I am negotiating a mineral lease for oil and gas. The lease form grants a 3/16 royalty on net proceeds realized by lessee, less certain costs for taxes, marketing, processing, etc. Another lease I recently signed grants a 3/16 royalty on gross proceeds, less the same type of costs. What is the difference between net and gross proceeds? Why would there be deductions for taxes, production and marketing costs for NET proceeds? Does "net proceeds" have a particular meaning in gas leases?
Gross proceeds minus deductions equals net proceeds.
The best advice is to revise the lease to NOT allow for deductions for taxes, production, marketing, transportation, etc. This is often done in an addendum to the lease. (These deductions most often show up in gas leases, because of the particular processing costs involved for extracting liquds from the gas, etc.)
The current lease you are being presented is to the oil/gas companies advantage, and should be revised as suggested prior to signing it.
Thank you for the reply. The leasing agent has suggested an addendum titled No Deductions, but this addendum has a caveat -- that any such costs which result in enhancing the value of marketable oil, gas or other products to receive a better price may still be deducted from the net proceeds as well as costs and expenses imposed by a third party purchaser identical to those imposed on lessee's share of such production. If the proceeds are net, wouldn't these costs already be deducted?
I believe the caveat is a good one, and one that you typically see. Bottom line is that if YOU end up making more money by some such optional enhancement, that is what you want.
Here's a typical clause; if someone has a better one, let us know.
PRODUCTION EXPENSES. For the purpose of calculating royalty payments due Lessor on all production from the Leased Premises, such calculations shall be free of any and all cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, marketing or pipeline construction and maintenance. 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 the deductions are based on Lessee’s actual cost of such enhancement and the Lessor’s pro rata part of such cost is less than the amount of the enhanced value of the product.
Agree with JW.
Thank you both, advice is very helpful.