I have received the following proposed wording from Staghorn Petroleum in response to my demand for a "clean" lease -- that is without the extended commentary that seems to be accompanying lease proposals that I have received. Are there any comments or critiques of the language?
No Deductions: 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 deductions, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing in the oil, gas and other products produced hereunder to transform the product into marketable form; however, Lessor’s share of any such costs which result in enhancing the value of 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.
I think that the "However" continues to be a problem since it does not prevent self dealing or inside sales to related parties.
That However just put the post production charges back in with no way to actually track or verify them. They did not even tie it to the Mittelstaedt case or say that it has to be a third party hands off transaction. Don't do it.
M Barnes is correct.
The Clause is silent as to affiliates and third party side letters of agreement. I omit everything after however and add, "Lessee has a duty to exercise due diligence and use all reasonable efforts in marketing any and all production from oil and gas wells on the leased premises to obtain the best prices reasonably available for the oil and gas.", but you should always get the advise of an attorney when altering your leases.
You are RIGHT ON!! Thanks
Archie,
In addition to the Lessee's duty to obtain best prices clause I posted earlier, I've seen the No Deduction Clause below reworded and used to combat the ambiguous "however". Check with an attorney to verify whether it's best to amend the however or omit it.
No Deduction: All oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction 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 and 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 enhancement, and result in a net increase to Lessor’s proceeds.