Transporation costs

I am negotiating a lease with Chesapeake and they insist on including transportation costs(gross) which I am not to keen on because it is a small parcel and that would cut into the royalty. Does shorting the primary time sound like a good counter then?

Here is the clause that an O&G attorney friend sent me to use in my O&G lease that I have been negotiating since 09.2014.

FREE ROYALTY: Lessor's royalty shall be subject to Lessor's share of all severance and other taxes. Except as to oil, gas and/or liquid hydrocarbons used on the leased premises for its operations, Lessor's royalty shall be free and clear of the costs or expenses of drilling, testing, completing, equipping, operating, producing, gathering, dehydrating, compressing, transporting, treating or marketing of the oil, gas, liquid hydrocarbons and the constituent products therefrom, from the leased premises, prior to Lessee's point of sale to purchaser.

Notwithstanding anything herein to the contrary, Lessee shall not be obligated to pay Lessor's royalty on a value for the sale of oil, gas, liquid hydrocarbons or other constituents therefrom which is more than the proceeds actually received by Lessee in an arms-length contract with a purchaser which is not a subsidiary or affiliate of Lessee. Any agreement to sale to a subsidiary or an affiliate shall require the consent of Lessor. However, if any sale of said gas is made to a purchaser, and Lessee should receive any additional amount either directly or indirectly from the purchaser, whether as a result of a re-sale thereof by purchaser or otherwise, then in such event, the price of said gas at the well shall be increased by this additional amount and Lessor shall receive its proportionate part thereof.

Good luck,

Pat

Are they still interested in your lease? That's 6 or 7 months ago.

Yes, we've been going back and forth since then. I really don't care if they pass me by unless they give me what I'm asking. I like the $ signs, but not as much as I don't want this beautiful place irreparably damaged or the good well water contaminated. I just don't trust O&G operators and being that I don't live there all year, I really don't trust 'em. Once the lease is signed, "that's all she wrote."

Thanks,

Pat

Pat:

Hang in there, I like your attitude. I'm not sure how detailed you read through these forums; but, if you have done a good job on most everything else, there is one additional issue that has come to my attention since I signed my leases. I don't know how widespread this has become; but, a friend of mine called and said that Gonzales county had hired a group to come in and evaluate or appraise locations where well pads and other oil related equipment had been placed and they were removing this acreage from the Agriculture Exemption tax rolls. If Gonzales County is doing this, I'm sure the other counties are not far behind, so I suspect this should be a big consideration in future leases. IMHO, this elevated tax charge should be something that the Oil Operator should pay initially and each year until this acreage is returned to full Agriculture Exemption status. Once lost, I believe it will take at least 5 years to get the exemption again. One additional thing to remember here is that most counties if not all are going back (5) full years at the full appraised value and charging taxes based on the full value. Without doing the math, this may not look like much of an issue; but, after doing the math, it is a total different story.

Good Luck!

Ms. Pat Malone said:

Yes, we've been going back and forth since then. I really don't care if they pass me by unless they give me what I'm asking. I like the $ signs, but not as much as I don't want this beautiful place irreparably damaged or the good well water contaminated. I just don't trust O&G operators and being that I don't live there all year, I really don't trust 'em. Once the lease is signed, "that's all she wrote."

Thanks,

Pat

Counties have been doing that for years.

A good lease form (for the surface owner) will provide that any increase in taxes or loss of exemption will be borne by the oil company.

Buddy Cotten

Bigfoot said:

Pat:

Hang in there, I like your attitude. I’m not sure how detailed you read through these forums; but, if you have done a good job on most everything else, there is one additional issue that has come to my attention since I signed my leases. I don’t know how widespread this has become; but, a friend of mine called and said that Gonzales county had hired a group to come in and evaluate or appraise locations where well pads and other oil related equipment had been placed and they were removing this acreage from the Agriculture Exemption tax rolls. If Gonzales County is doing this, I’m sure the other counties are not far behind, so I suspect this should be a big consideration in future leases. IMHO, this elevated tax charge should be something that the Oil Operator should pay initially and each year until this acreage is returned to full Agriculture Exemption status. Once lost, I believe it will take at least 5 years to get the exemption again. One additional thing to remember here is that most counties if not all are going back (5) full years at the full appraised value and charging taxes based on the full value. Without doing the math, this may not look like much of an issue; but, after doing the math, it is a total different story.

