The following question is time sensitive because I need to make a decision and report it to the landman.
Is it better to accept the Mineral Enhancement Clause with a 15% royalty OR take a Cost Free Royalty with a 14% royalty? Which is in my best interest?
This is the Mineral Enhancement Clause:
It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the
product into marketable form; 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 Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements. However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.
Thanks for any advice given,
Stephanie
Stephanie, if the cost free language is truly cost free and nothing but taxes taken out and paid on your behalf, I would rather have the 14% because the enhancements could equal half of the value of the gas.
There is also the matter of keeping track of the operators actual cost for processing, how would you know if they are charging you too much?
If they can't charge you for post production expenses, if they charge you for anything you will automatically know it's too much.
If the mineral enhancement was a better deal for you over the cost free, why would they offer you a higher royalty percentage to take it? Most times if you just follow the money, you will make the right decision.
Make absolutely certain that your royalty is based on the first arms length transaction. You don't want your operator selling to an affiliate at half price and basing your royalty on that.
As for the landman giving you an ultimatum that you have to get back to him by X time, I usually ignore those, tell them I am seeking another offer, tell them I am considering selling to someone else in the oil business or that I have changed my mind and may not want to lease, and if they ever contact me again, they should have someone else other than this particular landman do so. Don't let them try and rush you into a bad decision, whats the hurry, if they are not yet drilling, they probably will not start tomorrow, if they are already drilling it will probably be months before anything is produced. When they say they have to know by friday or monday, it's just BS. I mean, what are they going to do? They need your oil/gas to make money.
Stephanie, I hope you are running your lease past a lawyer if it's for more than just a few acres. Good luck.
Stephanie,
Why are you settling for 14 or 15% royalty? Ask for at least 20%. Don't settle for the 1st offer from these clowns and don't believe a thing they tell you unless it is in writing. Don't settle for a draft as payment. Make sure you have a check in your hand before you sign over the lease. As RW says, a good lawyer that is familiar with all the pitfalls is a good investment and to your advantage. Good luck on your lease.
Clint Liles
Stephanie, RW & Clint each offer good advice.
First, the 14 or 15% does sound low. Though depending upon your location it may be proper.
Secondly, as a rule accepting a lower royalty rate which is actually "cost free" is almost always better than a higher royalty rate from which costs can be deducted.
Finally, the language of the clause you cited, "any such costs which result in enhancing the value...", is vague to the point of guaranteeing you'll either 1. be taken advantage of, or 2. be looking at a costly lawsuit to fight over later. Don't be rushed into making a poor decision. Then carefully determine if their "cost free" offer on the 14% royalty is actually cost free. Good luck.
When I asked some smart persons in the business about similar situations in the past, the general consensus was that, in Texas at least, and for natural gas (not necessarily oil), a clause containing "free royalty" was worth 1.5-to-2 percentage points more on the royalty payments. In other words 14% cost-free royalty translated into 15.5-16.0% "regular royalty," more or less. I don't know if that is actually true, but if so, then the 14% option probably is your better bet.
Thanks, everyone, for your replies. I called the landman and asked him to email me the language for the cost free royalty. He emailed me and said the company had no such language on file for that clause. I don't believe he is telling me the whole truth, as he seems to have a way about saying things that are true, but not true at the same time, if you know what I mean. He, instead, turned his focus on the last email we exchanged which gave me the language about the market enhancement clause and reminded me of the firm deadline and his that his offer was unchangeable.
He was adamant about sticking to his time line or all the negotiations were null and void. Honestly, I think because our acreage was so small he was tired of dealing with me. I was worn out and because I am not just doing this for our family, but also for my husband's two siblings who were concerned about losing out of any deal whatsoever, I went ahead and agreed to the market enhancement clause.
The landman has told me that Antero is not out to cheat me and I will get the money I deserve. I have read so many nightmare stories about Chesapeake that I am skeptical of any company. Besides, won't Antero sell these leases off to some other company someday - even if Antero is honest, how do you know the next company will be? I tried to negotiate the right to audit their logs and such, but they said no. So I will just have to trust that the royalty we get is what it is supposed to be, which makes me very uncomfortable.
