Transportation and miscellaneous costs

I have a 45 year old producers 88 lease that states, "The royalties to be paid by the Lessee are (a) on oil, one-eighth of that produced and saved from said land, the same to be delivered at the well, or to the credit of the lessor into the pipe line to which the wells may be connected. It then goes on to other minerals but I'm wondering if someone could tell me if I'm correct in thinking that to mean that transportation costs could not be deducted from royalties as the transaction in terms of what value is due to the mineral owner appears to have taken place in such a way as to make any transporting after the fact with respect to a royalty owner's responsibly. If the value the royalty owner was due at another location then transportation costs might be warranted. It would seem that any post production cost would be the lessor's responsibility though miscellaneous is to vague for me to be certain when these costs were incurred.

Despite this clause in the lease, steadily increasing amounts (now up to 12%) are being deducted from the total payment under the designation of transportation or miscellaneous.

If I am correct and have been overcharged will contacting the oil company (Anadarko) be effective in having this corrected or would this require an attorney?

The answer will depend on the state where your minerals are located. If Texas, then under your lease, the value is at the well. If the gas is not sold at the well, but after transportation to and processing through the gas plant and then sold at the plant tailgate, then all the costs attributed up to the point of sale can be charged against your royalties. The Texas courts have held that the value at the well is defined as the being the revenues at the sale point and then charging all expenses incurred back to the wellhead. The royalty clause has to be carefully written to avoid these costs and cannot refer to market value or value at the well. All of this is because many years ago, almost all gas was sold by the oil company to the pipeline company at the point the gas entered into the pipeline. The pipeline company would then transport the gas to the plant for processing and sale by the pipeline company. Secondly, while you have not included all of the relevant lease language, it appears that this is a proceeds lease and so the gas price will be whatever price the oil company/operator sells the gas for, even if to an affiliate or subsidiary. If your lease further requires that the gas be sold at 'market value' and then you would be entitled to whatever a third party buyer would pay for the gas, again less the costs back to the wellhead.

Very well said.

Thanks for your answer. I’m in Weld County Colorado and this lease was signed 45 years ago. From what others have posted, in those days royalty percentages tended to be lower but without the mineral owner being responsible for post production costs. I’m pretty new at this, just inherited it a couple years ago and still trying to understand the lease terms but my impression is that there was little negotiation involved. It appears to be a standard (adhesion) take it or leave it contract. There is a reference to market value in regard to the rights of the leasee to purchase oil at the prevailing market price. Then in reference to gas it states, “the market value at the well of one eighth of the gas sold or used, provided that on the gas sold at the wells the royalty shall be one eighth of the amount realised from such sale.” That seems to indicate that no other costs would be deducted but like I said I’m still learning how this works.

Colorado law on this issue is different than Texas. There have been numerous class action suits for underpayment of royalties. The statute of limitations in Colorado is 6 years unless you can prove that they hid the deductions. I attended a presentation last Thursday by an oil and gas attorney who has tried numerous Colorado royalty suits over this matter. Send me a private message and I will forward you his information.

I know there had been a $17 million settlement between Anadarko/Kerr McGee and the federal government under the False Claims Act for underpaying royalties. “Anadarko and Kerr-McGee defendants improperly deducted from royalty values the cost of boosting gas up to pipeline pressures and improperly reported processed gas as unprocessed gas to reduce royalty payments, as well as a series of outstanding administrative claims.”

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