paying a fortune to attorneys or accountants.

There is no vast conspiracy that some whistle blower could reveal. There is only the sound of silence.

02/11/17 09:20:54PM @dott:

Frank, you can probably do a search on the Hope Fellowship church case and read the complaint filed and find out the Law firms name.

frank speaker
02/12/17 02:59:58PM @frank-speaker:

Thanks. I'll get around to that. I had hoped to get a quick answer so I could ask the attorneys some questions. I still want to know from this group just how Chesapeake determines its prices. It seems few care much that Chesapeake may be paying only about one third of the royalties that other companies pay on the same land.

Mike h
02/14/17 01:20:08PM @mike-h:

This article lists the attorneys that filed the Mount Hope lawsuit.

Billy Ray
02/03/17 07:54:30AM @billy-ray:

Thanks I agree. Regulations as they are would and the ramifications of production recording failures just seem unlikely. 

Billy Ray
02/03/17 07:58:57AM @billy-ray:

Well we are being told $15000 just to start for legal fees. The well we are looking would take several years to recoup that payment. It just seem unlikely we will see any changes unless there was simply a human error at CHK.

frank speaker
02/07/17 05:46:03PM @frank-speaker:

If you have a right to audit, why not try doing it yourself?  Start by asking to see their expense accounts and contracts. Legal fees are largely a fabrication. I once asked a Cleveland law firm to obtain a restraining order against a large corporation. Their response was it would cost $40,000 to start. I filed suit myself, for $250, and the case was accepted by the court and a docket filed. Eventually, I dropped the suit, and got a rebate from the clerk's office of about half my deposit.

02/08/17 08:48:07AM @gotgas:

Nice work Frank.

One of the major shifts in legal representation is the Limited Legal License. Basically, many states are granting authority to those with some legal training to fill the niche of assisting those in legal/administrative proceedings in lieu of an attorney. It is a nice shift which will hopefully help many who could not or would not dream of paying some of the astronomical attorney fees they sometimes demand.

Of course, representing yourself is rarely considered "Practicing Without a License"

frank speaker
02/08/17 10:21:58AM @frank-speaker:

Just as truck drivers may be replaced by self driving vehicles, people are beginning to wonder if lawyers can be replaced by computers. One thing I learned from the experience is that judges don't often know the law and they don't expect that they should. It is up to the attorneys to tell the judge the law, and of course throw a lot of snow around. The biggest obstacles for a layman are to find the legal precedents to support their case, and then  bring that and enough chutzpah into court to make it sound believable.

02/08/17 11:06:03AM @gotgas:

Well Said

Todd Attalla
02/15/17 01:31:04PM @todd-attalla:

Billy, I frequently read posts in these forums because I am in the oil and gas consulting business and it helps me stay informed on what is going on in the industry but I have never posted.  To disclose what I do, my name is Todd Attalla and I am a VP for Martindale Consultants, Inc. in Oklahoma City.  Our main business is Joint Interest audits for working interest owners and revenue/royalty audits for various governmental entities and royalty owners both large and small.

You ask a very valid question regarding audits because oftentimes, an audit may not be economically viable for a small royalty owner and nothing is ever guaranteed.  To give a little advice as to the things we initially look at to determine if an audit may be viable are 1) Lease Terms - Are they favorable to the Lessor, unfavorable, or ambiguous 2) What is the Lessor's NRI (Net Revenue Interest)?  Audits are typically validating the 8/8th's handling of the royalty payments/accounting and then everything is netted down to the Lessor's NRI.  For example, if you own all of the acres in a particular drilling unit with a 20% royalty provision, your NRI would be 20%, the less acres you own the lower your NRI is.  So if you have a large NRI, potential findings are at 20% of gross which makes audits more economically viable.  Conversely, if you have a very low NRI, they will not be economically viable because even if you have "findings", it will be at such a small percentage, the cost of the audit would be higher than the recoveries. 3) We also look at the production and/or volumes of the wells and time periods which also affect the economic viability.  4)  Payment remittances characteristics.  Oftentimes, payment remittances can disclose or give clues on how the Operator is handling royalty payments but they can also hide things as well such as deductions already being taken out of the net price and so forth.  They provide good upfront info but usually cause more questions based on the Operator's accounting methods and practices.

I hope this helps answering your question a little bit and I will leave you with this.  If you would like to learn more about pros and cons of royalty audits or pick my brain, you can direct message me (at least I think that is how it works on this site) and I would be more than happy to talk with you for a bit.  You can also look at our website if you would like to learn more about my firm.  Anyhow, I feel your frustration and thought I would offer you some factors to consider when researching audits.  It doesn't always have to go to litigation but depending on the clarity of lease terms, unfortunately, claims can end up in court.