As for 15%, the original offer was 12.5% and $1000 bonus. I asked for 25% and $2000 bonus, I got 15% and $2000. Maybe I should have asked for more bonus?
Thanks so much for helping me out! If I ever have to do this again, I will go into it much more informed and knowing what to negotiate for, and if it turns out that we ever end up with more than just a small parcel of mineral acres, I will let a lawyer do all the hard work!
Antero is likely to sell them off if they do not have a history of producing in that area, or a reputation for being what's called a "lease flipper," somebody who gets the lease and flips it to a real producer, somebody who is going to actually drill the well, in exchange for a fee, production payment, or override.
Stephanie, a landman is not a lord of creation. He can't tell the company where to drill, or not drill. If he fails to get your acres signed, they would probably send another landman because they need your acres and oil to make money. I hope you are happy with the $2,000 per acre and whatever they happen to send you in royalty. I think it would have been relatively simple to have a lawyer craft a true cost free royalty with no deductions for post production costs, no operating cost and no costs of drilling and completing the well for good measure, but against all advice and your own misgivings you went the other way.
Once you execute and return the lease you have no recourse but to sue and if your acreage is small, to sue wouldn't be cost effective anyway so you may as well say you have no recourse. My best advice from here is take whatever they send you and forget all else, because you don't want to know if they do cheat you because it will only serve to make you unhappy. Just consider the minerals sold for the $2,000 and whatever else you get is just bonus money that comes unexpectedly in the mail.
Stephanie, I would like to add to the above post because it didn't sound right to me or could be misinterpreted. If the deal is done, don't look back. I know how landmen can wear you down because I was dealing with them myself before I was really informed. There is a point of critical mass when you have enough information and you are not stumbling around in the dark. I am as apprehensive for you with this deal as I would seeing a friend get into a car with 4 bald tires and 1 headlight on a stormy night. Nothing has to go wrong, but there isn't alot of reassurance that it won't either. I hope everything works out for you and I hope you enjoy your deserved rest from oil negotiations.
R W, I want you to know that I did take IN your advice and also that of the others who have answered me, but I was obligated to end this thing for the sake of my family's sanity.
I want to believe that they really do need our acreage to drill and we could have waited for them to come back with another offer, but from everything I have read, in WV, it seems to me they can drill anyway and you don't get a cut. Maybe I am wrong about that. The fear of losing out is why there has been so much pressure from the family. For at least one family member, I don't think he could have waited it out without causing severe health issues. The pressure on me to get this thing done has been extreme. Now they are all at ease, and I am the only one still disturbed by this. I don't know if I ever will get over it, knowing that we have lost control of how the royalty is calculated.
None of us have any sort of disposable income and we struggle just to feed our children. We looked into hiring a lawyer, but it was so costly, we couldn't afford it. Like I said, if we ever inherit a bigger amount of acreage than what we have with this lease, I know going into debt to hire a lawyer would be worth it, and I would jump to do it, if even for the simple matter of I don't want to have to ever handle all this myself again!
By talking about all this, I hope to help others understand that they are not alone in the EXTREME STRESS of this whole situation.
I pray that moving from the original offer, which was 15% royalty calculated at the well from the sale of the net proceeds minus 15% of all production and post-production and taxes, to the market enhancement clause was at least a progression forward.
I was also able to negotiate a Pugh clause at 200' below the lowest producing horizon, delete the warranty clause, and add an indemnification clause. Everything else I tried to negotiate they said no to.
r w kennedy said:
Stephanie, I would like to add to the above post because it didn't sound right to me or could be misinterpreted. If the deal is done, don't look back. I know how landmen can wear you down because I was dealing with them myself before I was really informed. There is a point of critical mass when you have enough information and you are not stumbling around in the dark. I am as apprehensive for you with this deal as I would seeing a friend get into a car with 4 bald tires and 1 headlight on a stormy night. Nothing has to go wrong, but there isn't alot of reassurance that it won't either. I hope everything works out for you and I hope you enjoy your deserved rest from oil negotiations.
Antero Resources is new to the area in WV, but they do have wells drilled and are planning to drill more. They are originally from out West someplace. I don't know how long they will stay with the wells they drill here before selling the leases to some one else.
