If you have a lease with Chesapeake, we are proud to call you a partner in our historic development of the Barnett Shale. Natural gas production in this area is changing our nation and providing energy independence. As the second-largest producer of natural gas in the country, Chesapeake remains dedicated to the Barnett Shale and is making every effort to drill even more wells in North Texas to provide additional value to our mineral owners and shareholders.
We remain the most active driller in the Barnett Shale in part due to our joint venture with Total E&P USA, Inc., a multinational energy company. Total acquired a significant interest in Chesapeake’s Barnett assets in 2010, strengthening our drilling and production program.
Recently, Chesapeake completed a lengthy audit to assure that royalties are being properly calculated. Through the audit some leases were found that allow for the deduction of post-production costs such as gathering, compression and transportation. As a result, future payments on production tied to these leases will reflect these charges. If these changes will affect your lease, you will be notified by letter during August 2011.
We want to make sure this change is fully explained to affected parties. Below are several frequently asked questions concerning this change. If you have additional questions, please call our Owner Relations Department at 855-245-2100.
Q: What are gathering and compression?
A: Gathering is essentially the collection of natural gas from the wells, literally gathering it together to be sold. This process is performed by pipeline (or midstream) companies to gather volumes of natural gas in the gathering system to deliver to a sales point or to another pipeline.
Compression is an integral component of a natural gas pipeline system. The process controls the pressures found within the pipeline systems and is required to push the natural gas through the pipeline to distant sales points and/or end users.
Q: How are gathering, compression and transportation important to my royalty payment?
A: Without these functions, you could not receive a royalty payment. Natural gas is delivered to buyers through these functions. The gas must be sold for there to be revenues to share with mineral owners.
Q: How will this affect previous royalty payments I have received?
A: It won’t. Chesapeake has no intention of recouping those costs. This change will be effective on your July 2011 royalty payment, the gas price provided on your check stub from that point forward will reflect these charges.
Q: Where in my lease are these deductions permitted?
A: These deductions are expressly stated in some leases, but under Texas law, a lessor bears post-production costs unless the lease specifically provides otherwise. Market value, proceeds or amount realized requires valuation of gas at the wellhead. Costs incurred before sales are shared proportionately by the lessor (the mineral owner) and the lessee (the natural gas company).
Q: Why is your practice changing now?
A: Until we performed the audit, Chesapeake had not tracked which leases allowed for the deduction of post-production costs.
Q: Where is the gas being sold and to whom?
A: Chesapeake’s gas is sold at the wellhead to Chesapeake Energy Marketing, Inc. Total E&P’s gas is also sold at the wellhead to Total Gas & Power North America. As a large-volume gas producer, these companies consistently get the best price for natural gas available in the current market.