Post Production Charges

Barnes has provided language related to production charges and warnings about enhanced price clauses. The guidance doc from Texas A & M, "Hints on Negotiating an Oil & Gas Lease" point out that there is a connection between royalty percentages and appropriate production charges.

We are being pressed hard on a 3/16 royalty without protective language related to production charges. This feels unbalanced, not in our favor. If I consult an Oklahoma attorney, will they clear this up - in terms of prevailing wisdom?

AND with a glut of gas and oil, why is there SO much activity?

B. McBride, Boise, Idaho

With respect to Mr. Fambro, he made a statement that the post production expenses could be as high as 2%. What he meant to say was that the post production expenses could be as high as 2 percentage points. However, depending on your location in the US, he cannot make a blanket statement such as that. In parts of the north Texas shales, the post production costs are as high as 75% of your revenue.

Enhanced market clauses are nothing more than a wolf in sheep's clothing.

Sadly, in Oklahoma, there is forced pooling, so your ability to negotiate a lease is hampered, *unless* you own all the minerals in several adjoining sections.

You do have a couple of alternatives. First, is to wait until forced pooling. You will likely get a free lease and 1/4 royalty as an option, but you would still be paying post production expenses. Second, shop your acreage to block busters. Third, suggest language that would limit your post production costs to 2% (or some figure) of your gross value.

The landman might make statements such as, "Well, we just think that it is fair for your to pay your share of getting your royalty gas to market." The answer is, "Well, they are my minerals, not yours and I choose to never lease to you with your present attitude."

Asking a lawyer for advice to clear things up as to prevailing wisdom is as expensive as asking a doctor to teach you medicine. They will do it, but their hourly rate is very high. As to the language in the lease form itself, other states are looking to Texas law as a guideline on post production expenses.

Why is there activity if there is an oil glut? This is the beauty of capitalism vs communism or other forms of fascism. The market decides if there is the proper risk/reward ratio to investment dollars.


Buddy Cotten