Scorpion has taken over leases formerly held by Ventex Oper. Corp. I received a check this January on which stub the deductions were 61% of the gross royalty. This seems excessive to me. The production is gas and the deduction categories are as follows: Severance Tax, Maintenance Tax, Fuel Use Tax, and “Other Deduction” which is the largest deduction each month for each well. Any thoughts? Sounds like a potential class action to me.
Go back and read your lease. Check for whether it says net royalties or gross royalties and if you have any clauses that forbid the post production charges. Mississippi may be one of those states that routinely allow the post production charges. it can be very expensive to transport gas and get it into sellable form. Compare your check stubs from the previous operator and see what their deductions were.
A quick check of MS case law suggests that reasonable and proportionate costs of processing are properly chargeable to the lessor’s royalty, as the value at the well, upon which the royalty is calculated, is for unprocessed gas. Such processing costs which make the gas marketable are not considered as costs of “production” since such costs end when the gas is brought to the surface.
The 2001 Lease, a standard Producers 88, provides in Para. 3 for a royalty on gas produced based on the amount realized by lessee “computed at the mouth of the well.”
the phrase “computed at the mouth of the well” is why you are getting charged post production costs. The operator pays for any charges to get the drilling and completion done to the meter at the mouth of the well. From the meter at the mouth of the well, in order to get marketable gas, various other charges are needed to get it to the plant and to the tailgate of the plant to sell. Those may include the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, trucking, or marketing the oil, gas, and other products.
Thanks. The 5th Circuit back in '84 confirmed that. The issue here however is that the previous Lessee, Ventex, never made these deductions, and now the amounts Scorpion is taking are all over the park with no explanation. Not trying to deny the appropriateness of a reasonable deduction for processing and am trying to reach Scorpion for explanation.
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