Oil and gas lease - royalty clause meaning

Oil and Gas Leasing Help
1

My son has been offered a top lease for a small amount of mineral acreage he owns. (20 acres).

The royalty clause reads:

The lessee shall deliver to the credit of the lessor as royalty, free of cost, into the tanks or in the pipe line on the leased premisses to which lessee may connect its wells the equal one-fifth (1/5) part of all oil produced and saved from the leased premises, or lessee may from time to time at its option purchase any royalty oil in its possession, paying the market price thereof prevailing for oil of like grade and gravity in the field where produced on the date of purchase.

The lessee shall pay lessor, as royalty, on gas including casinghand gas or other gaseous substances, produced from the leased premises and sold or used off the premises or used in the manufacture of gasoline or other products, the market value at the well of one-fifth (1/5) of the gas sold or used, provided that on gas sold the royalty shall be one-fifth (1/5) of the amount realized from such sale. The amount reralized from the sale of gas shall be the price established by the gas sales contract entered into in good faith by lessee and a gas purchaser for such term and under such conditions as are customary in the industry. Price shall mean the net amount received by lessee after giving effect to applicable regulatory orders and after application of any applicable price adjustments specified in such contract or regulatory orders in the event lessee compresses, treats, purifies or dehydrates such gas (whether on or off the leased premises) or transports gas off the leased premises. Lessee in computing royalty hereunder may deduct from such price a reasonable charge for each of such functions performed, including associated fuel.

My concerns are (1) What exactly does the option to purchase any royalty oil in its possession mean?

(2) Regarding the gas royalty, it seems the company may deduct many charges from the gas royalties.

Bottom line, we don't understand the possible ramifications of these items. His attorney is working with the company on this and in my son's last conversation with attorney it sounds like the company is standing firm on this clause. In other words take it or leave it.

Any advise on this would be appreciated.

2

I am no expert at deciphering legalease, but it reads to me that they are going to give you 1/5 of the oil that they put in the tanks or pipline and from time to time at their option they can buy it from you. So my concern would be what if they don’t buy it from you. Are they gonna charge you to store it and take the money out of your royalty payment. Maybe they are just after the gas and they ate saying if they hit oil they will store it in a tank. Who’s tank? IDK.

3

Terry, the oil part of the clause is fine. The gas part is not. Negotiate to receive gas royalties free of all costs, as is the language for oil.

4

Tell them you will not sign the lease without a clause stating no deductions from your royalty. They should be willing to do that if they want the lease bad enough. Be willing to wait as they may test you. Good Luck.