Oklahoma - Limited Deductions clause issue

Oil and Gas Leasing Help
1

I was approached by Aspera Energy a few days ago to lease acres in Okfuskee and Hughes counties. Everything looked good until they changed the wording of my "No Deductions" clause in the Exhibit A clauses I sent them to a "Limited Deductions" clause which reads as follows (Aspera added the part in red):

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 deduction, for the cost of producing, gathering, storing, separation, treating, dehydrating, compressing, processing, transporting., and marketing 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 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.

I told them I was wary of going to a "Limited Deductions" clause despite their indication that "most are okay with it." I countered that I may accept the "Limited Deductions" clause, IF they were willing to change it to a more specific wording I found here at the MI board (posted awhile back by M Barnes), which is copied below.

However, Aspera is resistant to changing the wording. Should I refuse leasing to Aspera because of this issue?

LIMITED DEDUCTIONS: Notwithstanding any language contained 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, for the costs of producing, gathering, storing, separating, blending, treating, dehydrating, compressing, manufacturing, processing, transporting, and marketing the oil, gas and/or other products produced under or otherwise covered by this lease to transform such oil, gas or other product into marketable form or to make such oil, gas or other product ready for other use; however, Lessor’s share of any such costs which result in enhancing the value of such 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 and are otherwise in compliance with the guidelines established in Mittalstaedt v. Santa Fe Minerals, Inc., 1998 OK 7, 954 P2d 1203. If deductions are taken for any post-production costs as described above, Lessee, upon Lessor’s written request, shall provide the Lessor a detailed analysis of each such cost and how and in what amount each such cost enhanced the value of such oil, gas or other products.

Thanks in advance for any help you can offer!

2

First, IMO, anything associated with any deduction clause is scary since these guys have powerful lawyer networks and lot of money to buy off judges without any common sense involved.

Second, again, IMO, there is very little bit to nothing these guys ever do or have to do with oil to enhance the value, other than maybe decant the water, so Oil should be kept in the original part of the clause and Gas should be free standing and addressed separately. With that said, now we are only dealing with Gas and the potential enhancement. Dealing with all the potential in transporting and enhancing the profitability of Gas takes some very talented gas processing people working with a very talented attorney to work this part of the clause or at least review what you have chosen.

Good luck and if you come up with something that meets your requiements, it sure would be nice if you would share with the rest of us, since we all have or should have the same concerns.

3

First, IMO, anything associated with any deduction clause is scary since these guys have powerful lawyer networks and lots of money to buy off judges without any common sense involved.

Second, again, IMO, there is very little bit to nothing these guys ever do or have to do with oil to enhance the value, other than maybe decant the water, so Oil should be kept in the original part of the clause and Gas should be free standing and addressed separately. With that said, now we are only dealing with Gas and the potential enhancement. Dealing with all the potential in transporting and enhancing the profitability of Gas takes some very talented gas processing people working with a very talented attorney to work this part of the clause or at least review what you have chosen.

Good luck and if you come up with something that meets your requiements, it sure would be nice if you would share with the rest of us, since we all have or should have the same concerns.

4

Their clause substitution wipes out the first part of the document. They will maintain that ALL of the costs delineated enhance the value of the product. I have had very limited success with operators who plan to charge you without regard for the lease language. Endeavor showed the oil severance tax (in Texas, it is 4.6%) as 5.2%, which means they were lumping in transportation costs and calling it severance tax. They charged me processing even though it was a State of Texas contract form (they own the minerals and i am their agent). There have been a number of lawsuits that have gone in favor of the operators, even though the words could not be clearer, and even the State language isn't enough. Oklahoma does have some law about post production costs, and you might want to check that out with google.

IMO, don't do business with people like this, because regardless of the language, they intend to charge you for those costs. Lower oil values, or whatever, they will get it back.

5

Thanks for the input...I will post updates as I get them.

I posted this question in the Oklahoma statewide group as well, and got a question about my question that intrigued me: If I refuse Aspera's offer and then get force pooled, will the OCC accept a "limited deductions" clause in the force-pooling lease? I hope to hear from someone who can let us know more about this.

6

Good info...thanks for the reply, James. Here's a good article regarding case law in Oklahoma...sometimes the decisions regarding production costs being deducted from royalties are in favor of the producer: http://www.okbar.org/members/BarJournal/archive2011/AprArchive11/obj8211Noulles.aspx

7

Be sure you do NOT include the sentence --However, in no event shall Lessor receive a price that is less than or more than the price received by Lessee.-- unless you at least remove the words “or more than”. The “more than” can come back to bite you.

8

Yeah, I thought that wording sounded weasly! Thanks for the response.