In Texas, our landman has promised us a cost-free royalty, and we’ve hired an O&G attorney to finalize our lease ... and to make sure we actually get it. Our lawyer has given us the first draft of our lease; it hasn’t been presented to the landman yet.
The long, detailed royalty clause has 10 paragraphs with many sub-paragraphs. Most seem excellent, but I’m concerned about some of the sub-paragraphs. (I’ve asked the attorney but didn’t really understand his answer.) I’m hoping someone can reassure me this is a good royalty clause ... giving us the cost-free royalty we were promised. Do you think the following will give us a check stub with no deductions except taxes? Thanks for any insight.
As royalty, Lessee covenants and agrees ... to pay Lessor on gas and casinghead gas produced from the premises
(a) when sold by Lessee in an arms-length sale to an unaffiliated third party, one-fourth of the Gross Proceeds received by Lessee from the sale of such gas and casinghead gas, or
(b) when sold to an Affiliate of Lessee, one-fourth of the Gross Proceeds, computed at the wellhead, from the sale of such gas by such Affiliate of Lessee;
- Re (b) above, if the gross proceeds are “computed at the wellhead,” doesn’t this allow for the deduction of post-production costs per the Heritage case?
For purposes of this lease, “Gross Proceeds” means the total consideration paid for oil and gas produced from the premises, with the following exceptions: ...
(b) If gas produced from the premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is not owned by Lessee ... Lessor's royalty shall be calculated based upon the consideration received by Lessee ... from sale ... less Lessee's proportionate part of severance taxes thereon.
(c) If gas produced from the premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is owned by Lessee ... Lessor's royalty shall be calculated based on ... the total consideration received by Lessee ... from the sale ... less Lessee's proportionate part of severance taxes thereon.
(d) No royalty shall be payable on gas used on the leased premises for production operations or compression or dehydration of gas produced from the leased premises.
- In a cost-free royalty, why should there be any exceptions ... other than Lessor’s severance taxes?
- Re (b) and (c) above, why should Lessor’s royalty be calculated on the gross proceeds ... less Lessee’s severance taxes?
- Re (d) above, why shouldn’t Lessor be paid royalty on gas used on the premises?
Lessee shall place oil and gas produced from the premises in marketable condition and shall market same for Lessor, at no cost to Lessor (except as provided above). Except as expressly provided above, Lessor's royalty shall not be charged directly or indirectly with any of the following: expenses of production, gathering, dehydration, compression, manufacturing, processing, treating or marketing of gas, oil, or any liquefiable hydrocarbons extracted therefrom.
- Shouldn’t transportation be listed as one of the expenses that are not deductible?
And what about storage?
- Wouldn’t it be a good idea to include the phrase, “including but not limited to”?
- Would it also help to add a sentence like “Lessee shall directly reimburse Lessor for any such charges or expenses made or charged to Lessor and withheld by a purchaser, by Lessee, or by others.”?