"Cost Free Royalty" - Lease Contract Interpretation Help

The lease states lessor gets cost free royalty. What would the following mean?

(except lessor's pro rata part of any such costs charged by the third party or parties which are not affiliated with Lessee in an arms length transaction)

Thanks,

Joel

It means that you have to pay your share of transportation, along with potentially other costs.

Buddy, do you have any idea what the average expenses are per barrel of oil, in a typical lease, rather than the cost-free one?

Buddy Cotten said:

It means that you have to pay your share of transportation, along with potentially other costs.

Buddy Cotten
www.cottenoilproperties.com

Joel, It might depend on where the the exception clause in parenthesis resides. Is it contained in the lease itself, or an appendix/side agreement, or is it on a division order?

Mr. Cotton, thanks for your responce. I’ll write out what is written in the lease.

“Notwithstanding any other provision of this lease, Lessor’s royalty shall be free royalty. Lessor shall not be required to pay and Lessor’s royalty shall not be reduced on account of or charged with any of Lessee’s cost making the products produced hereunder ready and available for market (the above statement here) including, but not limited to, the cost of transporting, compressing and processing oil, gas and other gaseous or liquid hydrocarbons, it being the duty of lessee to transport the same to the purchaser thereof free of all cost to lessor (the above statement again). Royalty shall be calculated and paid on the price recieved from the purchaser. Lessee shall, however, bear and pay its proportionate part of all severence and windfall profit and other applicable taxes.”

I just didn’t understand what the statement in the ( ) meant. This property belongs to my brother just south of Burleson in Johnson County, TX. His first full month check was for approx 1880.00 & they deducted approx. 100.00 for the taxes & then another 560.00 aporox. for “other deductions”. This lease is with David Arrington. Thanks again.

Dorothy, this is an exhibit "A’ attachment to the lease. Thanks

Dear Lisa,

I suppose that it varies from location to location, but here in my area at today’s prices it averages about 5%. So, if you had a 25% royalty lease, then by having a cost free royalty it would be roughly equivalent to a 26.25% lease where the lessor bore his share of royalty deductions.

Lisa said:

Buddy, do you have any idea what the average expenses are per barrel of oil, in a typical lease, rather than the cost-free one?
Buddy Cotten said:
It means that you have to pay your share of transportation, along with potentially other costs.

Buddy Cotten
www.cottenoilproperties.com

Dear Mr. King,

Apparently, if they are deducting correctly, your brother is paying for transportation after connection to the purchaser’s line. That is what it sounds like. However, the amount seems excessive but I am not intimate with Johnson County transportation costs. Perhaps your brother should inquire as to the nature of the other deducts.

I doubt that they are deducting correctly, unless the lease royalty provision provides that royalty is to be computed at the mouth of the well. Then the Heritage Resources case would apply and your brother has to eat his expenses, the other language being considered by the Heritage court as mere superflurage.

Joel King said:

Mr. Cotton, thanks for your responce. I’ll write out what is written in the lease.
“Notwithstanding any other provision of this lease, Lessor’s royalty shall be free royalty. Lessor shall not be required to pay and Lessor’s royalty shall not be reduced on account of or charged with any of Lessee’s cost making the products produced hereunder ready and available for market (the above statement here) including, but not limited to, the cost of transporting, compressing and processing oil, gas and other gaseous or liquid hydrocarbons, it being the duty of lessee to transport the same to the purchaser thereof free of all cost to lessor (the above statement again). Royalty shall be calculated and paid on the price recieved from the purchaser. Lessee shall, however, bear and pay its proportionate part of all severence and windfall profit and other applicable taxes.” I just didn’t understand what the statement in the ( ) meant. This property belongs to my brother just south of Burleson in Johnson County, TX. His first full month check was for approx 1880.00 & they deducted approx. 100.00 for the taxes & then another 560.00 aporox. for “other deductions”. This lease is with David Arrington. Thanks again.

