Lessee Wellhead Deductions

I asked the operator how they calculated $$/bbl payment to me, lessor, i.e. it looked a little low, and this is the reply:

I checked on your inquiry and the below is what I received from marketing.

“November WTI was $41.2777. After deducting the transportation cost, location/quality diff, pipeline loss allowance, and the roll, this gets you back to the $37.77. The WTI price did start to rise in November, but it also include a full week of prices in the 30s. You should see a large increase on the December price with WTI averaging at $47.0682.”

THIS IS MY QUESTION: Why are they deducting, or what gives them the right, or is it normal/correct to deduct those costs from the wellhead price?

This question. Has been discussed in other threads. In a nutshell, the wellhead price is the ultimate sales price LESS all costs incurred from sales point back to the wellhead. Costs would include transportation and volume .line loss. Also the oil sales price is not just the listed WTI price, but it can go up and down by the roll and other factors. The oil price is averaged over 30 day period.

thank you. what are some of the key words to search by so I can locate other threads.

This thread has some good info regarding deducts & post production cost that you may find helpful.
Post Production Costs with XTO

Try searching “cost free royalty”.

I think the answer to your question probably boils down to the wording that is in your lease. If a special provision wasn’t added to the “standard” lease wording to restrict deductions from royalty then all the costs you listed are probably valid. Don’t feel alone if your lease didn’t address that. A lot don’t, and beyond that many of the folks who thought wording they got added had settled the issue later found if the operator choses to ignore it that filing an expense law suit is their only recourse, and there are legal precedents favoring the lessee. Including it is still worth pushing for when you are negotiating a new lease but no guarantee of smooth sailing.

As an aside, I bet lots of people reading your post would love to be leased to a company that will reply to royalty owners questions and provide that kind of detail even if it’s not the answer they were hoping for.

It may be helpful to know that in certain states, post production costs are automatically taken out of your royalties UNLESS you specifically forbid it in your lease (Texas is one of them). Other states are “implied covenant to market” states (OK is one) which mostly do not take out post production costs unless the leases specifically says they can charge for them. A very close reading of the draft lease is required as most operators would love to have the mineral owners share in their costs. Enforcement of the lease is a whole other topic of discussion…


From my lease.

Am I to assume that ‘wellhead price’ in Texas, and as written in my lease, really means wellhead price less post production costs [because Texas is not an ‘implied covenant to market’ state]?

This is what lead to me receiving this information on deductions: I contacted ‘owner relations’ with the question: With WTI running at $XYZ for the month, why am I only being paid for $ABC; the reply was as I posted.

Do you have any amendments or other clauses that specifically override this paragraph 3 you posted?

If not, then my non-lawyer opinion is transportation and marketing costs CAN be deducted from your royalties. The Lessee only agreed to get the oil & gas from the reservoir to the wellhead cost free to you. Once it’s at the wellhead, that is where your royalties are determined and you then share in any cost to move it to any other location than the wellhead to sell it.

Also, gas royalties are determined based on the “proceeds realized by the Lessee,” so you get hit with any fees they are hit with, such as pipeline and processing fees, by the nature of it reducing the Lessee’s proceeds.


yep, lots of info about the topic when one gets to looking.

for the thread archive, here are 3 add’l interesting links found on the subject: https://oilandgaslawdigest.com/caselaw/post-production-cost-fights-continue-supreme-court-holds-the-phrase-into-the-pipeline-set-a-valuation-point-for-amount-realized-royalties/

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Language on Post Production Costs will vary from state to state depending upon how the law is interpreted.

Thanks Martha, these are quite helpful. As time goes on, I realize more and more the importance of re-investing our mineral money. :slight_smile:

Our family is certainly doing that. The resource is naturally declining, so we try to take our mineral income and reinvest most of it in other instruments that will keep on making income. (We take out 10% for charity as a thanksgiving to God for his generosity.)

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