Does TX law allow post production deductions with " at the well " lease language?

Hello,

We have new wells with Noble/Chevron. They are deducting Transportation and Gathering expenses from our gas residue, NGL, and oil sales proceeds, as well as gas residue compression and plant processing fees from the NGLs.

Our lease states; As royalty… “a) To deliver to the credit of the lessor, in the pipelines to which the lessee may connect its wells, the equal 23% part of all oil produced and saved by lessee from said land, or from time to time, at the option of the lessee, to pay lessor the average posted market price of such 23% part of such oil at the wells as of the day it is run to the pipeline or storage tanks, b) to pay lessor for gas and casinghead gas produced from said land (1) when sold by lessee , 23% 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, 23% of the amount realized from the sale of gasoline or other products extracted therefrom and 23% of the amount realized from the sale of residue gas after deducting the amount used for plant fuel and/or compression;…”

The deductions for compression and plant fuel are specified, but it is my hope that the " at the wells " and " at the mouth of the well " language would prevent them from charging the quite large amounts for gathering and transportation.

When I asked them, they replied that " based on Texas case law , " at the well " language in the royalty clause permits us to deduct all post production costs "

Can someone comment upon the validity of their statement? I reviewed the prior topics and saw where there have been lawsuits in other states over deductions, but I did not see anything specific to TX case law, at the well.

If they are not justified in this, would it be worth fighting, or likely to be fruitless anyway, if they don’t agree after asking again nicely?

Thank you in advance, Mick

Unfortunately, the reference to “at the mouth of the well” or “at the well” has been interpreted by the Texas Supreme Court as allowing the deduction of the post-production costs. The basis is that to determine the sales at the well, you look at the sales at the point-of-sale, such as the tailgate of the processing plant, and then deduct the costs incurred from the well to the point of sale. There have been discussions on this site about cost deductions in Texas.

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I agree with TennisDaze so long as that’s the only language pertaining to royalties in your lease. Recent Texas Supreme Court and appellate court decisions hold that this language allows deduction of post-production costs. These costs can really add up! However, most oil and gas attorneys in Texas eliminate the effect of that language by inserting a “proceeds” clause in an addendum to the printed lease. Look to see if you have an addendum to your lease that might have language that modifies the “at the well” language.

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Thank you both. Your continuing help is appreciated by everyone in the forum.

I don’t quite understand the " logic?" behind the court decision(s), but if it is settled law, then that is that.

There are , unfortunately, no relevant addenda in this old lease, which was HBP for many years by a sputtering old well.

What is a proceeds clause? Is there a clause that prevents the oil company from selling to a subsidiary company at a low price and then reselling to themselves? Thanks

You can write a royalty clause requiring that royalties be paid at the price paid by an independent third party and not at the sales price paid by a subsidiary or affiliate or if there is no such sale, at a price determined by reference to a specific standard. Traditional proceeds language can be problem if not properly defined. Any royalty clause can be modified by other language in the lease as the lease is interpreted as a whole. You are best advised by an oil and gas attorney who understands both statutory and case law on royalty clauses.

As TennisDaze indicates, a gross proceeds clause negates the effect of the “at the well” language, but there are continuing court decisions about royalty language. For any new leases, you truly do need an oil and gas attorney who keeps up with all the aspects of royalties dealt with in a lease: the amount of royalty, how it is measured, where it is measured and what post-production costs can be deducted. These terms are found in more than one place in the lease.

At the top of the page click on the magnifying glass icon next to the +New Topic button and enter “CO2 and HOW LESSORS CAN OVERCOME LEASE LANGUAGE BARRIERS TO PROHIBIT POST-PRODUCTION DEDUCTIONS” and read the linked article.

Thank you AJ11. Although long and dense,( the important stuff is towards the end IMO) the article does go a long way towards explaining the language, how the courts have interpreted it, and how to avoid costs in a new lease

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You’re welcome, mick_h. A much shorter but important, current read is “BlueStone v. Randle — A Win for Royalty Owners on Post-Production Costs” by oil and gas attorney John McFarland. You can find it through a search engine like Google.

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