What are the customary terms with regard to gross or net royalties? I read where the leesor should make certain that the terms read gross, because under net terms the lessor could see the royalites significantly reduced.
Thanks,
Bill Mayo
Bill,
I haven't seen the term "net royalties" in oil and gas as often as I have seen it in mining leases. I think it is a good idea to have a floor (net) specified in the new leases that are out there these days because the right of the operator to arbitrarily deduct production costs from gross royalties is unfair to the lessor. Be very careful of the royalty language in a lease form. Know exactly how your royalty will be calculated and protected.
Thanks Gary. Actually it is Northfield, Vt. 100 miles up the road from Northfield, Ma.
Yeah, I know where you are. Beautiful Area. And I grew up in SW Colorado.
William P Mayo said:
Thanks Gary. Actually it is Northfield, Vt. 100 miles up the road from Northfield, Ma.
Check with a lawyer.
"Gross" may be the word, depending on context. You want the gross value of the substances produced. Gary Hutchinson's advice is good. The main thing is to use language in a lease similar to what I have seen:--The fraction or per cent royalty, then: "Such royalty shall be free of all costs of production, separation of oil, gas, condensate, gas liquids, processing, and transportation to pipeline or buyer [and more]".
Determination of value of product can be tricky.
Many things are negotiable.
A lawyer experienced in oil and gas leasing is worth the money to me for the whole lease form--can save me and my land and surface improvements from the perils of company forms. Oil companies have lawyers to maximize their profits, not yours, even though company employees and landmen may want to be fair. They are usually courteous, a good way for both sides to do business.
My husband was a lawyer with a major oil company in Houston years ago. He has been retired a long time and does not accept law business. He follows the maxim, "A lawyer who represents himself has a fool for a client." So as to our business matters he will do preliminary work and then get another lawyer experienced in the matter to finish the job. My husband now is not up to date. His advice is not up to date, and he can be mistaken. No one on this forum should rely on his advice (or mine). We want to be helpful, but anyone relying on what we say does so at his or her own risk. For folks on this forum: Please don't ask us for legal advice. We may choose to offer suggestions at times and when convenient.
Here is a sample clause that illustrates "gross proceeds" with respect to royalties. This is not legal advice, as you should seek your own, but it illustrates what you are asking about.
The Lessor’s royalty provided herein shall be paid on a “gross proceeds” basis. Lessee, its successors and assigns shall not deduct any costs associated with the well from Lessor’s royalty, including but not limited to the cost of transportation, processing, gathering, treating, compressing, dehydrating, and marketing or otherwise making such gas or other substances ready for sale or use. However, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual costs of such enhancements. Provided, that in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.
Ethlyn,
I think you have given the best advice that I have seen yet. And you husband is right, only a fool would represent himself. Also, people need to understand that a general attorney may be really good, but he doesn't work with it daily. If you want to know what is really going on, go to an attorney that works with it daily.
If it's oil/gas, go to that kind of attorney. It may cost a little more up front, but will take less time. A general attorney may charge less, but take twice as long as he's having to look up the rules. And rules do change real fast.
Also, know what you want before you get to the attorney's office, write it down, ask question, he's not mind reader. Do some research on your own. Google things you don't understand, computer have made life easy, so use it.
Ethlyn Freytag Fairey said:
Check with a lawyer.
"Gross" may be the word, depending on context. You want the gross value of the substances produced. Gary Hutchinson's advice is good. The main thing is to use language in a lease similar to what I have seen:--The fraction or per cent royalty, then: "Such royalty shall be free of all costs of production, separation of oil, gas, condensate, gas liquids, processing, and transportation to pipeline or buyer [and more]".
Determination of value of product can be tricky.
Many things are negotiable.
A lawyer experienced in oil and gas leasing is worth the money to me for the whole lease form--can save me and my land and surface improvements from the perils of company forms. Oil companies have lawyers to maximize their profits, not yours, even though company employees and landmen may want to be fair. They are usually courteous, a good way for both sides to do business.
My husband was a lawyer with a major oil company in Houston years ago. He has been retired a long time and does not accept law business. He follows the maxim, "A lawyer who represents himself has a fool for a client." So as to our business matters he will do preliminary work and then get another lawyer experienced in the matter to finish the job. My husband now is not up to date. His advice is not up to date, and he can be mistaken. No one on this forum should rely on his advice (or mine). We want to be helpful, but anyone relying on what we say does so at his or her own risk. For folks on this forum: Please don't ask us for legal advice. We may choose to offer suggestions at times and when convenient.
Gross versus net language can be tricky, and they don't always use the words "gross" or "net" in the lease. Also, even with a gross lease, there are some time honored exceptions, such as allowing them to use gas from the well to power the pump without charge.
99% of leases offered to you will have those "Post-Production" expenses lumped in and they are pretty crafty about it sometimes. Remove that clause. In the Fayetteville shale where I work the wells lose more and more of the proceeds as the production decreases (the well ages) and I have seen some that take more than 40% of the check.
Whole books can be written on royalty clauses in oil and gas leases (in fact, there are a few out there already). This is one of the most difficult clauses to draft in an oil and gas lease, and the likelihood that a judge or division order analyst interpreting it won't know the first thing about oil and gas production means that even the slightest misstep can be costly. An attorney experienced with oil and gas law and the mechanics of oil and gas development should advise you on this.
For example of how the seemingly most straight-forward clauses don't get followed, see 1) this article about a deliberate nationwide effort by a major operator to circumvent these clauses, and 2) an excellent blog post analyzing a Louisiana case that interpreted "No cost shall be charged or allocated to Lessor's interest except severance and other applicable taxes." to mean that costs could be allocated to Lessor's interest.
Good point, Wade. We use "produced and saved" vs "produced and sold." Also, non-arms length transactions can be devastating to a royalty stream.
Wade Caldwell said:
Gross versus net language can be tricky, and they don't always use the words "gross" or "net" in the lease. Also, even with a gross lease, there are some time honored exceptions, such as allowing them to use gas from the well to power the pump without charge.