In several oil and gas producing states, including Texas, an oil and gas company can deduct all post-wellhead costs when calculating royalty. If you live in a state where this applies, then a thorough review of your royalty clause is an important step before you sign an oil and gas lease.
To protect yourself from being hit hard in the wallet for post-wellhead costs (i.e. the dehydrating, processing, gathering, treating, transportation and other similar costs), specific language should be included or modified in your royalty clause. Here are some useful tips:
- Pay attention to the terms such as "gross proceeds” and “gross market value.” You want to make sure that your royalty is calculated on the gross proceeds from the well and not less than gross market value.
- Check for references to royalty calculations “at the well,” or “at the wellhead”
- Look for any language specifying any costs other than standard deductions (i.e. ad valorem, severance taxes)
- Review thoroughly any language associated with a “cost-free” royalty clause
While all oil and gas producing states have industry-related legislation, not every state follows the same rules, so you may hold minerals in a state where a company is not allowed to deduct all of the post-wellhead costs from your royalty. If you have specific questions about oil and gas law in your state, you may consider consulting an oil and gas attorney.
In no way is this blog post intended to provide legal advice