Post production cost

[RobP]

I have mineral assets in Weld County CO. I have received a oil and gas lease proposal that has post production clause. It states that the Lessor’s royalty shall be subject to Post Production Cost and will bear its proportionate share of all production severance and ad valorem taxes and applicable charges after oil and gas substances are in marketable condition. Post Production Cost include all cost of gathering, marketing, compression, dehydration, transposition, removal of liquid or gaseous substances or impurities etc.etc.etc… First question: what is a common or reasonable Proportionate Share? This looks very open ended, is there a standard formula or percentage? Second question: is it reasonable to remove this clause altogether, if not, what would be reasonable counter to this clause? Thank you Rob

[James_Garner1]

Proportionate is related to your DOI for the well(s). If you strike the clause, then you are potentially subject to an allocation of these costs, but review CO statutes for this issue. You should request a clause that excludes these costs other than State and Local related production taxes.

[RobP]

Thanks Jim, but what is DOI

[James_Garner1]

Division of Interest. This is your percentage in the entire unit and not the your tract(s) in the unit.

[Terrel_Shields]

Some costs are fixed. The pumper who visits the well charges a flat rate as an example. The taxes, transport charges are generally dependent upon volumes, not price nor flat rates. Therefore, PPExpenses are highly variable. In general, high production levels means lower PPE as a percent. And as a well or price declines, the post-production can increase rapidly. If it goes negative you would have a case where the well is not economic and the lease should automatically expire - OTOH companies tend to cling to such properties even when they barely pay their own way.

I would consult an expert to offer amendment to limit Post-Production expenses to a maximum percent or other way of limiting this annoying crap. You can thank George Bush I for these kinds of leases when they deregulated in the 1980s.

[jvt]

You will be much happier with your lease if you strike this clause. Processing and transport for gas wells especially can cut your royalty by 10%. The royalty owner has no say in what the operator is charging. Unscrupulous operators often shift these costs disproportionately onto their royalty owners, sometimes using subsidiary service companies to inflate these charges.