Pete Wrench said:
Antero is likely to sell them off if they do not have a history of producing in that area, or a reputation for being what's called a "lease flipper," somebody who gets the lease and flips it to a real producer, somebody who is going to actually drill the well, in exchange for a fee, production payment, or override.
Stephanie... it's good you got $2,000 bonus... but i wished you would have gotten 25% royalty. Your instincts are correct. I just hope you are treated fairly as long as they hold the minerals. Where do you live... the county where you have minerals. just curious because we are dealing with several companies wanting to lease our land in Howard Co. thanks.
Stephanie said:
Thanks, everyone, for your replies. I called the landman and asked him to email me the language for the cost free royalty. He emailed me and said the company had no such language on file for that clause. I don't believe he is telling me the whole truth, as he seems to have a way about saying things that are true, but not true at the same time, if you know what I mean. He, instead, turned his focus on the last email we exchanged which gave me the language about the market enhancement clause and reminded me of the firm deadline and his that his offer was unchangeable.
He was adamant about sticking to his time line or all the negotiations were null and void. Honestly, I think because our acreage was so small he was tired of dealing with me. I was worn out and because I am not just doing this for our family, but also for my husband's two siblings who were concerned about losing out of any deal whatsoever, I went ahead and agreed to the market enhancement clause.
The landman has told me that Antero is not out to cheat me and I will get the money I deserve. I have read so many nightmare stories about Chesapeake that I am skeptical of any company. Besides, won't Antero sell these leases off to some other company someday - even if Antero is honest, how do you know the next company will be? I tried to negotiate the right to audit their logs and such, but they said no. So I will just have to trust that the royalty we get is what it is supposed to be, which makes me very uncomfortable.
As for 15%, the original offer was 12.5% and $1000 bonus. I asked for 25% and $2000 bonus, I got 15% and $2000. Maybe I should have asked for more bonus?
Thanks so much for helping me out! If I ever have to do this again, I will go into it much more informed and knowing what to negotiate for, and if it turns out that we ever end up with more than just a small parcel of mineral acres, I will let a lawyer do all the hard work!
Hi Jack, the minerals are in Doddridge Co. in the McClellan district, near the Sycamore Fork. I don't know exactly where, since this was an inheritance that we just found out about and we don't live there. We only own the mineral rights.
Jack hodges said:
Stephanie... it's good you got $2,000 bonus... but i wished you would have gotten 25% royalty. Your instincts are correct. I just hope you are treated fairly as long as they hold the minerals. Where do you live... the county where you have minerals. just curious because we are dealing with several companies wanting to lease our land in Howard Co. thanks.
Stephanie said:
Thanks, everyone, for your replies. I called the landman and asked him to email me the language for the cost free royalty. He emailed me and said the company had no such language on file for that clause. I don't believe he is telling me the whole truth, as he seems to have a way about saying things that are true, but not true at the same time, if you know what I mean. He, instead, turned his focus on the last email we exchanged which gave me the language about the market enhancement clause and reminded me of the firm deadline and his that his offer was unchangeable.
He was adamant about sticking to his time line or all the negotiations were null and void. Honestly, I think because our acreage was so small he was tired of dealing with me. I was worn out and because I am not just doing this for our family, but also for my husband's two siblings who were concerned about losing out of any deal whatsoever, I went ahead and agreed to the market enhancement clause.
The landman has told me that Antero is not out to cheat me and I will get the money I deserve. I have read so many nightmare stories about Chesapeake that I am skeptical of any company. Besides, won't Antero sell these leases off to some other company someday - even if Antero is honest, how do you know the next company will be? I tried to negotiate the right to audit their logs and such, but they said no. So I will just have to trust that the royalty we get is what it is supposed to be, which makes me very uncomfortable.
As for 15%, the original offer was 12.5% and $1000 bonus. I asked for 25% and $2000 bonus, I got 15% and $2000. Maybe I should have asked for more bonus?
Thanks so much for helping me out! If I ever have to do this again, I will go into it much more informed and knowing what to negotiate for, and if it turns out that we ever end up with more than just a small parcel of mineral acres, I will let a lawyer do all the hard work!