How Is The Value Of Gas 'Enhanced'?

This is copied from a previous thread:

"The royalties payable under the Lease will be free of all production and post-production costs. However, any such costs that result in enhancing the value of the oil, gas, or other products to receive a better price may be deducted from the lessor’s share of production so long as deductions are based on lessee’s actual costs and the total amount of the costs do not exceed the amount of the enhancement in value."

1) Will someone explain how gas is ’enhanced’ to receive a better price?

2) Is this good language to use in an O&G lease where the price of gas is to be set to the market value at point of sale instead of at the wellhead?

Thank you.

If you want a cost-free royalty, meaning no deducts for post-production costs are charged against your royalty, such as for transportation, marketing, compression, treating, processing, etc..., then no, this is not a good clause to use. This "enhancement clause" simply allows deduction of post-production costs, because companies will say that the post-production actions that occur, such as transportation, processing, marketing, all technically enhance the value of the gas.

To get a true cost-free royalty, state that the royalty is to be based on the price of gas at the point of sale downstream of the wellhead, and then add in the clause that royalty is free of all post-production costs.

Ben,

Thank you for explaining/clarifying that double talk for this novice and for how to word a lease for a true cost free royalty.

No problem, but don't just use my short-hand language in your lease. I highly recommend you retain an oil and gas alwyer to assist you.

I will. Thank you!

Wilson Inc.,

Royalty is free of all "POST PRODUCTION COSTS". I like the sound of that. Period. These discussions are

very informative. I'm glad you asked that question and it was explained where the average MO can understand it.

This is what I was asking for when we had a discussion with the landman a few weeks back but he said something about then it would be charged back against the royalty. But I am not sure if I put the statement in the correct language because I said we wanted the oil/gas to be paid at market value. I am now going to tell him we want the -"Royalty is free of all "POST PRODUCTION COSTS". and if the company doesnt like that then I am going to ask for a higher than 1/5 royalty. Need to discuss with family but this is my suggestion.

Clint Liles said:

Wilson Inc.,

Royalty is free of all "POST PRODUCTION COSTS". I like the sound of that. Period. These discussions are

very informative. I'm glad you asked that question and it was explained where the average MO can understand

it. Thanks.

Clint Liles

3toy@nctv.com

903)2457969

Native American,

Look here for a more complete discussion of cost free royalty. Sorry, I do not know how to make a direct link to them.

Enjoy.

Realistic Oil Royalty Values

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