Good Luck!

Ms. Pat Malone said:

Yes, we’ve been going back and forth since then. I really don’t care if they pass me by unless they give me what I’m asking. I like the $ signs, but not as much as I don’t want this beautiful place irreparably damaged or the good well water contaminated. I just don’t trust O&G operators and being that I don’t live there all year, I really don’t trust 'em. Once the lease is signed, "that’s all she wrote."

Thanks,

Pat

Re Buddy - in response - will the oil company take on the loss of exemption for five years or as long as the land is not in Ag?

Re: Bigfoot - Interesting! You are right! Oil well pads don't fall under the category of Ag deductions. Just this last Good Friday early morning, an XTO landman called, and woke me from a good sleep, to say that an operator wanted to horizontal drill on the well just northeast of my back boundary line. Then, he asked if I would like a "lot of money" to lease them a well pad site on the area behind my back tank. I asked him how he knew I had a back tank. He said they saw it "from the sky" (Google). I quickly said that I "didn't want any trash in my back yard" and then went back to sleep.

Thank you.

Pat

Dear Pat,

Yes, they will. I have never had an Operator refuse or modify that clause.

Best,

Buddy Cotten

Going back 5 years on the tax roll (basically, losing your special AG valuation up to 5 previous years) is a called a Roll-back due to change of use (from AG use to non-AG use). This is very common when commercial developments occur on land that was previously used as AG. Most developers (commercial) when they acquire such property, include the rollback taxes as part of the payment to the farmer who is selling. It does not surprise me at all that counties are now doing this (roll-back) to well site pads. Removing the acreage taken by the pad from the previous property tax account, creating a new account that has no special land valuation. I would certainly include that in any leases that either are currently, or may potentially be covered by an agricultural use special valuation. It is not technically a property tax exemption, it is just a special valuation (that saves a significant amount of property taxes $$$).

Kitchen:

Everything you have said is true. Thanks for the followup reply and yes this is and has been pretty much an "easy hit" standard for the greedy ones in the tax office for some time on the commercial sale of property and I presume on long-term lease property as well; but, my concern is not only the initial 5 year rollback hit; but, the long term effects since this isn't a sale. As you know this property is still owned by the leasing property owner that still gets the tax bill each year and getting long-term tax payments or reimbursements out of an operator that may or may not have a marginal well. Plus we have to remember that even after this well is shut in and plugged and theoretically capable of being returned to agriculture, it will still take at least 5 additional years to regain the exemption.

Again, thanks for keeping this discussion going so that as many interested parties as possible will be aware.

Kitchen said:

Going back 5 years on the tax roll (basically, losing your special AG valuation up to 5 previous years) is a called a Roll-back due to change of use (from AG use to non-AG use). This is very common when commercial developments occur on land that was previously used as AG. Most developers (commercial) when they acquire such property, include the rollback taxes as part of the payment to the farmer who is selling. It does not surprise me at all that counties are now doing this (roll-back) to well site pads. Removing the acreage taken by the pad from the previous property tax account, creating a new account that has no special land valuation. I would certainly include that in any leases that either are currently, or may potentially be covered by an agricultural use special valuation. It is not technically a property tax exemption, it is just a special valuation (that saves a significant amount of property taxes $$$).

Bigfoot I completely agree with your concerns about the long term tax liability from a portion of acreage being taxed at full value as opposed to ag use. This would be very important to include as part of lease negotiations and language included in the final lease agreement.

Very good advice here ... especially for O&G lease negotiations.

Thank you.

Pat