Chesapeake Energy Marketing Inc.
Chesapeake Energy Marketing Inc., (CEMI) is a wholly-owned subsidiary of Chesapeake Energy Corporation that provides natural gas marketing services including contract administration and nomination services for Chesapeake and its partners. CEMI purchases natural gas from Chesapeake Operating, Inc. (COI) at the wellhead and sells it downstream at multiple sales points throughout the country based on contractual and spot market conditions. Interstate and/or intrastate pipelines, local gas distribution companies and large volume natural gas users are all examples of multiple sales points.
Before natural gas is delivered to a sales point, post-production processes must take place including gathering produced natural gas from the wellhead, compressing, processing and treating the gathered gas. All of these post-production processes are considered costs for which royalty owners are charged only their proportionate part required to deliver natural gas to these sales points.
Determining Natural Gas Prices
The price of natural gas is set by market forces, primarily supply and demand. Those market forces provide information where informed buyers and sellers agree on the price of natural gas on a constantly changing basis. Natural gas is considered a commodity and commodity markets are inherently volatile, meaning the price can change often and at times drastically. Pricing for natural gas is driven by the economy, the weather and other pertinent factors, and therefore is one of the most volatile commodities on the market.
Natural gas is priced and traded at different locations throughout the country. These locations, referred to as market hubs, are located at the intersections of major pipeline systems. There are more than 30 major market hubs in the U.S. and prices fluctuate at each hub depending on the supply and demand for natural gas at that particular point.
Figuring Weighted Average
The weighted average price of natural gas is the average price that CEMI pays COI during a given time period, usually a month. CEMI aggregates natural gas from multiple wells into a pool. The volume of natural gas aggregated in this pool is then divided into sales to many different sales points. The weighted average sales price (WASP) is calculated by averaging the price received from individual sales out of this pool across the entire volume contained in the pool. This WASP is then applied to all of the wells whose production contributed to the sales pool. Chesapeake royalty owners are typically paid based on this weighted average amount in accordance with the terms of their lease, which is an individual contract between the mineral owner (lessor) and the operating company (lessee).
Differences Between Individual Wells and Leases
The British thermal unit (BTU) value of natural gas is different from each producing well. Prices paid for natural gas may vary depending on its considered higher heating value (HHV) or lower heating value (LHV), which is determined by the BTU value. Additionally, natural gas from a particular well may require more or less post-production processing due to its quality and, as a result, require different routes to sales points (discussed above) which will impact wellhead prices.
An individual lease is a contract that is negotiated between a lessor and lessee. The lease terms can vary to meet the individual needs of a mineral owner, so it would be inappropriate to answer a specific question about an individual lease. We encourage each Chesapeake mineral owner with questions concerning their royalty payments to contact the Chesapeake Contact Center at 877-CHK-1GAS. The Contact Center provides first-rate customer service for our mineral/royalty owners and is staffed with employees dedicated to answering your questions. It is open Monday through Friday from 8 a.m. to 5 p.m. Central Standard Time.