We are pretty happy with the lease negotiations. That being said they are willing to give a higher royalty or no post production cost. Which is better? I am leaning toward no post production cost but would love to hear peoples opinions and why.
Thank You
I would say that no post production cost could mean much more than, more royalty. Take my brother as an example, the post production cost the operator tales from his royalty adds up to a drop from 16% to the equivalent of 13.5%, quite a chunk. So you could consider paying no post production costs to be equal to more money. There is also the matter of you have NO CONTROL WHATSOEVER over post production costs, the operator need not answer to you, they can take out as much as they like, when they like, save maybe that you will spend $50,000 of your own money to sue them. If I had a choice between 18% and no post production costs or 20% royalty WITH post production costs, I'd pick the 18% without, good for today, and good for my grandchildren also.
You should ask them what cost they will deduct from your royalty check for their efforts to enhance the value of the production to get a better price for it. 'Enhancing the value' is the expenses they will deduct for instead of calling it 'post production cost', even though those expenses for the procedures are identical whether they are called 'post production cost' or 'enhancement cost'.
Wilson Inc, I agree with you almost always, but I fail to see what asking what they will take has to do with anything unless they stipulate the amounts they may take in the lease and they are not going to do that, and you still have no control over what they take in the future. They can always change their mind, I would not put it past them to outright lie if it will get a lease signed, because there is probably little a mineral owner can do after that point.
RW, instead of telling Donna to 'ask them' I should have just told her (sorry Donna , I just did not think to answer you this way before) that they would gladly give her a no post production deducts clause and then deduct those same expenses for enhancing the value of the production unless her lease also states that there will be no deductions for enhancing the value.
I agree with your conclusion. I would just add to it what I have underlined here: "If I had a choice between 18% and no post production costs and no enhancement cost or 20% royalty WITH post production costs or enhancement costs, I'd pick the 18% without, good for today, and good for my grandchildren also."
Donna, this is not legal advice. So I hope you have an attorney who specializes in oil and gas leasing to advise you.
Wilson, you are absolutely right I was being less than perfectly clear myself, mea culpa. Donna should cover both and probably also add something I learned from Buddy Cotton, state that any deductions for post production costs or market enhancements must be added back in before figuring Donna's royalty, Just to be on the safe side.
From my experience, on average the costs associated with post-production costs eat up about 1.5-2 percentage points, so I agree with R. W. If they go any more than two percentage points lower for the "free royalty" than they do for "regular royalty," I would go with the "regular royalty" (royalty that includes deductions for associated costs).
Thank You for all the info and anymore coming in. I had not heard of "no enhancement costs". We have been wondering how much exactly post production costs would be, and I'm sure it varies. We do plan to have a lawyer who specializes in oil and gas review the contract prior to signing.
Donna,
Royalty rate is just a number to be used in arithmetic in calculating your payment. Measurement and price are the foundations for application of the royalty rate. Measurement can be at the well head or point of first sale. It can include or exclude use of product by the operator. Prices can be set at the point of transfer, publicly posted prices, or market prices adjusted for quality. Prices should be arms length sale prices allowing producers to sell to associated companies at internal prices. The most important thing to you is to be able to monitor measurement and prices through independent means. (See RW comment on arbitrary application of production costs the biggest reason to me to simplify and verify royalty calculations.) The smaller your acreage, the less these things matter. Then it is a matter of understanding how long your land can be tied up with no production. If you anticipate unconventional development on your land, a little legal help will go a long way towards your peace of mind as this may be the last lease you can ever sign. A little difference in bonus will be forgotten in a month while royalty payments may last for decades.