Post Production Costs with XTO

[Tenniesson]

I would like to jump on this thread a bit late. I receive royalties from a horizontal pooled lease operated by XTO in Martin Co TX. About July 2019 they started retroactively applying deductions to the GAS and NGL such that now the total non-tax deductions for the gas products is more than twice the severance tax on the oil alone. Prior to that, XTO only made a Transport (TRN) deduction on the oil production; there were no deductions on RES (gas) and NGL (non-gaseous liquid) royalties.

So now there are Processing (PRO) deductions on NGL, and the RES (gas) is sold in 2 lots (2 separate line items on stub). The lot sold at the higher price has deductions for Transport (TRN), Compression (COM), Dehydration (DEH), Downstream Fuel (FLB), Gathering (GAT), Other (OTH) and both lots have Treatment (TRT) deductions. The net for the 2 lots is about the same. Actually the lot with all the deductions that is sold at a price of about 2X the unprocessed lot, nets less after deductions than the the unprocessed lot.

Recently another member of my family was approached by a man (don’t know company name) offering to assess net worth of our oil properties, and check deductions against filed copies of mineral leases for 2% of our net royalties per month. The details aren’t clear for how many production months. Personally since I know how to look up all production info on TXRRC I am skeptical of the services being offered, although on last pay stub total non-tax deductions were 9.1% of owner gross royalties. I’m not willing to give up 2% on all future royalties - I might consider it for a single month.

This made me think about the deductions. For some reason I thought I had reviewed the original mineral lease (original lease signed in 2006 and vertical wells in productions since 2010). My understanding is that the original lease is binding to pooled leases, as long as there are producing wells (I did sign a Pooling Agreement with XTO but there is no language which modifies our original lease). I thought from previous review I had decided there was no language to prohibit these post-processing deductions. I looked again tonight; I was wrong. I was confusing the Martin Co lease with language from a more recent mineral lease on other land with no drilling activity.

My findings:

1. The specific language in a clause added as Exhibit 1 to the notarized lease states: “Notwithstanding any language in this lease to the contrary, Lessor’s royalty shall never bear, either directly or indirectly, any part of the costs or expenses of producing, gathering, dehydration, compression, transportation from the leased premises, nor any part of the costs of construction, operation or depreciation of any plant or other facilities or equipment for procession or treating oil, or gas produced from herein leased premises.”

2. I cannot find any “however” clause that allows costs to be deducted which result in a better price, with the possible exception of a paragraph in the body of the standard lease where it spells out our 20% share of royalties: “… a) … lessor’s interest, in either case, to bear 1/5th of cost of treating oil to render it marketable pipe line oil; (b) To pay lessor on gas and casinghead gas … (1) when sold by lessee, 1/5th of the of the amount realized, computed at the mouth of the well, or (2) when used by lessee off said land [I assume this pertains to Downstream Fuel use and reported under Disposition Code 2 by TXRRC] or in manufacture of other products, the market value, at the mouth of the well, of 1/5th of such casinghead gas.” The only other sentence in this clause that caught my eye: “Lessee covenants and agrees to use reasonable diligence to produce, utilize, or market the minerals capable of being produced from said wells, but in the exercise of such diligence, lessee shall not be obligated to install or furnish facilities other than well facilities and ordinary lease facilities of flow lines, separator, and lease tank, and shall not be required to settle labor trouble or to market gas upon terms unacceptable to lessee.” That last part of sentence about “terms unacceptable to lessee” may be the GOTCHA. Does this trump the “Notwithstanding any language to the contrary” clause that is in the addendum prohibiting processing and transportation deductions???

Does anyone think I have a case to ask XTO to stop most of the deductions from gas royalties and even the transport deduction for oil?

Actually XTO has a pipeline and processing facility within 1 section of our land, and has an oil pipeline easement that runs through our property so I would think the transport of oil would would be small cost if trucks involved. I digress.

What is the next step? Do I need to get a legal opinion on the mineral lease? I’m not asking anyone here to give me a legal opinion; I’m asking whether it would be worthwhile. Referrals would be appreciated.

I am thinking that maybe XTO doesn’t examine each mineral lease in the pool carefully, and maybe they are basing their right to make deductions on some other mineral lease within the pool, and applying same deductions to all mineral holders. Or maybe I’m naive.

Could I just send a certified letter to XTO with a copy of our lease and ask them to cease and desist from making certain deductions?

Is there another thread I could be directed to with details how to go about challenging royalty deductions?

Appreciate any thoughts on this.

[TennisDaze]

These thoughts are based on the limited language presented.

An attorney would need to review your lease in its entirety to give you definitive answers as there may be other lease clauses which affect your royalties, even if they are not apparent to you. The royalty clause in your lease reads: “…when sold by lessee, 1/5th of the of the amount realized, computed at the mouth of the well,…” Two problems. First is that the “amount realized” is the sales price that XTO is getting, regardless as to whether that is the market value. Second, is that the royalties are calculated “at the mouth of the well.” In Burlington Res Oil & Gas LP vs Texas Crude Energy (573 SW 3d 198), the TX supreme court held that this wording means that all post-production costs (think all charges off the well pad) such as transportation are deducted to get back to the value at the wellhead / mouth of the well. The court ruled that language where royalties are valued at the well essentially overrides any other lease language regarding costs such as in your Exhibit 1.

You will have an uphill battle on getting XTO to stop these charges. That said, you can still send a letter citing your clause and asking for the charges to be reduced. Many mineral owners have had the same experience. You are wise to reject an offer to only review your lease language and charge you 2% for life of the lease. That is not a guarantee of any savings and gives someone a gravy train.

[AJ11]

Search this forum for the thread “CO2 and HOW LESSORS CAN OVERCOME LEASE LANGUAGE BARRIERS TO PROHIBIT POST-PRODUCTION DEDUCTIONS” and read the law review article.

[James_Flesher]

I don’t know about Texas, but in Oklahoma the “Exhibit A” attached to the basic lease has precedence over the basic lease. Given what your Exhibit A says about deductions, I think XTO should stop taking those deductions and return deductions already made. And in OK, they would owe 12% annual statutory interest on those wrongful deductions. I first would email XTO, requesting the above, and why, and cite your lease’s location (book and page here in OK) in your county’s county clerk’s office. If they don’t respond, send them a registered letter with a copy of your lease. The step after that is to retain a lawyer. XTO has been hit hard by big class action suits in OK that have cost them many millions of dollars, for taking wrongful deductions, e.g. Chieftain v. XTO in 2018.

[CPF]

I have the some of the same questions and concerns as Tenniesson though a different state and different lease language. In Colorado if the lease is silent - as mine is - regarding post production expenses then they can’t be deducted, see Rogers v. Westerman Farm Co., 29 P.3d 887 (Colo. 2001). Nonetheless they have been deducting for a “processing related fee” and I’ve been meaning to address it.

Then Anadarko sold to Occidental and now along with processing fees they are retroactively applying deductions to gas and oil significantly reducing the size of my checks. So now I need to do something about it and wondering how to go about it. A certified return receipt letter sent to the legal department? Get an attorney’s letterhead on it? Or actually retain counsel with all the expense that would bring. Do production companies tend to acknowledge their duty to comply with their legal obligations or will they make me jump through hoops and spend a lot of money before doing what the law requires?

[James_Flesher]

I would send a certified return receipt letter demanding that post production expenses stop and previously wrongly deducted post production expenses be returned. Typically, such a letter is sent to the Division Order section of the company, in my experience. I would try this first before going to the expense of hiring an attorney to write a letter.