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.