I read about natural gas selling around $5.00… So why does my royalty check show less?
The natural gas price you read in the news is the price paid at what is called “Henry Hub” which is the central gathering point in South Louisiana that establishes the “Base Price” for natural gas sold in the United States. All natural gas is priced at this “Index Price” LESS transportation (pipeline costs) and LESS treating costs such as dehydration (removing water vapor) and compression (pumping the gas through the pipelines). The difference between the Index Price and the price you are paid for your royalty gas is the sum of these charges and is generally referred to as the “Gas Price Differential.” The farther your natural gas is located from its ultimate market, the greater the Gas Price Differential will be and of course, the less you will be paid at the wellhead for you royalty gas.
Additionally, the quality of natural gas produced in the field varies widely from producing area to producing area; the heating value (BTU content), contaminant concentration (N2, CO2 and/or H2S) and natural gas liquid content, all greatly affect the value of the gas that is produced at the wellhead (where nearly all royalties are paid). As with the Gas Price Differential where the location of your royalty gas determines the amount of price deduction you will bear, the poorer the quality of your royalty gas, the less you will be paid for it.
Therefore, due to the many factors that can affect the price you are paid for your royalty gas, the price you see on your royalty check will almost always be less than the Index Price and often, much less!