Dorothy, this is an exhibit "A’ attachment to the lease. Thanks

Buddy Cotten said:

Dear Mr. King,

Apparently, if they are deducting correctly, your brother is paying for transportation after connection to the purchaser’s line. That is what it sounds like. However, the amount seems excessive but I am not intimate with Johnson County transportation costs. Perhaps your brother should inquire as to the nature of the other deducts.

I doubt that they are deducting correctly, unless the lease royalty provision provides that royalty is to be computed at the mouth of the well. Then the Heritage Resources case would apply and your brother has to eat his expenses, the other language being considered by the Heritage court as mere superflurage.

Best,

Buddy Cotten
www.cottenoilproperties.com


Joel King said:
Mr. Cotton, thanks for your responce. I’ll write out what is written in the lease.
“Notwithstanding any other provision of this lease, Lessor’s royalty shall be free royalty. Lessor shall not be required to pay and Lessor’s royalty shall not be reduced on account of or charged with any of Lessee’s cost making the products produced hereunder ready and available for market (the above statement here) including, but not limited to, the cost of transporting, compressing and processing oil, gas and other gaseous or liquid hydrocarbons, it being the duty of lessee to transport the same to the purchaser thereof free of all cost to lessor (the above statement again). Royalty shall be calculated and paid on the price recieved from the purchaser. Lessee shall, however, bear and pay its proportionate part of all severence and windfall profit and other applicable taxes.” I just didn’t understand what the statement in the ( ) meant. This property belongs to my brother just south of Burleson in Johnson County, TX. His first full month check was for approx 1880.00 & they deducted approx. 100.00 for the taxes & then another 560.00 aporox. for “other deductions”. This lease is with David Arrington.
Thanks again.

Dorothy, this is an exhibit "A’ attachment to the lease.
Thanks
Thanks again for your help. My brother has a call in to them so I'll let you know how that turns out.

Joel King said:

Buddy Cotten said:
Dear Mr. King,

Apparently, if they are deducting correctly, your brother is paying for transportation after connection to the purchaser’s line. That is what it sounds like. However, the amount seems excessive but I am not intimate with Johnson County transportation costs. Perhaps your brother should inquire as to the nature of the other deducts.

I doubt that they are deducting correctly, unless the lease royalty provision provides that royalty is to be computed at the mouth of the well. Then the Heritage Resources case would apply and your brother has to eat his expenses, the other language being considered by the Heritage court as mere superflurage.

Best,

Buddy Cotten
www.cottenoilproperties.com


Joel King said:
Mr. Cotton, thanks for your responce. I’ll write out what is written in the lease.
“Notwithstanding any other provision of this lease, Lessor’s royalty shall be free royalty. Lessor shall not be required to pay and Lessor’s royalty shall not be reduced on account of or charged with any of Lessee’s cost making the products produced hereunder ready and available for market (the above statement here) including, but not limited to, the cost of transporting, compressing and processing oil, gas and other gaseous or liquid hydrocarbons, it being the duty of lessee to transport the same to the purchaser thereof free of all cost to lessor (the above statement again). Royalty shall be calculated and paid on the price recieved from the purchaser. Lessee shall, however, bear and pay its proportionate part of all severence and windfall profit and other applicable taxes.” I just didn’t understand what the statement in the ( ) meant. This property belongs to my brother just south of Burleson in Johnson County, TX. His first full month check was for approx 1880.00 & they deducted approx. 100.00 for the taxes & then another 560.00 aporox. for “other deductions”. This lease is with David Arrington.
Thanks again.

Dorothy, this is an exhibit "A’ attachment to the lease.
Thanks
Thanks again for your help. My brother has a call in to them so I'll let you know how that turns out.
Mr. Cotton, my brother received a call from D. Arrington Co. & the lady told him after reading the clause several times, she realizes the wording is confusing so she judged that the intent of the statement was for the royalties to be free & clear of the transportation, etc. chargers. "Lessors royalty shall be free royalty" - period. I would agree with this because as in any standard lease I've ever seen, including this one, it allowed for the deductions, so it would be strange to turn arround & put a clause in to allow for the same thing unless they were trying to befuzzle someone. Thanks so much for your insight.