1. No Deduction: Lessor’s royalty will never bear, either directly or indirectly, any part of the costs or expenses of production, separation, gathering, dehydration, compression, transportation, trucking, processing, treatment, storage or marketing of the oil or gas produced from the leased lands, or any part of the costs of construction, operation or depreciation of any plant or other facilities or equipment used in the handling of oil or gas, regardless of whether the costs or expenses set forth herein are incurred directly by Lessee or Lessee’s purchaser, affiliate, a midstream company or any other third party. For the purposes of this subsection, where any third party (including, but without limitation, any purchaser, affiliate of Lessee or midstream company), receives or retains a portion or percentage of the production (including, but without limitation, oil, gas, residue gas, processed liquids (or natural gas liquids) or any other constituent or component derived from the gas) in exchange for incurring any of the costs or expenses set forth herein, such as under a “percentage-of-proceeds” contract as the term is used in the industry, that portion or percentage received or retained by the third party shall constitute an indirect cost or expense that shall not be assessed against Lessor’s royalty in the same manner as if such cost or expense had been incurred directly by Lessee. In no event shall Lessor receive a price that is less than the price received by Lessee or any Lessee affiliates thereof.
The above is an Example of one I have seen. It has no deductions and used in a lease. Here is another that has some deductions tied to the Mittelstaedt case which has been used as an Exhibit in a pooling hearing.
“Cost Free Royalty Payments: Lessee shall pay royalty on the fair market value of the marketable product, which is the price received by the Lessee at the final point of sale, with an arms length transaction, to a bona fide purchaser, without any post-production expenses or charges or any other cost of making the products produced hereunder ready or available for market being prorated back to Lessor. Such post-production expenses or costs are to include, but are not limited to, the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, manufacturing, transporting, and marketing the oil, gas and other products produced hereunder. Royalty will not be paid on a “raw product” as produced at the “mouth of the well” or “wellhead” but will be made on a “marketable product” as described above. 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 the gross value of which Lessor’s royalty share is calculated as provided under the guidelines established in Mittelstaedt V Santa Fe Minerals, Inc., 954 P 2d 1203 (Okla 1998). If the product is enhanced, Lessor shall be notified in writing.”
Not giving legal advice. Just showing examples. Others are welcome to share.