Royalty lease language

It´s been a couple of years since we´ve had lease offer and this language concerning royalty payment is new to me. I would like to know the pros and cons of the two methods of payment mentioned for gas and casinghead gas in this section

To pay Lessor on gas and casinghead gas produced from said land 1. When sold by Lessee % of the amount realized by Lessee, computed at the mouth of the well, or 2. When used by Lessee off said land or in the manufacture of gasoline or other products, the market value, at the mouth of the well, of % of such gas and casinghead gas.

I assume if the lessee chooses one of the methods of payment it would choose the less amount to pay us.

The law review article linked below has some good points to consider. Remember that a lot of money could hinge on a word or even a punctuation mark. If you are unfamiliar with oil and gas leases, you might get an oil and gas attorney to assist you in the leasing process. “When viewed collectively, the four cases highlighted above provide strong guidance for mineral owners seeking a lessor’s royalty free of post-production expenses. The key goal for lessors is to modify the general rule that a lessor’s royalty is subject to its proportionate share of post-production expenses. As prior case law indicates, achieving this goal requires careful drafting. Heritage Resources, Inc. v. NationsBank warns lessors to not use the phrase “market value at the well” while Warren v. Chesapeake Exploration, L.L.C. instructs lessors to avoid phrases like “amount realized at the well”. Potts v. Chesapeake Exploration, L.L.C. further instructs that even if the parties move the royalty valuation point from the wellhead to a to-be-determined point of sale, post-production expenses may still be deducted if the point of sale is at the wellhead. Thus, royalty owners should avoid the term point of sale for royalty valuation purposes. The best royalty valuation phrase to avoid making a no-deductions clause legal surplusage is price actually received or proceeds…”

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Thank you. Our family is pretty experienced and we do use legal advise on new items.

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Different states have different laws on the royalties, so get legal help to make sure you have language that protects you. The little words “at the wellhead” mean totally different things in Texas versus Oklahoma. Just an example.

You’re welcome. The law review article has some very good information, imo.