Hot off an annual meeting where they decided that “shut up and cash your check just won’t work anymore,” members of the National Association of Royalty Owners (NARO) launched a campaign against intrastate gas marketing practices they say are at best clouding the market and at worst ripping them off.

The crux of NARO’s dissatisfaction stems from the check stubs royalty owners receive from operating companies. The royalty owners claim they are not given adequate information on amounts deducted from their royalties to pay for costs associated with intrastate gas transmission. They say that when they try to find out they are stonewalled by either the operator or pipeline or both. For instance, the operator will say it doesn’t know how the deducted costs are allocated, or it will say it can’t share the information with the royalty owner because of a confidentiality agreement it has with the pipeline, explained NARO Executive Director Jerry Simmons.

Traditionally, royalty owners have been paid a wellhead price minus deductions for costs that were generally understood. However, as gas prices have risen over recent years, “we had deductions becoming larger and larger, percentage-wise, from royalty checks, and royalty owners would say, ‘What are these? What am I being charged for?'” said Simmons.

“Well, it was, ‘We had to sweeten your gas to get it into the system. We had to pay for fuel and transportation and infrastructure, and on and on and on.'”

Simmons told NGI that when royalty owners sought itemized lists of charges they were told the information was confidential. “That kind of started the whole ball rolling of people looking into it further and asking questions about what was going on.”

During its last session the Kansas Legislature passed compromise legislation that addresses the issue but doesn’t go as far as the royalty owners would like. For instance, just prior to passage, wording that would have specified what is to be done in the case of affiliate sales and split-stream sales was stripped,” Erick Nordling, executive secretary of the Southwest Kansas Royalty Owners Association told NGI. As it stands, the legislation allows royalty owners to make written requests for information but provides for little in the way of oversight.

Legislation also has been proposed in Texas. Legislation introduced this year in Oklahoma died in committee.

Simmons said he believes independent producers are, or at least should be, on the association’s side. After all, they’re paying for intrastate gas transmission and its associated costs, too. Additionally, state taxing authorities and, ultimately, consumers also have an interest in transparency of intrastate transmission costs.

“We believe there is an awful lot of taxes that aren’t getting collected out there,” Simmons said. “There’s money changing hands for sales and distribution that it’s not part of the equation in the tax structure.”

NARO President Linn A. Willers spoke at the association’s annual meeting Sept. 7-9. “We must take action now to help preserve the integrity of natural gas production, or the marketing system could be facing a meltdown in the coming months and years,” he said. “The proliferation of master limited partnerships [MLPs], which create virtual regional monopolies in the pipeline gathering sector, coupled with relatively ineffective or non-existent intrastate regulatory oversight, has resulted in enormous profits for a handful of companies at the expense of independent producers without pipeline capabilities, royalty interest owners and consumers of natural gas and its by-products.”

At the meeting NARO resolved to support legislation to eliminate confidentiality from contracts between producers and transporters/purchasers, strengthen oversight of intrastate affiliate sales transactions, and educate government, royalty owners, independent producers and the general public on the issue.

“The drum that we started to beat, probably about a year ago, was for full transparency,” Simmons said. “We still talk about that. We still talk about these issues as royalty owners and everybody along the line: consumers, taxing authorities, etc., producers, should all demand full transparency.”

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