Does the lessee really need free oil and gas to produce the well?

Oil and Gas Leasing Help
1

Our family is negotiating a lease and we added this provision to the contract we are proposing.

Lessee shall have no free use of gas, oil and water produced from said land for any purpose. However, Lessee shall have the right to purchase from Lessor gas, oil and water to use for any purpose.

Potential Lessee wrote back: This provision is impossible for us to accommodate as it prohibits us from producing the well. Please let us know if you are willing to strike this provision with: Lessee shall have the right to use, free of cost, gas, oil and water produced from said land for its operations thereon, except water from wells of Lessor.

Is the lessee’s claim accurate? We believe we should be paid for all of our gas and oil. Any help or explanation would be appreciated. Thanks.

2

It may not prevent the Lessee from operating a well, but if oil or gas are consumed on the lease as fuel for the purpose of driving machinery, that increment so used is not sold (having been consumed before it ever leaves the lease). Consequently, under normal circumstances, there would be no basis for paying a royalty on production consumed as lease fuel. It never leaves the lease and never gets sold.

3

Thank you for this informative answer.

4

We always require that the Lessee pay for gas consumed on the site. In Texas, the operator has to report the volumes as lease use (as opposed to flared gas) and pays severance tax on that gas. Otherwise, the operator could use the gas to run a compressor rather than pay for electricity. Paying royalty on all gas production is a cost of doing business and getting a lease. We do make an exception for gas which is used for gas lift. This is a different issue since the gas is essentially being recycled in and back out of the well and will ultimately be produced and sold.

Secondly, the lessee’s demand to use your oil is very strange. I have never heard of any operator using oil. Thirdly, the operator should not have unlimited right to water from your land, particularly fresh water. That is a valuable commodity and the operator should pay for the water. At least in Texas, the water belongs to the surface owner. If the surface owner is different from the mineral owner, then the operator would have to pay for the water. If you own both the surface and the minerals, do not accept the landman’s argument that you only deserve to be paid for the minerals and the lessee should get a free ride for well location damages or for the water. These are not the same assets and you should be paid for all value.

5

Helen, my family just finalized our leases after one year negotiating with AEW/AEP (American Energy Woodford). We wanted several clauses deleted and they wouldn’t do it. We wanted the “pay for a portion of gas production…” clause removed, and they refused. Because our family split on accept/decline the lease, and because surrounding neighbors signed their leases with that clause, my family didn’t have enough interest to control that section. AEW knew when they had enough signed leases to gain control of a section, then when the price of oil dropped, they withdrew many lease offers. Actually very few in my family got the lease money.

Our experience was this - get a good O/G attorney, and listen to what he advises. We went into this lease deal somewhat naïve, and now know it’s a tough, ruthless, hard core business with experienced, powerful players planning to grow their investors’ money - not make you rich. Don’t let them push, hurry or threaten you into signing by posing the “no lease” threat. If your family doesn’t have enough interest to control that section, their threat may be a real one. However, if they need your leases to tie up section, they’ll negotiate when they know that you’re not intimidated, and believe me, they will know if you have a good lawyer.

Martha, Tennis and others have given you good advice. My only advice is don’t hesitate to hire a lawyer, and don’t go against what he advises.

6

The most common compromise on this issue is to let them use the gas for free to drive pumps and motors directly related to production at the well, but not for any other use, such as powering the big compressor station they put elsewhere on the lease. Oil is rarely used in production. However, that is the compromise. A lot of people start negotiations with the operator paying royalties on everything produced.

7

Free water? SB 332 says that the groundwater under your land belongs to the landowner. Why would anyone want to give away their water? The rascals (two landmen) I’m currently dealing with want it all … all for nothing. HA!

Here are some excerpts from my lease that I’m currently negotiating:

Lessee shall not take water from any existing water well or other water source located on Lessor’s leased Premises for any reason whatsoever, including the taking of any fresh water from the Leased Premises for any waterflood or secondary recovery operations.

If Lessor consents, in writing, to the drilling of a water well to supply Lessee’s drilling or completion or hydraulic fracturing operations, Lessee agrees to pay Lessor for such water at the rate of Fifty Cents ($0.50) per 40 gallon barrel used, and Lessee agrees to install and properly calibrate and operate a meter to measure the water used. Such payments shall be due and payable not later than 60 days after the end of the month in which the water is produced from the land. Any water well drilled by Lessee on the Leased Premises shall be drilled, cased and completed in compliance with all rules and regulations of state or local authorities applicable to the drilling and completion of water wells to be used for livestock or domestic purposes.

