Shale Daily / NGI All News Access

Chesapeake to Royalty Owners: The Haircut Is in the Mail

The monthly check from Chesapeake Exploration LLC will still be in the mail to Barnett Shale royalty owners, but some of them will find it to be a little lighter than in the past.

The Chesapeake Energy Corp. unit told about 20,000 of its royalty owners in the play that it will begin deducting expenses associated with post-production of gas, such as gathering, compression and transportation.

The move is intended to align the company's practices with those of Total E&P USA Inc., a unit of France's Total SA. In January 2010 Total E&P acquired a 25% stake in Chesapeake's upstream Barnett assets in a $2.25 billion joint venture agreement (see Daily GPI, Jan. 5, 2010).

A Chesapeake executive told the Star-Telegram of Fort Worth, TX, that if the change had not been made, royalty payments would have had to be handled with two separate checks.

The change does not affect all royalty owners, only those that do not have agreements in place with the producer that would preclude such an expense deduction. Based on current costs and gas prices, the change is expected to cost affected royalty owners about 25% of what they had been receiving.

In the Aug. 1 letter Chesapeake reminded royalty owners that "you have personally witnessed benefits from natural gas production. Chesapeake values its relationship with its royalty owners and is proud to have invested more than $10 billion in North Texas during the past seven years."

Chesapeake said it is not applying the change retroactively, so royalty owners will not have to pay it back for past post-production expenses. "However, effective with the July 2011 check, your payments will reflect these charges going forward," it said. "As a result, you may see a reduction in the amount you receive for your royalty share."

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