Gross proceeds clause

West Virginia Mineral Rights
1

I am having trouble parsing the language here. This does not seem like a " no deductions Clause" or a proper “gross proceeds clause” am I wrong. Thanks in advance, Bob

  1. Royalties. Lessee will pay Lessor a royalty proportionate to Lessor’s percentage of ownership, as follows: (a) On oil, a royalty equal to 12.5% of the gross proceeds received by Lessee for the sale of oil produced from the Leased Premises less 12.5% of Post Production Costs and less the same share of all production, petroleum excise, and severance taxes. Lessee, including Lessee’s affiliates, may from time to time purchase oil produced from the Leased Premises paying the price per barrel that Lessee received during the same month for the sale of comparable oil at locations in the vicinity of the Leased Premises; and (b) On gas, including casinghead gas or other liquid or gaseous substance, produced and sold from the Leased Premises or used beyond the well, a royalty equal to 12.5% of the gross proceeds received by Lessee for the sale of such gas less 12.5% of all Post Production Costs and less the same share of all production, petroleum excise, and severance taxes. Lessee, including Lessee’s affiliates, may from time to time purchase gas produced from the Leased Premises, paying the first of the month local index price published by Eastern Gas-South or Texas Eastern Transmission Corp-M2, or an equivalent successor publication;

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        As used in this Lease, “Post Production Costs” shall mean all costs actually incurred by Lessee or its

affiliates, including, but not limited to, all costs of gathering, treating, processing (including fractionating), stabilizing, blending, marketing, compressing, dehydrating, transporting, trucking, blending, removing liquid or gaseous substances, and/or removing impurities, and costs of any other activities associated with making the oil and gas, including casinghead gas or other liquid or gaseous substances, ready for movement, sale, or use, and less all losses of produced volumes whether by use as fuel, line loss, flaring, venting, or otherwise, between the wellhead and the point of sale. For royalty calculation purposes, Lessee shall never be required to adjust the sales proceeds to account for the purchaser’s revenues, receipts, costs or charges, or other activities that occur, beyond and past the point of sale. Lessee or its affiliate shall have the right to construct, maintain and operate any facilities providing some or all of the services identified as Post Production Costs. If Lessee or its affiliate does so, the actual costs of such facilities shall be included in the Post Production Costs as a cost per barrel or per mcf or MMBtu, as appropriate, calculated by spreading the construction, maintenance and operating costs for such facilities over the reasonably estimated total production volumes attributable to the well or wells using such facilities.

2

You are not wrong, this is neither a “no deductions Clause” nor a “gross proceeds clause.” It is saying that the lessor gets paid after all post production costs are deducted. This is more of a “net proceeds clause” ie not cost free and the lessor pays the proportionate share of post production costs. A decent rule of thumb is that the post production costs are worth about 1% of the royalty.

3

Thank you very much for your reply! Based on examples of wording that I have found on this forum and other websites regarding oil & gas leasing I am studying a lease agreement that has been tendered to me and I find problems for the lessor in nearly all of the 24 paragraphs. Many of the clauses start out fairly benign and then in the middle of the text the dialogue seems to move to the lessee’s advantage. I see examples that shift the dialogue in favor of the lessor however I still have problems with the royalty and so called “gross proceed/no deduction” clauses. I have pasted another example from a more current proposal below and would like to ask for your opinion on it. It get muddy for me at (Lessor and Lessee agree). After a little study some of these problems seem fairly easy to recognize but I think trying modify this lease myself would be problematic and foolish. Thank you for your help. Best Regards, Bob