(There’s more to this but you get the gist of it.)

8

Helen -

I have an example Addendum I would like to send you that includes provisions that may address your concerns as to on lease gas and oil usage.

I’ve never been able to upload any attachments in any of these message strings, but will try it again. There are two lines in the Addendum that I have Bolded and Enlarged to 12 PT so that they are easy for you to find.

If my attempt to upload the Addendum doesn’t work, then please accept my invitation to become A Friend on The Forum so you can send me your email address.

Charles Emery Tooke III Certified Professional Landman Fort Worth, Texas

1397-SAMPLEADDENDUMLEASEGASUSAGEPROVISION.doc (46 KB)

9

Cool Beans, it worked!

And I agree with the others about oil and water usage. Especially water usage. And don’t forget to include a provision whereby they are required to drill a water well to a different water table than that presently used on yours or any surrounding lands. And that they have to leave the casing in the well when they leave and the well then becomes yours. Have a clause about that around here somewhere if you need one.

Do you own your surface? And what do you do with it?

Charles

10

We just own the minerals but we know the owner of the land. His dad/grandfather bought it from our grandfather. We can pass this info onto land owner about the water well and leaving the casing. Thanks for all the help from everybody. The website is a godsend. Thanks again

11

The program would not let me download it and save but it did allow me to download and read and then I was able to save it. Thanks for the efforts and great help. I will share your great advice with other family members this evening. Thanks again.

Charles Emery Tooke III said:

Helen -

I have an example Addendum I would like to send you that includes provisions that may address your concerns as to on lease gas and oil usage.

I’ve never been able to upload any attachments in any of these message strings, but will try it again. There are two lines in the Addendum that I have bolded and enlarged to 12 PT so that they are easy for you to find.

If my attempt to upload the Addendum doesn’t work, then please accept my invitation to become a Friend on The Forum so you can send me your email address.

Charles Emery Tooke III Certified Professional Landman Fort Worth, Texas

12

Helen -

Glad you liked it, just please don’t bring my name up around any of the Landmen or Company People you are dealing with. My first love is what I do for a living and sometimes I push the boundaries between my professional responsibilities to the companies I represent and what I allow the people I answer questions for here on The Forum.

One other small bit of advice: Watch out for the Company’s Landman trying to insert the phrase “Notwithstanding anything to the contrary herein…” anywhere in your Lease (could be anywhere, but typically at the end of their proposed form or in the Header of your Addendum or anywhere within any of your additional Provisions). That phrasing effectively NULLIFIES anything that follows.

For example, in Texas, unless some act of Legislature has been amended that I am not presently aware of, it is my understanding that any edit or amendment regarding the Royalty reserved by the Mineral Owner (Lessor) must be declared on the first page of the Lease. Many people, however, attempt to amend the Lease in the Addendum to reflect a greater amount of Royalty reserved by the Lessor than the “one-eighth (1/8)” reflected in the printed form.

If anywhere in their proposed Lease form or the Header to your Addendum or the Provision itself regarding the change of the Royalty from 1/8th to a greater amount, such as a 1/6, 1/5, 3/16 or 1/4, includes the phrasing “Notwithstanding anything herein to the contrary…”, your Lease could be interpreted by an unscrupulous company (Lessee) as remaining at a 1/8th Royalty Lease. And they’d more than likely be legally right.

You will sometimes find where the Company’s Landman and even his “Higher Ups” if negotiations become that involved, will keep trying to add that verbiage back in with every edit, amendment and delete, as you negotiate back and forth. Keep taking it back out and insist that it not appear anywhere.

If your Surface Owner needs one, I can send you or him an example or two of a Water Well Provision. It never hurts to end up with a free water well, especially one from a deeper water table than you can reasonably afford to drill to yourself.

The company will take away their Surface Installation, of course, once they are through using the well. That’s alright - their Surface Installation equipment wouldn’t be suitable for farm or ranch use anyway. But you can include a Provision that leaves you the Casing and other underground materials in place. Free Water Well.

