I just received a lease for my mineral rights in 158 R93 and it has the following language for royalties. I have a few questions.
3. In consideration of the premises the said Lessee covenants and agrees:
1st. To deliver to the credit of Lessor, free of cost, in the pipe line to which Lessee may connect wells on said land, the equal one-eight (1/8th) part of all oil produced and saved from the leased premises.
2nd. To pay lessor one-eight (1/8th) of the gross proceeds each year, payable quarterly, for the gas from each well, where gas only is found, while the same is being used off the premises, and if used in the manufacture of gasoline a royalty of one-eight (1/8th), payable monthly at the prevailing market rate for gas.
3rd. To pay Lessor for gas produced from any oil well and used off the premises or in the manufacture of gasoline or any other product a royalty of one-eight (1/8th) of the proceeds, at the mouth of the well, payable monthly at the prevailing market rate.
What does "free of cost" mean? Does it mean that the royalty will be paid before the Lessee deducts the costs? Or does it mean they can deduct costs?
Is there anything glaring in the other language that would be problem for me?
The cover letter states a royalty rate of 18.75% while the lease states one-eight. I will need to get that changed but I was wondering if there was anything in the language that is a problem. There are no other references to post-production costs or market enhancement clause in the lease.
What state is this lease covering minerals in? The lease language appears to exclude paying you for any gas/oil produced and used ON the premises.. That may be significant if they have to install compressors to transport the gas.
The royalty provision may certainly be the most important and most litigated clause in an oil and gas lease.
The free of cost only applies to oil in your abstract above. That means no costs of marketing, transportation, etc will (or should) be deducted.
On gas, the stated royalty above is paid at the wellhead, which has less value if paid, for example, at the point of first sales. To move the gas from the wellhead to point of sales, you will be paying a royalty share of marketing, processing, dehydration, compression, transportation and other costs to make the gas pipeline grade or quality.
A good landowner royalty provision is by necessity very complex. This one is not.
Mr. Cotten, I have a sample of very complex royalty language but it refers to other articles that were not included in the royalty language. I wouldn't even know how to begin to write proper language. If my family re-wrote the royalty language to be more complex, how would we know that the royalties are being calculated correctly? We are hoping they will have a producing well before the end of the contract since they are drilling all around us. So this may be the last lease.
I have another question. Article 14 states that the Lessor hereby warrants and agrees to defend the title to the lands herein described. I don't own the land, just the mineral rights. Should I ask for this entire article be removed?
Buddy Cotten said:
Dear Ms. Biggs,
The royalty provision may certainly be the most important and most litigated clause in an oil and gas lease.
The free of cost only applies to oil in your abstract above. That means no costs of marketing, transportation, etc will (or should) be deducted.
On gas, the stated royalty above is paid at the wellhead, which has less value if paid, for example, at the point of first sales. To move the gas from the wellhead to point of sales, you will be paying a royalty share of marketing, processing, dehydration, compression, transportation and other costs to make the gas pipeline grade or quality.
A good landowner royalty provision is by necessity very complex. This one is not.
I would never recommend any landowner attempt to pen their own royalty provision. To do so would be asking for trouble. Actually, this recommendation applies to pretty much all the other provisions as well. The oil and gas lease is a conveyance of minerals and also a contract and the modifications thereto be best left to a professional.
As to verification of production, there are ways to do so and many advisers will recommend that you have audit rights in your lease, if your acreage position gives you the negotiating strength to do so.
Striking the warranty provision in the lease does almost no good.
Mr. Cotten, I have a sample of very complex royalty language but it refers to other articles that were not included in the royalty language. I wouldn't even know how to begin to write proper language. If my family re-wrote the royalty language to be more complex, how would we know that the royalties are being calculated correctly? We are hoping they will have a producing well before the end of the contract since they are drilling all around us. So this may be the last lease.
I have another question. Article 14 states that the Lessor hereby warrants and agrees to defend the title to the lands herein described. I don't own the land, just the mineral rights. Should I ask for this entire article be removed?
Thanks again for the info, Buddy. I'm coordinating a lease for relatives that live in WA, MO, IL and OH. Our minerals are in North Dakota. I see you have an Exhibit A for North Dakota, Wyoming, Colorado and Montana which appears to address several of our concerns. If we purchased this form and had a lawyer prepare our documents would he be able to cover all of us even though we live in different states? Do you have recommendations on how to find a lawyer who is knowledgeable in mineral leasing?