In various places in the royalty clause of my lease it states (in general) that the Lessee will pay the Lessor the agreed percentage as royalty on what the operator sells the minerals for (gross abbreviating here). The question, is there not a standard or index (particularly in the La Salle, TX area) that oil, gas and other minerals are valued to? Is it perceivable that an operator would sell the minerals to a cousin-company for a fraction of the true value? Should I insist that the royalties are keyed to “local market value” or to some pricing index for the area?
Side- comment: I have received tremendous feedback and great information from this forum. You guys have been an invaluable source of guidance and advice. Thanks to all!!!
Well, 153 views and yet no one wants to comment on this problem. Your lease should specify an "arms length" sale of the product. That means that the buyer and seller should have no relationship.
However, if the company has an exploration company, a production company and sales company, without an "arms length clause" in your lease, they could conceivably make some sweetheart deals with their subsidiaries.
Sad but true.
The whole lease negotiation process has been truly enlightening. After ready your post, it's become clearer to me as to why my attorney wants to put this clause in my lease regarding this subject matter:
"The royalty shall be XX% of all oil, gas, condensate and other hydrocarbons and their by-products that are produced and/or saved under this Lease, same to be delivered at the well or to the credit of Lessors. If Lessors elect not to take delivery at the well, then Lessee shall set such production at the market price, and the royalty shall be XX% of such market price, plus any premium. In that event, such market price shall be determined by the highest price including premium, if any, reasonably obtainable by Lessee under an arms length transaction with a non-affiliated purchaser. In selling any minerals produced from the Leased Premises, or any lands with which the Leased Premises may be pooled, Lessee shall exercise good faith and use due diligence and prudence to market such minerals produced at the best price and upon the most favorable terms that may be obtainable by Lessee."
Yes, mineral leases need to be crafted by skilled attorneys that specialize in this field.
Unfortunately, it appears many people seem to take the first nickle that comes down the road.
Sam. Any lease like this should refer to arms length transactions for the reasons you state otherwise youd end up getting a share of an
Internal transfer price and the operator can then bag the full value by selling the product on from wherever it was transferred to. % of selling price deals can also benefit from a regular review to ensure the % you get represents the open market royalty rate for the minerals. Of course this can work both ways depending on the state of the economy and the production costs, but it does protect you if prices start to Leap upwards.