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BP Prudhoe Bay Royalty Trust Message Board

  • taxcpatx taxcpatx Jul 28, 2010 7:54 AM Flag

    Royalty Trust

    A royalty is created in two ways. One way is made with the land owner which could be an individual or the federal or state government. These royalties are usually 1/8. Texas state royalties are 1/6, It gives the company the right to drill, produce and sell the production and the 1/8 or so percent goes to the land owner.

    The other type is an overriding royalty interest (ORRI) which is "carved" out of the remaining 7/8 to which the producer would otherwise be entitled.

    If the producer sells its working interest (7/8 minus overriding royalty) the new owner is still obligated to pay the ORRI as long as the wells continue to produce.

    If the well goes dry or production ceases, there will be no more ORRI payments. Eventually the well will lose gas pressure and will require pumping or gas will have to be purchased and injected to maintain pressure. Finally gas-lift and pumping will no longer be feasable and production will stop. This could be many years in the future or it could be sooner.

    In view of the above, I would say that if BP goes broke, the assets will be sold to someone and production will continue. So BPT is not dependent on BP's financial problems.

    The only risk would be if BPT share holders were to agree to something that would reduce their share of the production. Also there could be temporary problems during any transition to new ownership.

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    • When XOM bought XTO it also bought in the HGT royalty. Sounds like XOM will fund HGT so far.
      Should BP sell out, could XOM use HGT for its own purpose. HGT was the XTO way to pay less taxes, it is now own by XOM. I am sure that all these royalties have significant percentage, 30% or more, of the units own by the producer. It is a back door way to keep control of your baby. Should changes be in the works, XOM would have controlling votes?
      Interesting angle!

      • 1 Reply to ousaouparis
      • You keep posting these strange speculations. XOM cannot decide not to pay HGT royalties. Nor can XOM "use HGT for its own purpose" (there is nothing to use...it is not a separate company, there is no management or employees, it is simply a percentage of the revenues of the properties covered by the royalty interest).

        And HGT is not "owned" by XOM. XTO (now XOM) is the operator of the fields covered by the royalty interest of HGT and CRT. That is not the same as HGT "owning" them.

        Suggest do some googles about overriding royalty interests. Here to start you off...
        "The term "overriding royalty interests" means fractional, undivided interests or rights of participation in the oil or gas, or in the proceeds from the sale of the oil or gas, produced from a specified tract or tracts, which are limited in duration to the terms of an existing lease and which are not subject to any portion of the expense of development, operation or maintenance.

        A royalty interest, in addition to the basic royalty, created out of the working interest; it is, therefore, limited in its duration to the life of the lease under which it is created. An overriding royalty is the right to receive revenues, in addition to the basic royalty, from the production of oil and gas from a well without paying the drilling or monthly operating expenses from the well. Overriding royalty interests are not connected to an ownership of minerals under the ground. Rather, it stems from ownership of a portion of generated revenues from oil and gas. Owners of overriding royalty own only proceeds from the production of minerals and not the minerals under the ground. An overriding royalty interest expires once the lease has expired and production has stopped, whereas, minerals and royalties owners maintain their ownership after production stops."

    • BPT sole purpose is for BP to pay less Federal and State taxes. The tax rate is less for individual then for corporation. My opinion is that the BPT units are really the future production payments therefore the royalty is a reimbursement with interest . This production is associated with BP. Should BP sale its Prudhoe Bay properties, BP will not be obligated to pay the Royalty on the production it does not own any longer. My opinion is that BPT is not a member of the Prudhoe Bay production. Does the new owner of BP asset is legally obligated to pay the royalties. The new owner may chose not to pay and may opt for another venue to lower its taxes. If BP sales its asset, the sale will have to take into account the residual value of BPT. If BP goes belly up, BPT was a losing investment. If the feds or the state of Alaska take over BP's asset, it's any bodies guess.

    • Yes BPT is a Royalty manage by the New York Bank. From a legal aspect BP has nothing to do with the management of BPT. The only connection that BP has with BPT is the amount of money or royalty BP pays BPT. The amount of money is based on BP production of its share of the Prudhoe Bay production field. BP assets in Prudhoe Bay is limited to 26% of the total production. None of the other producers of the oil field participate in the Royalty payment to BPT. When the BP production will become impossible to generate a profit, BPT will cease to distribute Units payment and will be dissolved.
      So yes BPT has nothing to do with BP, but without BP royalty payment, BPT die. Interesting none connection?

    • My understanding is that BP bought Prudahoe Bay from Standard Oil, created BPT
      and it has nothing to do with BP stock, or BP stockholders. In other words,
      for the sake of this conversation, 2 totally different companies.

      • 1 Reply to gardnergreen
      • It is a separate legal entity whose value is driven solely by (1) current price of oil, (2) current production (above first call trust has on monthly flow), (3) estimated future price of oil, and (4) estimated reserves in ground (i.e., how long the wells here can produce). BP can disappear and it would not affect BPT. I own a bunch of it.

    • Lisahuang on this MB had an interesting tangent on the reason for BPT to exist. The trust BPT is based on future production, and is an excellent insight to financial maneuvers above my pay grade. Thank a bunch Lisa...
      I am still wondering about BP. BP is the lead of the, what I call consortium. The BP share is 26%, the partners are COP 26% and XOM 46% plus 2% represented by the Canadian interest.
      My understanding from having looked at the Alaskan tax website, the daily production of Prudhoe Bay production field is around an average of 325 000 BPD (1 July 2010 was 327,667 barrel) The share of BP is less than 90 000 BPD. My conclusion is that BP represent the consortium not itself. For BP to modify or set up a new royalty, BP would need the approval of the majority of the partners. With 46% XOM as the weight to say yes or no. This also mean if APA buy off BP share, is APA the new BP, would the consortium lead change?
      This mean that BP does not have sole control of BPT, I am right, if not why.

 
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