I don’t have an example Provision regarding the charges per barrel of water that a Surface Owner should expect for the water that an Oil and Gas Company uses, but it seems like someone included one above. I’ll have to look back and see.

Never allow them to use water from your well for operations on anyone else’s lease.

If no one suggested a Provision regarding such but has one, I’d sure appreciate an example.

What does he use the land for, your Surface Owner?

That can be an important issue for him and there are many issues for him to consider: Gate Construction and Maintenance, Cattle Guards, Fence Maintenance, Interior Fence and Gate construction and Maintenance, Road Right of Way Design, Construction and Maintenance, Timber and Crop Damages, Loss of Future Use of the same… all sorts of things.

For example, the effects of Oil and Gas Operations upon the natural DRAINAGE of the lands is very important.

Things to think about.

Hope this helps -

Charles

13

This becomes a philosophical issue with me.

If the well is next to a power line, then an electric pump will likely be installed. If you have a cost-free royalty, you do not pay your share of the electric bill.

If it is not next to another source of energy, then either natural gas from the well or diesel will be used.

The average pumping unit uses about 1.8 MCF a month to run one pump. Let’s say you have 3 pumps. The operator will be using 3 x 1.8 MCF, or 5.4 MCF per month. If you only had a 20% royalty, that is 1.08 MCF for your share @ say, 3.50 per thousand. That works out to $3,780 per month in lost royalties.

Again, to me, it is one of philosophy. Either it is a free royalty or it is not. My language reads on “all gas saved or used…”

Best, Buddy Cotten

14

We are grateful for all the excellent comments on our question. There is so much to learn! Thanks again.

15

Mr. Tooke, I need help! I have been asked to sign this Amendment:

  1. Lease Use Gas. The lease is hereby revised and amended by adding the following provision in its entirety to the end of the lease:

“Lease Use Gas. Notwithstanding anything herein to the contrary, Lessee shall be entitled to the royalty free use of all gas produced from wells located on the leased premises for its operations on the leased premises (or lands pooled therewith), including without limitation gas lift operations on the leased premises (or lands pooled therewith) and re-injection of such gas into wells for purposes of enhancing the productive potential of those wells; provided, however, that this provision shall not be construed to excuse Lessee from committing waste with respect to same. Lessor acknowledges that Lessee’s operations in this regard will result in the periodic deferral of sales of gas from wells completed upon the leased premises (or lands pooled therewith), and that Lessee’s royalty obligations hereunder shall not accrue until such time as gas from wells completed upon the leased premises is sold or otherwise used by lessee off of the leased premises (or lands pooled therewith). Lessee shall have the right to inject gas produced off of the lease premises (“off lease gas”) on the leased premises (or lands pooled therewith) for the purposes of enhancing the productive potential of any wells located on the leased premises (or lands pooled therewith). Prior to injection, Lessee shall meter all Off-Leased Gas being injected on the lease premises (or lands pooled therewith). Notwithstanding anything herein to the contrary, with respect to gas produced from the leased premises (or lands pooled therewith) following the injection of any Off-Leased Gas, Lessee shall not be obligated to pay any royalties on such gas until after a volume of gas equal to the total volume of injected Off-Lease Gas (as determined by Lessee’s meter) has been produced”

  1. No other Amendment: Ratification. Except as otherwise expressly amended herein, the provisions of the Lease shall remain in full force and effect in accordance with their respective terms following the execution of this Amendment. Except as expressly provided herein, this Amendment shall not release, waive or excuse, and each party shall remain responsible and liable for, such party’s respective rights and obligations (or breach thereof) under the Lease, as amended by this Amendment, arising prior to, on or after the date hereof. Lessor hereby adopts, ratifies and confirms the Lease and hereby grants, leases and lets unto Lessee the leased premises or lands described in the Lease as provided in the Lease, and in each case, as amended by this Amendment.

