The 2 clauses presented above are language that is used to describe a gross royalty position versus a net royalty position on your leased acerage.
The 1st paragraph above is a net royalty description. You will note that it assigns post-production costs and governmental severance taxes per the following wording:
shall be subject to such production and severance taxes as are properly allocable thereto.
This is NOT a good thing for you since the company determines what goes into those post production numbers. I have a sister that negotiated a net royalty lease with one of the oil & gas companies and her royalties have been reduced by 45% because of this stipulation. In effect, having a net royalty position is almost like having a working interest in the wells being drilled. You are inbusiness with the oil & gas firm and paying for your share of post production costs.
Since you are the owner of a small amount of acerage, IMO, you need to negotiate for a gross royalty position that does not assign any post production costs and the royalty received by you should be based the price received by Lessee ( oil & gas company) from a NON-AFFILIATED THIRD PARTY SALE.
In other words, the production should not be valued at the wellhead but at the point of third party sale.
You may also want to consider what the potential pay-off of your royalty position might be by looking at published production rates for wells in your area. This can be gotten off the Web by looking at State records. Is there much in the way of potential royalties to your position given the fact you have a small interest in the entore acerage being developed?
You may find out that negotiating a flat out sale of your mineral rights to the Lessee or a company that buys mineral rights might be the better option for you since your royalty position in the platform will most likely be small. This would allow you to get your money up front and not have to worry about production rates in the future and wait for a monthly or quarterly check to arrive. If you find out the sale price is not adequate, then you could go through with the lease.
The 2nd paragraph which is labeled "Market Enhancement" is one way to structure a "Gross Royalty" position in the drilling program, with an exception being in those costs that are incurred to enhance the value of the product to receive a better price. In that situation it is implies that you would be reponsible for your share of the enhancement costs.
However, I beleive the wording of this paragraph misses the mark as follows:
1) It does not define where the product will be priced, at the wellhead or at a third party sale. When it is not defined, you are at the mercy of the oil & gas company and it will be priced at the wellhead. IMO, that needs to be changed per my remarks above.
I would also modify the language above to include "POST-PRODUCTION" costs since those costs are well known within the industry and within the existing language above, they could be interpreted as not being in the list of costs above. In other words, be on the safe side and include the term "post-production costs" so there is not any question as to their inclusion to the list.
2) It does not define what types of costs could be incurred for "value enhancement" and that needs to be defined. Otherwise, a lot of costs could be designated as value enhancement costs, when in fact they are not.
These are my thoughts as to our question. Remember, you need to negotiate for gross royalties and not net royalties. Since your % of the project is small, you may find the oil and gas company prepared to grant you that change to their lease.
Lastly, please understand, that although I have negotiated an oil & gas lease in the past, I am not an oil & gas attorney. Therefore, these are my thoughts based upon my experience. You need to do your own due diligence before agreeing to any contract with the oil & gas company, whether it be a lease or an outright sale.
If you uncomfortable with doing so, yu might want to consider discussing the same with an attorney that specializes in the oil & gas business and has experience in negotiating a successful lease for he LESSOR, which is you.