Best Regards,

frank speaker
02/15/17 02:20:22PM @frank-speaker:

I would like to know if your auditors examine the contracts a company has with its contractors for the purpose of verifying their expenses, especially when dealing with a company which makes sales and transfers payments to its parent company and its bases its royalty payments to third parties on these figures.

Todd Attalla
02/15/17 02:32:55PM @todd-attalla:

Frank, good question but the answer is contingent on the lease terms.  Some provide the Lessor the right to examine the contracts and some are silent.  It also depends on if it is an affiliate or not because from an audit standpoint, you can rely more on independent true third party documentation.

frank speaker
02/15/17 06:01:20PM @frank-speaker:

So then once you are able to determine the transport costs, for example, for one lessor,you know the costs for all lessors of that unit, and can use that information to verify the expenses for everyone in the unit. Have you ever done an audit for two lessors in the same unit, or in the same local area?

Todd Attalla
02/16/17 09:01:18AM @todd-attalla:

Frank, Typically, the PPC's are consistent for each type of production (crude, residue, NGL's etc.) and accordingly, the actual costs would be the same for each Lessor.  So I can answer your question of "verifying costs for everyone" as somewhat of a yes but not a categorical yes.  Because each Lease may allow or not allow various deductions, fuel use, or other items, or may have different valuation methods such as "gross proceeds" or "value at the wellhead" which mean different things.

We have done audits for more than one Lessor (where Lessor's can pool the audit costs for economic reasons) but it is usually a group of Lessors with identical or similar Leases from a Trust or family where the mineral rights have been passed down.  When you get into two Lessor's with different Leases, it can be much more difficult based on the individual provisions which call for different audit objectives and confidentiality concerns.

frank speaker
02/16/17 10:57:47AM @frank-speaker:

People who have concerns of confidentiality concerns are fearful of the damage that may come to them from revealing their data. But the important players already have this information.

The irony is that by not sharing critical information with their neighbors everyone is hurt. If they knew that some people may only be receiving as little as one third of the revenues they are entitled to, they would pool their resources and share this information.

Some lessors in a unit might be entitled to much more than others, but knowing the true and standard costs of post production, and the sale point and price basis would be highly valuable and in everyone's interest.

I have probably had fifty offers to sell my royalties or minerals, as have many others, but nobody has ever offered to perform audits.  Are auditors prohibited from soliciting business?

Todd Attalla
02/16/17 11:12:13AM @todd-attalla:

No sir, we are not prohibited from soliciting business and we are involved with organizations such as NARO and COPAS and others that help make people aware of us and aware of the pros and cons of audits and if they can be beneficial for not.

With that being said, we market our services and so forth but do not "cold call" or contact individual royalty owners but instead look for opportunities to help folks by speaking at meetings and things of that nature.  The majority of our work comes from existing clients, word of mouth, and speaking engagements from time to time.

Feel free to contact me directly through our website or via email and we could discuss any specific situations of your case if you would like.

Ronald Hayhurst
02/15/17 01:36:28PM @ronald-hayhurst:

This may help you.

In the major oil and gas companies their are two departments, disbursements (royalties payments) and marketing (receiving payments for sale of oil, gas and other associated products). I do not believe they communicate between each other(share information). Thus what the meters( tested less often) say at the well site (which you get paid for) vs what the meters actual read at the sales point (tested more often) differ. Sometimes greatly.

Note. i think the marketing company by FERC rules has to be a separate sub-corporation. Thus their is plenty of chance for the number to very.

If your well makes any NGL's they are probably measured at the processing plant not at the well site. By the time they get to the plant the NGL's have been mixed with NGL's from may other wells. 

I hope this will help you can understand why it is so difficult to figure out if you are being paid right amount in an audit.


frank speaker
02/15/17 02:14:04PM @frank-speaker:

The problem with Chesapeake royalty payments is probably not so much involving auditing the metering or production figures, but auditing the expenses of post production to see if they are excessive or outside industry standards. The first problem in an audit is to see what these expenses actually are, since they are kept under wraps.

Ronald Hayhurst
02/15/17 02:26:22PM @ronald-hayhurst:

We find with our checks one of the biggest problems are the adjustments the make each month. We once followed thru all of the months of payments and adjustments for the sale of some oil and found they actually gave us a negative number for the oil.

frank speaker
02/15/17 05:32:01PM @frank-speaker:

At the end of 2015 Chesapeake revised their contract with Williams Company which was  supposed to lower their transport costs in 2016. Did your audits reflect this?




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