Accounting for lease payments

Chesapeake Energy is a big player in the oil and gas business in Pennsylvania.  Over the years it has signed many, many leases with Pennsylvania residents, mainly former farmers.  The company's pitch has been that the lessees will become millionaires in a few years of receiving royalty payments.  One of the lessees got a check for $8,506 for his first month’s share of the gas produced by the wells on his land.  Four months later the wells were producing the same amount of gas, but the royalty check was for $1,690.The difference was for “gathering” expenses; what these consisted of was never explained.

The companies seem to care little for the leases as they deduct expenses for transporting and processing natural gas, even when leases contain clauses explicitly prohibiting such deductions.Another scheme is to set up subsidiaries or limited partnerships to which they sell oil and gas at reduced prices, only to recoup the full value of the resources when their subsidiaries resell it. Royalty payments are usually based on the initial transaction.  

ProPublica has been investigating oil and gas royalties paid to private parties and the government and has concluded that the companies are keeping billions of dollars in royalties out of the hands of private and government landholders.