Price of natural gas lease clause


#1

Are any companies agreeable to a “cost of gas clause” in an oil and gas lease? A lot of companies get around the cost free clause by setting the price of gas at 20-25 % less than actual prices. Has anyone had a clause that ties the price paid to Henry Hub spot prices, for instance. Thanks. Bill


#2

Bill,

I have such a clause in my lease. I’m happy to share the paragraph with you, but if you choose to use it than you are using it at your own risk. I’m not making any claims as to how well it will work for you in any event it is tested in court. I just started using it and have no wells drilled under this new clause as of yet, but have had two lessees accept the clause so far.

i. to pay Lessor on gas and casinghead gas produced or used from the Leased Premises

a) when sold by Lessee in an arms-length sale to an unaffiliated third party, the greater of one-fourth (1/4) of the 1) Gross Proceeds received by Lessee from the sale of such gas and casinghead , 2) the market value at the point of sale of such gas or casinghead gas or 3) gas produced times the Henry Hub Spot Price, or

b) when sold to an Affiliate of Lessee, the greater of 1) one-fourth (1/4) of the Gross Proceeds, computed at the point of sale, (point of sale shall never be at the well) from the sale of such gas by such Affiliate of Lessee, 2) the market value at the point of sale of such gas or casinghead gas or 3) gas and casinghead gas produced times the Henry Hub Spot Price.

c) when used by Lessee one-fourth (1/4) of the greater of 1) market value at the point of sale of such gas and casinghead gas or 2) gas produced times the Henry Hub Spot Price.

d) when flared otherwise produced but not sold, one-fourth (1/4) of the greater of 1) market value at the point of sale of such gas and casinghead gas or 2) such gas and casinghead gas produced times the Henry Hub Spot Price. However, Lessee may flare gas for ninety (90) days after the well is considered complete per paragraph 2.3 before the Lessee is required to pay the royalties for flared gas per this paragraph.

The last lessee wanted to change “Henry Hub” to “Houston Ship Channel” which I allowed.

I hope this is a starting point to help you come up with your own clause.

Robert


#3

Thanks. It looks good to me. I will add it to next lease. Thanks again for your response.


#4

Nice clause. The great mystery is the clever “produced or used” rather than the more common “produced and saved”, or “produced and sold.”

There is a companion to this provision in the definition of primary term that makes the primary and secondary term conditioned on the proper payment of royalties.

Be very careful that Dr. Frankenstein does not attempt to create his own lease form and ends up creating a monster whose only solution is to save whatever bonus dollars that were paid to fund the sure to follow lawsuit if production is established.

Good to see you again, Bob and Donna!

Buddy Cotten Mineral Manager


#5

Hi Buddy,

Good to have your input, and it is sound advice to not have Dr. Frankenstein build a lease agreement. I’m pretty sure I have the primary paragraph to which you are referring. We did have an oil and gas attorney word the paragraph to tie the royalty payment to the “greater” of 1, 2, or 3 (which is the Henry Hub price) so we could try one more step to avoid the Lessee from ignoring the cost free post production clause paragraph.

I’m always hesitate to share any information because I don’t want to harm anyone, and since you have replied I am now worried for trying to share and help a fellow mineral owner. But I did try to inform Mr. Bill that he is using at his own risk, but I guess I should have thrown in “please have your attorney review this information” statement and I will if I ever decide to share information again.

Good to hear from you and Thanks for all your help and knowledge. Donna and Bob


#6

You did the right thing. This is all about helping people! Everybody here knows that the advice is worth what they are paying for. There have been numerous times on this board when well intentioned people have give absolutely horrible advice or recommendations. When I see that, I try to be helpful on my end. That’s all we can try to do as nice people. Be well intentioned and helpful!

Best wishes to you both.

Buddy