Could anyone please tell me what this means; Lessor shall receive the same gross price as received by Lessee under a bona fide "arms length" gas or oil sales contract entered into by Lessee with an independent third party purchaser? Shouldn't current market value be in the lease? Any help would be greatly appreciated.
Jean, that language means that the lessee/operator can't sell to an affiliate [ basically to himself ] at half price and then your royalty would be based on that half price. It's a good language. It might be punched up a little more by saying the price will not be less than the field price where the oil/gas is produced or if it's not in a recognized field then not less than the price from the nearest field.
Dear Jean,
What most people do not know about that clause is that there are sometimes exchanges between seller and buyer of non-money things of value in which the mineral/royalty owner does not share.
My Professional Lease form handles the matter in this way:
"If any contract by which Lessee or an Affiliate of Lessee sells oil or gas produced hereunder makes deductions or adjustments to the price to account for costs of production, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or gas produced from the Leased Premises, or any liquefiable hydrocarbons extracted therefrom, then such deductions shall be added back to the price received for purposes of computing the Gross Proceeds upon which royalties are to be paid hereunder."
Buddy Cotten said:
Dear Jean,
What most people do not know about that clause is that there are sometimes exchanges between seller and buyer of non-money things of value in which the mineral/royalty owner does not share.
My Professional Lease form handles the matter in this way:
"If any contract by which Lessee or an Affiliate of Lessee sells oil or gas produced hereunder makes deductions or adjustments to the price to account for costs of production, gathering, dehydration, transportation, fractionation, compression, manufacturing, processing, treating or marketing of oil or gas produced from the Leased Premises, or any liquefiable hydrocarbons extracted therefrom, then such deductions shall be added back to the price received for purposes of computing the Gross Proceeds upon which royalties are to be paid hereunder."
Best,
Buddy Cotten
Mineral Manager
Buddy,
Thanks for your reply. I should have added the whole paragraph. The first lease they gave us was terrible. Then I started researching oil and gas leases and started adding clauses to their lease. Out comes a new lease with all this extra stuff plus extra stuff they added. They added this new royalty clause. Upon reading different articles it looks like it would be better to get the market value. I didn't like the fact that I would have to wait until the third party bought the oil or gas to have the royalties be paid at that time frame. I asked the landman what if they decide to store the gas or oil and then when would you get the royalty. He really did not have a reply. Here is the complete paragraph:
22. ROYALTY PAYMENTS: Anything contained to the contrary notwithstanding, it is understood and agreed that Lessor shall
receive the same gross price as received by Lessee under a bona fide ‘arms length’ gas or oil sales contract entered into by Lessee with
an independent third party purchaser. Lessee shall pay Lessor’s royalty within
90-days of the sale by Lessee of such oil, gas and
liquid hydrocarbons produced from the land herein leased or from any land with which it may be unitized, or after the curing of all
significant title defects, whichever is later. Liquidated damages for failure to timely make such payment shall be one and one-half
percent (1-l/2%) per month of the royalty due Lessor. If Lessee fails to comply with the provisions of this Paragraph, then Lessor
shall, at Lessor’s option, have the right to terminate this Lease Agreement. Lessor shall, however, give written notice (certified mail,
return receipt requested) of such intention to Lessee and Lessee shall have
30-days after receipt of such notice in which to comply
with the requirements; and failure to comply herewith shall cause a forfeiture of this Lease. The rights of Lessor under this Paragraph
shall be in addition to, and not in lieu of, all rights Lessor may have as to payment of royalty under V.T.C.A. Natural Resources Code,
Section 91.401 through 91.405. Lessee may, however, make estimated royalty payments to Lessor during any period of disagreement
as to the terms of this Paragraph in order to remain in compliance with this Lease.
It seems like every time I get something from the landman, it gets more and more complicated. I have now talked to three landman from the same company. Jean
Jean, the intent of the language looks good but I suggest you have a professional/ trusted lawyer look things over. You are worried about the 90 days post sale? One of my operators does not have 90 days after sale to make royalty payments and they pay 60 days after oil production.
Gas sales are 90 days after or more, you would at least have language of when they must pay or they owe interest and a true remedy of lease cancellation if the lessee does not comply, that is pure gold. The lessee/operator is not going to store unless they have an extremely good reason because it costs money, money that would come out of their pocket.
Jean, royalty is from the sale of property. You want the operator to be able to make the best contract to sell your oil/gas that he can.
Thanks for all your wonderful information. This has been a learning experience. I do live in Oregon and the Texas property has been in our family for over a hundred years.
Jean