We are negotiating a new lease with a major oil company with respect to our interest in a few acres in northwestern Weld County. They are wanting to reserve the right to deduct from royalties such production and transportation costs as …gathering, marketing, compression, dehydration, transportation, removal of liquid or gaseous substances or impurities…etc. It is their contention that cost recovery of transport from connect to point of sale is standard across the DJ Basin for their company. Does anyone have insight into how standard that deduction actually is and whether there might be a way we can protect ourselves from exploitation of that loop hole? Thanks. Ed
Post-production costs like the ones you mention are a hot topic right now, and with the market going up and in a place like Weld County, it’s becoming more and more typical to have leases specifically take this burden off the royalty owner. “Standard for their company” can mean lots of things and is likely just fluff to keep you from negotiating. The problem I see in Colorado is that many owners I talk to have tiny fractions of land and simply don’t have the bargaining leverage to pay for legal aid to write in these clauses, or to even know they need them.
Leases are generally highly negotiable. If you are being offered 25% royalty, you should be able to get these costs removed. If you’re being offered less than 25% royalty, focus on upping your royalty to 25% before working on these other terms.
That is just my non-legal advice as an engineer who mostly does TX/NM/OK work, so finding local legal advice would be best if the transaction could afford it.
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