We’re negotiating a lease with Surprise Valley/Comstock who is proposing two items in the lease that we don’t agree on. One is that the royalty will be calculated at the wellhead on the “net” proceeds (after deductions). This doesn’t seem to fit a definition cost-free royalty to me.
The other is that the Pugh clause seems sketchy to me. Here is part of the verbiage - “At the end of the primary term of this lease or upon the cessation of any drilling operations being conducted at the end of the primary term or any extended term under the provisions hereof, this lease shall terminate as to all of the mineral estate lying more than one hundred (100) feet below the stratigraphic equivalent of the base of the Haynesville Shale, as found and defined on e-logs in the Hoyt-Powell Gas Unit #1 (API #42-395-31700) at 16,940 feet measured depth.”
I would love to hear from those of you that have signed leases with Comstock or Surprise Valley and would like to know what you were able to get in your lease:
Did you get a cost-free royalty? - Was the calculation of your royalty at the wellhead or downstream?
Did you get a Pugh clause? If so, was it similar to the above?
This is just a total depth clause that has been liberally defined as “Pugh.” It does preserve deep rights, but nothing else. People in this forum use the term Pugh and assume if they get an OGL with a “Pugh Clause” that it meets their goals. But do they understand what they are attempting to achieve by the introduction of such a clause? Are they prepared to negotiate with oil and gas professionals on terms contained within such a clause?
Understanding the actual value of the inclusion of limitations and “royalty free” terms and conditions is only a part of the negotiation, but it is critical. Are you willing to enforce terms and litigate in the future? After more than 4 decades in this business, it is rare that the non-professional mineral owner is prepared to negotiate contract terms with an oil and gas professional without professional support of their own. You then have to assess the value of the support against the expected gain.
It is true as a non-O&G professional, I have a limited understanding of the Pugh clause and was advised it is necessary to allow a mineral owner the ability to pursue other leasing opportunities once the term of the lease ended IF the property was pooled. I have the impression that Comstock is the main company over much of the leasing going on, so I’m wondering if even having this clause is worthwhile. If they are the company that ends up drilling and working the whole area around us, is it likely any other OG company would want to go in? I’d be interested in opinions on this.
On the royalty, it just seems unfair that the mineral owners are asked to accept a royalty valuation after they have deducted their expenses. That could take a chunk of money away from the mineral owner. And I just wondered what others are getting in their leases. Any information will help guide others.
There are many potential OGL limitations related to a “Pugh Clause.” Maintaining as many of your rights during OGL negotiations is a key part toward potentially maximizing the future value of the property. The terms you noted do reserve the “below total depth” rights, but no further. As far as if the clause is worthwhile, it depends on what you have to give to get the inclusion of a reasonable clause.
The company does not have a requirement to be fair in a negotiation, but they do have a requirement not to be misleading in their statements. Technically they provided a Pugh clause to you as requested. If you want to know about other OGL activity, then you can perform research in the County Clerk’s Office and contact the other owners. They may be willing to share OGL terms with you.
Only you can determine how hard you are willing to push and invest in the best potential outcome. Even with determination the offer may not improve to your expectations.
Comstock has refused to agree to a cost-free royalty provision in a proposed lease. I am not interested in leasing with its royalty provision where it can deduct all the post-production expenses and base my royalty on the net sales price it receives for the production.
It is the basic tenet of a royalty in the OGL that the products are produced at no cost to the royalty owner (Lessor). Companies entered into the contract with this basic agreement with the Lessor, then have tried to get around this obligation for many years with affiliates, marketing, transportation and other methods that have been unfortunately supported by Courts. Royalty owners are responsible for taxes related to the production such as severance, Ad Valorem, and income.
Surprise Valley is not a good broker to deal with! Lease to some other company and stop wasting your time with them. Surprise works for Comstock, they are just a “middle man”.
While we’re tripping down memory lane, they used to give gas to the landowners for free and still give NGL to some. The farmers call it drip gas.
They flare or pay to dispose of the gas in the Permian sometimes. Who should pay for that? Maybe they should deliver the unprocessed gas to the royalty owner and they can decide how they want to handle it!
Some of the more sophisticated OGL do have a take in kind option. This is only for those that have a significant interest and understand markets as well as the obligations.
Flare gas is not sold, so it is not a part of a royalty consideration; however, the producer has an implied covenant to efficiently produce the well for the best financial outcome.
Ben, you probably need to dial back a bit. The relationship between the Lessor and Lessee in general is very positive. Neither exists without the other. Both are seeking the best financial outcome for themselves and that is where conflicts arise. You have some people on the forum who are still learning about negotiations and fostering relationships in this complex business.
Translation is “Buyer Beware.” The lessor is a seller or leasing of the rights. Lessee is the buyer. What you mean is Caveat Venditor, Let the Seller Beware.