Royalty Calculation - ExcoOperating

I entered into a lease that was ultimately acquired by Chesapeake and then trnasfered/sold to Exco on South Texas lands.

the lease has the following with respect to royalty: "Royalty on Gas. Lessee shall deliver to Lessor as royalty on gbas, one-fourth of all gas, including casinghead gas or other gaseous substances prodcued and saved from the leased premises, provided that on gas including casinghead gas or other gaseous substances produced from the leased premises and sold on or off the premises, the royalty shall be, at Lessee's option, one-fourth of all gas including cassinghead gas or ther gaseous substances produced and saved, or one-fourth of the net proeceeds received the sale thereof. The royalty paybale on gas shall include a royalty on all liquids or other constituent byproducts stripped or processed from gas produced and sold from the leased premisesor land pooled therewith and any residue gas produced and sold."

But it also has a section that reads: "Royalty Costs & Expenses. Lessor's royalty shall be calcuated free and clear of all costs, expneses and deductions for exploration, drilling, development and production, including, but not limited tocosts of dehydration, storage, compression, separation by mechanical means, and stabilization of hydrocarbons at the well; but, said royalty shall bear its proportional share of (i) severance and other taxes based on production and (ii) the actual reasonable costs charged and deducted to transport, compress, stabilize, or treat the production under any contract negotiated by Lessee at arm's length with any non-affiliated purchaser or gatherer."

I have noted that in my checks, Exco is deducting "Gath Trans Other Excess Deduct" equal to the value of all gas and liquids reflected. The intent from me was for a cost free royalty. I find it hard to believe that Exco is reaping zero benefits on sale of gas and liquids.

Can someone give me their opinion whether this treatment by Exco is correct?

Re: Post Production Costs

I'm not sure if this article applies. But, here it is in case you missed it.

Regardless, it's informative reading.

Good luck,


1114-PostProductionCosts_BobMalone.doc (35 KB)

Thank you Ms. Malone.

As I scan the case, it appears that this is in response to an overriding royalty interest and whether or not it was appropriate to CHK to allocate costs.

the difference for me is that my interest is a royalty interest and even if they can allocate costs, the lease says "..actual reasonable costs..." I know of few if any business, and virtually none that last a very long time in which costs equal or exceed revenues.

I have spoken with another mineral owner and he has been told by the oil company that actual costs are well in excess of what they are showing but they can not recapture these costs against the oil royalty.

Thanks again for providing the aticle.


“no dogs allowed, except for cats.” Classic!

Use of term 'net proceeds' leads to proceeds net of costs. Reference to being sold from lease premises also leads to sales less expenses back to well. You have also specifically allowed deduction of costs that lessee agrees to pay any third party. Sometimes an oil company will agree to higher costs for some gas in exchange for another benefit somewhere else. So your royalty will not be 'cost-free.' But if these charges are 100% then that is disturbing. You should contact operator about the charges and ask for a written explanation of why charges are so high.