As an attorney working with mineral owners, I try and get the best lease terms possible. Typically, I include a clause that prohibits deductions for post well head costs (marketing, transportation, etc.). As I often get push back from companies (not in CO, based on some case law), I'll amend it to state that the deductions cannot exceed the enhanced value.
The reason is that I want to protect that mineral value. And often times, the company owns the downstream companies "enhancing the value." Without addressing this issue, the company may deduct costs from your royalty.
In a recent conversation with a landman, a well-known Denver based natural resources company has refused to incorporate either clause. And this response is becoming more common. With the wealth of offers that are obtainable on your minerals, don't settle for a company that won't play fair!
What do you think about this clause? Is it fair to the landowner?
Cost Free Royalty: Lessor's royalty shall bear and be charged with its proportionate part of severance taxes and all reasonable costs actually incurred by Lessee in marketing of gas from the leased premises including charges for compression, gathering, treating, dehydration, processing, fuel use, transportation and similar cost and expenses. (Provided, however, the aggregate of any such deductions (other than taxes) shall never reduce Lessor's royalty by an amount greater than $0.35 per mcf or $0.06 per bbl).
I definitely prefer not to pay for the dehydrating, processing, gathering, treating, transportation and other similar costs.
My question is do I want to be paid for my royalties at the well head? Do I want net or gross?
What is the best clause to use in a Texas OGL?
Cpt. Skittles - I have never seen taxes being passed through to the landowner. Bad news!
CNT - I am not licensed in TX but generally the gross is better than net. So long as the cost of improving the gas does not reduce the well head price, you are good. For example, if the well head price is $1.80 and the company improves the gas to $2.20, and only charges you $.30, you are coming out on top. This is a factually-intense analysis. We have often looking at checks and deductions to determine how this should square up.
Mr. Rammell, are you saying the states you have mineral rights in do not have production and severance taxes, or that the operators are paying the mineral owners portion of the production and severance taxes ? Sounds like a great deal. I'm having 11.5% production and severance taxes (combined) withheld from my checks for North Dakota.
RW - Every state has some severance tax. But that tax is paid by the operator and is not passed along to the landowner, typically.
Kaye - Well head would mean pre-treatment. Point of sale could be anywhere, but it is post-treatment. It just depends on whether their improvements increase your net. Hard to determine without getting down and dirty with your statements.
Justin, I know of no mineral owner who has leased their O&G minerals in ND who is not getting the production and severance taxes passed on to them.
Justin Rammell said:
RW - Every state has some severance tax. But that tax is paid by the operator and is not passed along to the landowner, typically.
Kaye - Well head would mean pre-treatment. Point of sale could be anywhere, but it is post-treatment. It just depends on whether their improvements increase your net. Hard to determine without getting down and dirty with your statements.
RW - Every state has some severance tax. But that tax is paid by the operator and is not passed along to the landowner, typically.
Kaye - Well head would mean pre-treatment. Point of sale could be anywhere, but it is post-treatment. It just depends on whether their improvements increase your net. Hard to determine without getting down and dirty with your statements.
The practise ought to be outlawed. Our lease contains no such provisions. We get a flat 1/8th...but they tried to deduct it from folks similarly situated, and that resulted in them having to threaten court action. Chesapeake has the worst reputation in that respect...but look at all the lawsuits over post-production expenses... Arkansas has a number of them on going.
A royalty ought to be a royalty. And remember as a well delines, the cost of production increases. Lower pressures means more compressor costs for instance. I have seen several exceed 40% and line items often show a NEGATIVE number....not a good thing.