The original lease has this Royalty clause:

  1. As royalty, lessee covenants and agrees: (a) To deliver to the credit of lessor, in the pipelines to which lessee may connect its wells, the equal 25% part of all oil produced and saved by lessee from said land, or from time to time, at the option of lessee, to pay lessor the average posted market price of such 25% part of such oil at the wells as of the day it is run to the pipeline or storage tanks, lessor’s interest, in either case, to bear 25% of the cost of treating oil to render it marketable pipeline oil; (b) to pay lessor for gas and casinghead gas produced from said land (1) when sold by lessee, 25% of the amount realized by lessee, computed at the mouth of the well, or (2) when used by lessee off said land or in the manufacture of gasoline or other products, 25% of the amount realized from the sale of gasoline or other products extracted therefrom and 25% of the amount realized from the sale of residue gas after deducting the amount used for plant fuel and/or compression; (c) To pay lessor on all other minerals mined and marketed or utilized by lessee from said land, 25% either in kind or value at the well or mine at lessee’s election, except that on sulphur mined and marketed the royalty shall be five dollars ($5.00) per long ton.

The Addendum to that lease has these Royalty clauses:

  1. ROYALTY: Notwithstanding the provisions of Paragraph 3, the royalties in this lease on oil, gas, other hydrocarbons and all substances produced therewith shall be the greater of:

a. 25% of the fair market value of the hydrocarbons produced and saved and sold from a well or wells located on said land or on lands pooled therewith without the deduction of post production costs (dehydration, compression, transportation to the pipeline to which the oil or gas is sold, or other costs); or,

b. 25% of the proceeds derived from such sale or sales, without the deduction of post production costs (dehydration, compression, transportation to the pipeline to which the oil or gas is sold, or other costs); and

Additionally, Lessor shall be entitled to receive Lessor’s proportionate part, One-fourth (1/4th) of all sums or other benefits payable to Lessee by virtue of products recovered or sold as a result of this oil, gas and mineral lease. Included within said term “products”, but not limited thereto, is gasoline, butane, propane, other liquid hydrocarbons extracted, manufactured or recovered by Lessee or for which Lessee might be paid. The same payment formula set forth in (a) and (b) above shall apply to these products.

  1. FREE ROYALTY: All royalty due under this lease as provided in the royalties paragraphs shall be paid without deduction for all costs of transportation, compression, dehydration or other operations necessary for the marketing of oil and/or gas, save and except Lessor’s proportionate part of taxes that may be due. However, Lessee may deduct Lessor’s proportionate share of gas used for lease operations. In addition to payment of the fair market value of the hydrocarbons as defined in paragraph 3 above, the Lessee shall additionally pay all post-production costs. These provisions constitute part of the consideration for this lease.

All provisions considered concerning royalties, what do I need to change in the Amendment to make sure I am being paid a cost-free royalty on everything produced from the well. And should the Amendment be attached to the Addendum, not the original lease?

Thank you in advance for your help & anyone else out there who can help me.

16

Hi, Keilty!

Great Name! What does it mean?

You should always have an experienced Oil and Gas Attorney review all of these kinds of contracts, but my observations are:

Paragraph 3 of the Original Lease appears to be standard royalty language.

Provision 19 of the Addendum to the Original Lease begins with the verbiage “Notwithstanding the provisions of Paragraph 3”, which effectively negates the remainder of Provision 19 - allowing Paragraph 3 to overrule anything in Provision 19.

[I hate the phrase “Notwithstanding anything to the contrary herein” and every variation of it. I think it was conjured up years ago to confuse Lessors.]

Your current goal of “being paid cost-free royalty on everything produced from the well” appears to have been intended to be protected by Provision 24 of the Addendum. Provision 24 includes, however, “Lessee may deduct Lessor’s proportionate share of gas used for lease operations”, so they can use gas for running their machinery. And it continues with “… Lessee shall additionally pay all post-production costs”, directly contradicting the first half of the provision.

I wish I had better news, but you do not have the right to “cost-free royalty on everything produced from the well”. You did not negotiate for it when you negotiated your Original Lease and the odds of your getting an Oil and Gas Company to renegotiate that point with you after the fact would be mathematically impossible to calculate.

Paragraph 1 of their proposed Amendment appears to provide for their having free use of gas produced on your lands for running machinery on the Wells on your lands or on lands pooled therewith. They already have that right.

It appears to further provide for their being able to inject gas produced from your lands or lands pooled therewith and, vice versa, to inject gas from lands other than yours into your lands without paying royalties from the gas produced from other lands and injected into yours.

Sounds like they want to use the natural gas to periodically enhance production from a number of Units at a time, but need to pool the available gas to do so.

That’s reasonable. You get paid for your gas, the other landowners get paid for theirs, but before they sell it and pay you any royalties they get to use it.

