Does Lessee have obligation to pay royalty on gas and liquids?

General Mineral Rights Discussion
1

I have a lease for which a well is producing oil, liquids and gas, for which the operator is failing to pay royalty on the gas and liquids and only paying on the oil, The Lease says the following:

III. ROYALTIES

3.1 Royalty Payment. Lessor reserves for itself, its successors and assigns, the following royalties and Lessee, in consideration of Lessor’s granting of this Lease, shall deliver same to Lessor as follows.

(i) to deliver or cause to be delivered to the credit of Lessor, into the pipe line or other receptacle to which Lessee may connect its wells, one-fourth (1/4) of all oil, condensate and liquid hydrocarbons produced and saved by Lessee from the Leased Premises, or from time to time, at the option of Lessor, Lessee shall sell Lessor's share of such oil, condensate or liquid hydrocarbons with Lessee's share and shall pay Lessor one-fourth (1/4) of the Gross Proceeds (as hereafter defined) received by Lessee or any Affiliate of Lessee (as hereafter defined) from the sale of all oil, condensate and liquid hydrocarbons produced and saved from the Leased Premises;

(ii) to pay Lessor on gas and casinghead gas produced and saved or used from the Leased Premises

(1) when sold by Lessee in an arms-length sale to an unaffiliated third party, one- fourth (1/4) of the Gross Proceeds received by Lessee from the sale of such gas and casinghead gas, or

(2) when sold to an Affiliate of Lessee, one-fourth (1/4) of the Gross Proceeds, computed from market value at the point of sale, from the sale of such gas by such Affiliate of Lessee; and

(3) when used by Lessee one-fourth (1/4) of the market value at the point of use.

(iii) to pay Lessor on all other minerals produced and marketed or utilized by Lessee from the Leased Premises, one-fourth (1/4) of the Gross Proceeds received at the point of sale

3.4 Gross Proceeds. For purposes of this Lease, “Gross Proceeds” means the total consideration paid by the first purchaser which is not an Affiliate of Lessee for oil and gas produced from the Leased Premises, except that (1) Lessor's royalty shall bear its proportionate part of severance taxes actually paid by Lessee attributable to production from the Leased Premises. In addition:

(i) If gas produced from the Leased Premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is not owned by Lessee or any Affiliate of Lessee, “Gross Proceeds” shall include (a) the consideration received by Lessee (or any Affiliate of Lessee) from Lessee's (or any Affiliate of Lessee's) sale of such liquefiable hydrocarbons plus (b) the total consideration received by Lessee (or any Affiliate of Lessee) from the sale of all residue gas, less Lessor's proportionate part of severance taxes thereon.

(ii) If gas produced from the Leased Premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is owned by Lessee or an Affiliate of Lessee, “Gross Proceeds” shall include (a)the total consideration received by Lessee (or any Affiliate of Lessee) from the sale of all products extracted from such gas, plus (b) the total consideration received by Lessee (or any Affiliate of Lessee) from the sale of all residue gas, less Lessor's proportionate part of severance taxes thereon.

3.6 Post-Production Costs. Lessor's royalty shall not be charged directly or indirectly with any of the following: expenses of production, gathering, dehydration, transportation, fractionation compression, manufacturing, processing, treating or marketing of gas, oil, or any liquefiable hydrocarbons extracted therefrom. If any contract by which Lessee or an Affiliate of Lessee sells oil or gas produced hereunder makes deductions or adjustments to the price to account for costs of production, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or gas produced from the Leased Premises, or any liquefiable hydrocarbons extracted therefrom, then such deductions shall be added back to the price received for purposes of computing the Gross Proceeds upon which royalties are to be paid hereunder.

The Lease goes on to provide for a 2% Late Charge and Interest at 12% until paid. Further it provides that if a default by Lessee is not cured within 45 days, Lessor has the right terminate the lease and retake possession of the land and then goes on to say that if it is necessary to engage professionals to enforce provisions of the lease, and Lessor is "sucessfu" in any court action to enforce the same, those costs are also to be reimburesed by Lessee.

My question is this: Is there any reasonable justification that the Lessee would be omitting payment of gas and liquid royalty based on the language in Article 3 shared above?

2

They should be paying on all products unless you only have rights to the oil and liquids. I have seen some deeds for Gas only or Oil only. If you are entitled to the gas, the wording of your lease needs a review. "Credit of the Lessor" mean you pay post production costs. It would be beneficial to see who the first sale is made to or what plant the gas goes to if you are entitled. Then the expenses could be reduced.

Do Not threaten to cancel the lease before seeking counsel. At the same time if you determine that they do owe you for underpayment, request they pay the 2% late charges OR the highest amount allowed by law.

What wells and who is the operator?

3

Sometimes an operator will contract out the gas gathering and payments to another company, and it may be them who are failing to pay, also. Whetther that is ultimately the responsibility of your operator depends on the nature of the deal between the operator and whoever they contracted with, plus the wording in your lease regarding assignability.

4

Brian, thank you for your thoughts. The lease says 2% for late fee and 12% per annum until paid. The intent was to make them pay for jerking us around on amounts due to us

The language i quoted was for a lease i entered into when the operator purchased a number of wells from a very public and despised company for which the well had been shut in for almost two years, a termination event in that lease, not leaving the new operator sufficint time to again start producing.

Now i have received the monthly revenue check and they have now started charging expenses for processing, enrichment, transportation and who knows what else in an amount equal to the revenue. I am not the best business man, but those costs sure seem out of whack, if even legitimate expenses

5

Wade, if that was the case, would revenue show on the revenue check? It shows volume, price, gross value, less severence tax and costs. Shocking that the costs equal the revenue and my severance tax is offsetting the oil allocation.

6

OXY, Cobb, Yoakum? Prices very low and there should be no severance taxes on gas if the market value is $0. Maybe a CO2 issue. Oxy has two plants in Yoakum and is reported as the gatherer. If I am correct on the wells. Maybe a good case for failure to pay in paying quantities if this happens for an extended period of time.

7

If they are showing the revenue they are probably the operator. Sounds like a situation where they are using deductions to eat up all your gas income. That is a complicated issue, but looks suspicious given your lease language.

8

Spoke with a gentleman this morning who certainly is one of the most knowledgeable operators in North Texas. He acknowledged my suspicion as a reasonable conclusion that the operator is likely going broke and grabbing for whatever they can. I have written a very nice letter pointing out that they are in default and suggesting it be immediately cleared and suggesting they familiarize themselves with the provisions allowed in the Lease

As my father in law used to say, “the bonus money is for your future legal costs. The little guys cheat because they are too stupid to know they are cheating and the big boys cheat because they can. Just remember they all cheat.”

9

I love the part that the bonus money is for your future, legal costs.

It would be great if everyone on this website did some brainstorming.

There must be a way for the royalty owners can stop flagrant theft.

For instance, a lease could require a fixed percentage:

* payment of the gas and liquids.

* charge to process the gas and liquids.

In any hot location, the royalty owners would push for an article advising any new royalty owner to download the new style lease for signature.

10

Robert:

Personally, I don't like anyone dictating what I can do or not do with my personal properties; but, you are correct that it would be nice if every lessor had to go through a short study course before they were allowed to sign a lease so they would at least have an idea of what they are getting themselves into. Trying to get a group of land/mineral owners together on the same page is much more difficult than trying to pen a pasture full of wild hogs with only a prayer and a small tree branch in hand.