Cost Free Royalty

Oil and Gas Leasing Help
1

Buddy and others,

I have heard mixed opinions as to whether a well-worded Cost Free Royalty clause really has much teeth in Texas (or anywhere, I guess). Just wondering if you had such a provision in your lease, can you really expect there to be no deductions (besides taxes) when your check arrives? Any thoughts would be appreciated. Thanks.

GAllen

2

I think if you don't have to pay drilling, operating and equipment cost you have a cost free royalty. I think what you are looking for is a royalty free of post production costs/deducts, which I think can be accomplished with a well crafted clause. Whether you can get the potential lessee to agree to the inclusion of said clause is a different matter.

3

Actually, I didn't word my question very well. Yes, I meant post-production deductions for transportation, marketing, compression, etc. Have people been successful having these included in their leases AND O and companies been compliant with excluding these deductions in the royalty payments that follow? Thanks.

4
  • Yes, my parents were able to get a lease in Texas in the 1990s with no post-production cost deductions. The company has been compliant when paying us our share of the royalty.

    G Allen said:

Actually, I didn't word my question very well. Yes, I meant post-production deductions for transportation, marketing, compression, etc. Have people been successful having these included in their leases AND O and companies been compliant with excluding these deductions in the royalty payments that follow? Thanks.

5

I wasn't being critical of you Mr. Allen. I believe that some people were not being charged for post production costs, under cost free language. A fairly recent court decision has made it so that lessors who hadn't been having deducts from their royalty for all the things you mention, now they do.

G Allen said:

Actually, I didn't word my question very well. Yes, I meant post-production deductions for transportation, marketing, compression, etc. Have people been successful having these included in their leases AND O and companies been compliant with excluding these deductions in the royalty payments that follow? Thanks.

6

Dear Mr. Allen,

The short answer is yes - you can contract for almost anything if you do it right. There are certain traps that if you do not follow, the courts have held that you will pay for those charges anyway. You must take certain contractual steps to make sure that what you wanted is how you ended up.