Nothing wrong with their proposed Amendment Paragraph 1 or 2.

An Amendment is a separate, stand-alone document. Their language regarding attaching it to the Original Lease looks to me like minor semantics.

Hope this helps!

17

(My name is Gaelic. It was my mother’s maiden name. I have been told it means “girl”. I’m glad you like it!) Thank you for your great advice! In the future, I will strike “Notwithstanding anything to the contrary herein” and every variation of it, in any lease that comes my way! When there is a direct conflict as in #24, (1st half of the paragraph says they can use the gas/2nd half says they must pay all production costs), which contradicting statement prevails? Since I have given them the right to use the gas, is there anything I can add to the language of the Amendment to limit the time I have to wait to get paid a royalty on the gas? Their provision sounds open-ended and all in their control as to how much and how long they can use the gas.

18

Keilty -

Also watch out for their using or attempting to use the “Notwithstanding…” language in the HEADER to any Addendum you propose. That will alter or might completely negate the intended effect of EVERY PROVISION of your Addendum.

You may find during your Lease negotiations that every time you take the language out, they will try and put it back in. You will have to watch for that and insist that the language be taken out.

There is language that you can add to the Header of your proposed Addendum or as an additional Provision of your Addendum (perhaps the first one) that states that without any question the Provisions of your Addendum will prevail.

I’ll have to look that back up and send it to you. Feel free to remind me to do so.

You have my comments and remarks regarding Paragraph/Provision 24 all wrong.

The first part provides that you will receive the “cost-free royalty on everything produced”, which is what you wanted and should have successfully negotiated for when you negotiated your Original Lease. The second part directly contradicts that and completely undermines what you intended the first part to allow.

There isn’t really any prevailing language in it, it simply is what it is. You negotiated for one thing, they appear to have proposed a caveat which you appear to have accepted, whereby you bear your proportionate share of Post Production Costs.

That was a Self-Inflicted wound. You should have consulted an experienced Oil and Gas Attorney when you negotiated your Original Lease.

There doesn’t appear to be any limit to the time that they might need or want to keep producing and then injecting and re-producing and re-injecting the natural gas before they eventually sell it and pay you royalties on it. It might go on for years.

I haven’t reviewed the Wells involved or how they are being operated (managed). And I am not a Petroleum Engineer and cannot advise you as to whether their producing and then injecting the Natural Gas time and time again has any profound effect upon the production of Oil, but their wanting to do so before they eventually sell the Natural Gas and then pay you royalties for it indicates to me that they believe so and, therefore, doesn’t strike me as such a bad thing.

If injecting and re-injecting the Natural Gas enhances (improves) the Production of OIL in the area, then you should be all for it.

Natural Gas is only selling for a few dollars per MCF right now and from my knowledge and experience will only be selling for a few dollars per MCF for what appears to be years and years to come. Perhaps the remainder of our lifetimes.

Whatever the Oil and Gas Company can do to get OIL out of the ground should be in your focus.

If they have sent you any documents that you want me to review or to have an experienced Oil and Gas Attorney to review, then scan them in and post them here or send them some other way before signing them and sending them back.

If you do not know any experienced Oil and Gas Attorneys, many of us that respond to questions on The Forum can recommend a few.

Hope this helps -

Charles

19

I am sure more research can be done, but I think “The Slender One” is the best: Nickname for the Ancient Leader of a very proud and strong Clan.

http://www.surnamedb.com/Surname/Keilty

https://www.ancestry.com/name-origin?surname=kielty

https://lp.myheritage.com/last-name/data-3

Let me guess: Red Hair, fair skin, fierce in every way and with an occasionally fiery temper?

20

Dear Denny,

There is a lot to think about when signing an O&G lease and I “get your drift” that you want to stay friendly with the surface owner. Did you know that, under Texas law, the lessee has the right to use the surface estate? And they can use as much of the surface estate as is “reasonably necessary” for mineral exploration and production. This right requires no permission or consent from the surface owner.

But, I think that IF both sides were willing, you could sign a lease with a “no drill clause.” The lessee may want to renegotiate their final offer down to pennies on the dollar, but if you don’t need that money to buy your week’s milk and bread, that may get you where you want to be. And, your oil and gas, and surface owner’s precious water may be saved, along with your surface-owner’s friendship.

Good luck,

Pat