Kentucky has a significant presence in the oil and gas industry. The right to remove oil and gas from the earth’s surface is granted under an oil and gas lease. At one time, natural gas was deemed to be an undesirable by-product of oil extraction. It is now a valuable resource that is easily transported via interstate pipelines and is a cost-effective energy alternative.
Natural gas is removed from the earth by a pipe. The pipe leads to a meter, which records the volume of gas that pass through the meter. The meter is then sent to an integrator to determine how much gas passed through the meter during a given time interval (usually a month). The volume is usually stated in terms of a thousand cubic feet (Mcf). The integrator’s report is then transmitted to the producer (i.e., the lessee under an oil and gas lease), who calculates the royalty due the landlord. A one-eighth (0.125) royalty is typical under most oil and gas leases. The royalty is usually determined by the net sales price of the gas, which is the gross sales price minus certain costs associated with getting the gas to market. Often times, the gas is sold at great distances from the leased premises where it is produced. There has been a significant amount of litigation as to the types of costs that the producer/lessor is entitled to deduct from the gross selling price when determining the royalty due the landowner. Because the gas producer does not disclose the contents of the integration report (which tells how many Mcfs of gas a given well has produced during a given time interval) to the landlord, the landlord has no idea how much volume a given gas well is producing over the course of time. In other words, it is easy for a gas producer to report less than actual volumes of gas produced and thereby misrepresent the amount of royalties due. For this reason, it is critical that a gas landlord only lease gas development rights to reputable producers.
Natural gas is a vital and valuable resource and the oil and gas industry is likely to be an economic driver as the price of crude oil increases. DLG stands ready to use its experience in this significant Kentucky industry to counsel both gas lessors and lessees with respect to any dispute arising under an oil and gas lease, whether the dispute arises in or outside of a bankruptcy proceeding.