Recently got a check that listed the gross price received as $38.74 for oil and $4.21 for gas. No deductions on oil but deductions for gas were 113% of gross resulting in a net negative subtracted from my total. Thoughts
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Welcome to the world of âpost production costsâ and why you donât want them in your lease. If your lease allows them and your state allows them, then you may be stuck. Certain states have pending lawsuits over that issue if the charges are excessive.
It costs money to extract the gas from the flowstream and get it into a marketable state. Compression, transportation, dewatering, etc. etc. Certain states allow those charges to happen. Other states do not. As gas fields get older and older, it costs more and more to get the product to market.
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Understand. Inherited this very old lease. I now use my own lease which has a good âno cost royaltyâ clause which I update often to keep up with case law. Still wonder why they continue running there gas at a loss (unless they own or have an interest in the entity to which they pay the costs). Thanks for the reply.
Most of the operators think really big picture. They may take a loss on the gas to get the oil; they may âownâ the gas buyer (hence all the lawsuits), or they may have a further strategy that allows them to take that loss for the bigger fish down the road. Who knowsâŚ
It is not possible to shut off the gas and still produce the oil. The only alternative would be to flare the gas and most State regulatory agencies will not allow that to occur if there is an existing pipeline connection.
Explain this to me. Even though we ask an operator or land person to not include post production costs, the language is still in the lease. Then they add a no deduction clause to an addendum but even in this clause they have language which seems to be a counteraction the whole purpose of the clause. Ex: ââŚshall be without deduction for the cost of producing, gathering, storing, separating, dehydrationâŚ; however, any such cost which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessorâs shareâŚâ
Now, isnât this a back door approach to take deductions for the very same cost that they claimed before that they will not take??
And what about âthe right of the Lessee to use free of cost, gas, oil ⌠whether on or off lease, as fuel in delivering or marketingâŚor otherwise making such oil and gas ready for sale or use. Isnât this an open ticket to use as much product free of cost for their operationsâ. Not sure how this is different from any other deductions take from royalties.
Sure there is a lot of expense and risk associated with these operations and the market has been screwy over the last few years. But the potential value is why they are in the business to begin with. I donât get it. A deduction is a deduction is a deduction for what ever reason the operator deems fit. Sometimes the royalty check looks like we have paid for all the expenses.
You are correct. That is backdoor approach. I strike the âhoweverâŚâ and I also strike the free use of oil, gas, etc. As more and more of the rig and frac fleet change over to mixed fuel diesel/gas engines, companies have been known to use folkâs gas to run their engines and hearsay says they have manufactured electricity and sold it back to the grid (without paying the mineral owner). That is why I strike it.
Oh yea, I forgot to mention that when we told one of the land people that we did not want to give free product to the operator, the land person said the company would not agree to a lease without this freebie in there. Feels like blackmail. We signed that lease anyway and now they are back for another lease. Feeling gullible and used right now. Guess we should stand our ground this time and say no way.
I have stood my ground and not had either the free oil, gas and water or post production charges on my leases in years, but I am in OK where it is easier to do.
Martha, you give us new found courage and am eternal grateful for the tips and advise that you and others provide. I think we have been too easy a mark for too long. 98% of our interests are in OK so,âŚTime to sharpen our pencils⌠Thanks Gale and Pat Carmoney -Rose-Wall OK LLC
That is why this forum exists! We can help each other out and educate one another on what is good practice.
Devious, while at the same time clever!
I have an old lease (1/8) and the only clause I see would be in my favor. âAnd lessor to have gas free of cost from any such well for all stoves and all inside lights in the principle dwelling on said land during the same time, my making lessorâs own connections with the well at lessorâs own risk and expenseâ
I think I should buy a cheap trailer, and get a 50kw multi-fuel generator (to produce power for the inside lights), hook it up to the supply, use a few watts and sell what I can back to the power company!
I suspect you might have an issue classifying your 50kW generator as being for âstoves and inside lights.â
I remember an operation years ago, where we had a very difficult time accounting for a marked drop in a certain wellâs gas production. After a little investigation, we discovered that the farmer was firing a very large grain dryer with his free âDomestic Useâ gas. He ended up having to pay us for the gas going forward.
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And who says farmers are dumb aside from city dwellers? Just to survive in that occupation, one has to be clever and resourceful in order to figure out solutions to problems.
Although Iâm sure my âdomesticâ use interior light generator would be a little harder to disprove vs. a grain dryer as principle dwelling fuel source, Iâm not going to rush into this any time soon. After all, the companies have deeper pockets, and I believe their lawyers would outlast mine!
Although it would help enhance my 1/8th interest 
Read these two cases and compare to your situation. I believe you are wrongfully being charged and your royalties were under paid. You should be refunded the deducts with statutory interest. Mittelstaedt case forces the operator to prove that enhancement increased the value of a already markable product.
MITTELSTAEDT v. SANTA FE MINERALS INC
PUMMILL v. HANCOCK EXPLORATION
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Boy I just love reading court case summariesâŚNot. I am glad you shared these cases though. It reminded me that last year I requested a clause to exclude post production costs and the land person specifically referenced the Mittelstaedt case in the revised lease to make me feel better. At the time I thought this made good sense and went along with it. The problem now is how does one justify the costs to make the product more valuable (marketable). How do I know which of these 30-40 different companies we deal with are honest and which are taking advantage? Is it obvious looking at the production numbers and deductions on the check?
I certainly would have no proof to argue with the producerâŚwould I? Just interpreting the production details on some of the check stubs is difficult enough. Not all of them are that bad but some are almost impossible. I canât even get the math to add up when we do our taxes. Glad we are talking about this and appreciate your sharing these legal cases.
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