Gross Proceeds Clause Lessee shall pay Lessor a royalty on gas at the agreed upon royalty rate based on the value of the unprocessed gas produced from each and every well on the Leased Premises, or on lands pooled or unitized therewith, calculated by multiplying (i) the MMbtu equivalent of the gross volume of gas metered at or near the wellhead in a given calendar month and (ii) the first of the month index price for Eastern Gas-South, or a successor publication (the “Index Price”). Lessor and Lessee agree that the gas royalty is being calculated prior to processing and extraction of natural gas liquids or other byproducts from the gas stream and that no additional royalty is due for the value, if any, of natural gas liquids or other byproducts contained in the gas stream. It is further agreed between Lessor and Lessee that all royalties accruing to the Lessor under this Lease shall be made without deduction, directly or indirectly, for the cost of drilling, testing, completing, producing, gathering, transporting, dehydrating, separating, stabilizing, processing, and marketing the oil and/or gas produced hereunder. Lessor agrees, however, that Lessee may deduct from such royalty payments Lessor’s same proportionate share of all production, petroleum excise and severance taxes. In the event the Index Price is not available at any time or for any reason, Lessee may select, in good faith and in a commercially reasonable manner, a replacement monthly index price determined by Lessee to reflect sales to unaffiliated third-party purchasers at locations in the geographic area in which the Leased Premises are located.

4

Bob,

Yes it is a situation of it’s easier to recognize the more examples seen no matter what dialect of legalese spoken. So they’re saying that the royalty is going to be paid only on unprocessed gas. A little background, shale plays have fairways ie different oil and gas cuts, sometimes even 50/50. In laymen’s terms you’ll hear things like volatile oil, condensate, or wet/dry gas. Most stubs break out payment by oil, gas, and simply products. I think it’s fair to say that there has been an increase in the amount of products derived from oil and gas; and, demand for refined products such as LNG, LPG, and other hydrocarbons such as butane, ethane, etc., all with a different value. There may be a situtaion where the processing, marketing, etc., less expenses, results in a higher royalty received. Below is an example from a lease describing such. In practice, most of the change happens further downstream; and, the operator gets paid for what they produce, in accord with their contracts, same as the mineral owner.

  1. It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas and other proceeds accruing to the Lessor under this Lease or by state law shall be without deduction for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements.
5

It would be wise to get a West Virginia Oil & Gas attorney to help you with any lease language. Doing it yourself can really turn into a problem.

6

Thank you again for your reply, even though I am able to recognize some of the pitfall/gotcha clauses in this lease I don’t think I would be able to negotiate it myself so I am going to seek council, which in itself is a little discouraging. Best Regards, Bob

7

I did realize that, however I was sorta having fun cyphering it out, but it’s a little discouraging to recognize the corporate machine will take advantage of what it can, kind of funny, Antero Resources, even though I’m a small mineral rights holder individually, with all my family not that small, aren’t we actually “The Resource”! Irony never lost on me. If you have a suggestions for West Virginia oil & gas attorney’s that you might recommend I would sure appreciate them. Thanks for your input. Best Regards, Bob

8

Bob, not sure what area in WV you are in but my family located in CA and also family in Mannington, WV used a lawyer in Fairmont, WV. Lawyer recently negotiated a sale for our Wetzel County minerals and currently negotiating a lease for our Marion County minerals. I can tell you in both cases he negotiated much more than our original offers. He came very highly recommended.

Alex Miller Miller Law offices Fairmont, WV 304-366-0822

It is always best to have an oil and gas lawyer read the lease you’ve been give by the purchaser. Alex is very reasonable on his pricing. Good luck.

9

based on my second example of the so called gross proceeds clause it says “based on the value of the unprocessed gas” wouldn’t I want the royalty rate based on the processed gas produced but not have the processing costs deducted. Thanks Again, Bob

10

I received an unsolicited offer from Antero for land in Green District that has the same language as in seaker236’s. It is a FLAT RATE PAID-UP lease. It is riddled with language that in my opinion is not at all beneficial to me, the Lessor.

11

mine was from antero also in Tyler county WV, who is the landman, probably a guy from Texhoma. That is exactly what I concluded, almost every paragraph in the lease had text that I didn’t think was right or in my best interest, I spoke with an attorney and he verified my concerns.

12

We had a similar experience with Antero. With each negotiation Antero changed the beginning language, but as you read on they turn it entirely to their benefit. That is why I have been asking about the new forced pooling law in West Virginia, SB 694 which appears to provide much better terms than what Antero is offering. Have other people looked at what you get under SB 694 vs Antero’s demanding Shut In provisions, Force Majoee

13

Force Majeure, title liability, and on and on, none of which are present if one is force pooled. Thanks

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