QUESTION. What is the best way to state on a lease about royalties around well head. I know that you can get rid of third party and post production costs, but what is the best way to word that paragraph so it is best for a landowner or a mineral rights owner. It seems to me that its very hard to find a updated example of such, and there should be because of the importance of this small paragraph in the lease. The difference could be thousands of dollars
Vergil,
With your last sentence, I know you get the essence of recovering true value from you minerals. Since all fields, deposits, operators, and marketing opportunities are different by state due to supply and demand economics, a standard royalty provision is impossible to draft. However, most good operators will try to put a royalty provision in the lease they submit that reflects their business plan for a specific area or field.
As the mineral owner, you should a)allow the operator to make the best deal for itself, b) provide for arms length transaction prices if an operator affiliate is the purchaser, c) tie the price to a published price for the field, d) tie the production to a regulatory report at a minimum, e) obtain audit rights for situations where published prices are not available, and f) don't give away free oil, gas or water. There are other considerations but the 6 above are the most important to me.
Don't focus too much on the well head royalty unless that is the field practice and the point of sale. You may still base your royalty on a point of sale transaction which makes everybody honest and audit able. Don't allow the operator to discount the royalty for any other reason than severance, production taxes, or quality issues such as sulfur in oil and Btu energy in gas.
Good Luck and if you have a lot of acreage refer to the advice of "6th Generation Texan" to the forum.
The way I understand it is the oil and gas company can't deduct post-production costs at all in West Virginia. Here's a link to an article I found: http://www.ogfj.com/articles/print/volume-2/issue-7/features/a-new-era-in-oil-and-gas-royalty-accounting.html. Also, http://caselaw.findlaw.com/wv-supreme-court-of-appeals/1311629.html. I have language that I use when I consult with a mineral owner, but since I'm an attorney and there's the possibility that somebody might try to say I entered into a client/attorney relationship with them by posting it, I won't. If you'd like a copy of it, PM me.
@Gary - I'm curious to know if you think I'm way off base with this.
Kyle,
Great legal and accounting analyses. The courts commonly agree that "absent anything to the contrary in the lease", . . . . puts the burden on you to protect your clients with lease language that prevents mischief and misunderstandings. "Standard" leases today are cleverly written to protect the operator and allow vagueness to the lessor's rights so that the operator has flexibility to market the product to its needed primary benefit. The lessor usually doesn't want to process or market his share from the well head and knows that going into a lease. On the other hand, the operator needs the lease and may offer a high royalty to get it without knowing what product quantity or quality it may have for sale or who the purchaser might be or the point of sale.
In my non-legal but practical point of view, the operator (lessee) takes the risk and needs the flexibility to market the product while the lessor needs to limit the opportunity for mischief and vagueness by setting down rules in the lease to determine and audit prices and production. "But not less than X percent of gross revenue" language also can pin down guidelines after a well is drilled and tested.
Don't forget to check out the coal lease language in your state for royalty provisions.
Kyle Nuttall said:
The way I understand it is the oil and gas company can't deduct post-production costs at all in West Virginia. Here's a link to an article I found: http://www.ogfj.com/articles/print/volume-2/issue-7/features/a-new-.... Also, http://caselaw.findlaw.com/wv-supreme-court-of-appeals/1311629.html. I have language that I use when I consult with a mineral owner, but since I'm an attorney and there's the possibility that somebody might try to say I entered into a client/attorney relationship with them by posting it, I won't. If you'd like a copy of it, PM me.
@Gary - I'm curious to know if you think I'm way off base with this.
Gary,
Thank you for spelling this out! I thought I had a pretty good understanding of this until, I read something that made me begin to question myself all over again! lol
Seems as though I find myself doing that a lot in this oil and gas business.
Kaye