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Cracker plants and Market Enhancement Clause..what's the connection or is there any? (if you have a Mkt. Enh. clause you best read thru this discussion)

 

http://www.specialchem4polymers.com/resources/latest/displaynews.as...

http://www.observer-reporter.com/or/gasdrilling11/02-02-2012-GasDri...

of course it isn't decided yet between certain states..

I just happened to find this link while trying to google ethanol and its cost to produce.   For some of the lease contracts have a clause regarding 'market enhancement' and I remember that was discussed and the rep told us that is when the NG is enhanced to make it into products like propane, etc.  

The oil company rep also told us not to worry about that cause most likely it wouldn't affect our area...well now with reading at the above link about building a cracker plant ..I am not sure.  

the below article lists the 'ane's that a cracker plant accomodatees:

http://www.pittsburghlive.com/x/pittsburghtrib/news/breaking/s_7406...

 

    Read your contract to see if you have the 'market enhancement clause' and see if it is worded this way. .

"however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements."

now I read that as the entire cost of the enhancement deducted from Lessor's share (not split between Lessor and Lessee....and surely that prevents the contract from being a true Gross royalty.  Of course they use the word "MAY" so perhaps it isn't as firm as the word 'WILL"be deducted.  So we should find out what we can before they start doing the enhancement.  I know some people think this is a cost 'shared' between Lessor and Lessee but I don't see the words equally divided between Lessor and Lessee in the cost of such enhancement...I only read to be deducted from Lessor's share.

..it is supposed to be the only cost deducted from a 'gross ' royalty contract.    I still wonder about that as gross means 'no production expenses deducted'.   Fellow landowners with that clause....I am concerned...as we couldn't get the rep to scratch out that clause about enhancement and we negotiated a 'gross' royalty contract.   But later finding that we were misled in so many of the clauses (no oil/gas atty utilized at the time) that I wouldn't be surprised if the oil company has a surprise for all of us with that clause...because if the cracker plant is put in..the entire state of Pa. will utilize it and we still don't know the cost of enhancement that could be possibly deducted as an expense.  And surely if they plan to  deduct transportation costs to the cracker plant as part of enhancement then how did we truly get a 'gross' royalty contract?  or would transportation costs to the cracker plant not be considered as part of the enhancement cost? 

the oil companies had to have known ahead of time that the cracker plant would be approved...and they knew that the Lessors would have no idea as they were not even aware of most of these clauses.  So telling us that it most likely wouldn't happen in that area then why leave it on the contract?  we tried to mark thru it, but were told they wouldn't accept that/

 

http://www.timesonline.com/news/local_news/legislative-incentives-g...

 

Anyone else have this clause?   .....and I hope we don't have to pay for the cracker plant also as I surely still do not understand the Lessor's liability with that clause..do you?  I would hope that we don't have to pay any costs of enhancement as they wouldn't explain that other than it shouldn't affect our area...now I know why.   they need a cracker plant to make those products.  If anyone knows more about this would you pls speak up about it.....thanks.

(i mean I think its great to have a cracker plant and to add jobs....but having that market enhancement cost as the Lessor's deduction...just would that cost more than the royalty proceeds?   Example...if the enhancement cost is 1.00 and the price at market was 5.00 and the Lessor's royalty is 13% then the royalty to the Lessor would be  60 cents rather than 75cents?  but what if the costs of enhancement is much more?   

 I hope you lawyers are paying attention to this stuff....as this is almost riduculous to explain, yet the land agents talked people into signing these contracts anyway.

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Tags: clause, cracker, enhancement, ethane, market, marketenhancement

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Replies to This Discussion

Permalink Reply by Dan Warfield on February 12, 2012 at 10:49pm

Looks like the Antero lease for NW Monroe County has the phrase "may be proportionally deducted" in that lease?  So I am guessing since it is for 21% royalty, the lessor "may" have to pay 21% (proportionally) of this processing cost?

Permalink Reply by USA Landowner on February 12, 2012 at 11:29pm

any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production

is what the contract states on the one I have....   Proportionally may mean sharing the costs of the enhancement or it may mean that the full expense of the enhancement cost will be deducted from the Lessor's share of royalty.   Such as if the cost to sell without enhancement was 5. and with enhancement it was 8. then if the enhancement cost let's say $1. then if at 21% royalty would be based on the $8.00 but the charges of enhancement would be directly deducted from that amount.   So it would behoove you to find out if that is a shared expense with the oil company (lessee) or if it is a cost directly deducted from your royalty share (it is confusing as we don't know how much or when enhancement is used.   I suppose you have a 'GROSS' royalty contract?

Permalink Reply by Dan Warfield on February 12, 2012 at 11:36pm

Yes, the latest Antero/NW Monroe lease is a gross contract... at least I thought it was?  Now, possibly, I am not certain????

 

Permalink Reply by Dan Warfield on February 12, 2012 at 10:39pm

WOW.... that's quite a find VG!  This issue could get really ugly fast!  I would hope this would only be written into company leases only, and not into landowner group produced leases?

 

Permalink Reply by USA Landowner on February 12, 2012 at 11:04pm

thanks Dan for the participation....yes it is a WOW but not a good wow for someone with the market enhancement clause where the Lessor may end up paying the expense to enhance yet though it is supposed to be a GROSS non-deductable royalty agreement......and I am very concerned.  My other concern is what if the market enhancement costs are more than your royalty percentage?   for some have min. royalties (1/8) and not all have even 16%...as they are now about 20% in some areas.   Now if enhancement isn't much of a cost...then it may result in more profit and sales and then no worry...but not knowing the cost of enhancement or when they would use it  doesn't speak much of what to do if you are expecting to even live off royalty checks (as some retirees will expect to do that).

Now the contract my family has does  have the sentence the way I posted it in the discussion.   I since have spoke to some others who have the verbage as your contract, "may be proportionally deducted" which I don't have the full clause (if you wish to post it) as does 'proportionally deducted' equal sharing the costs of enhancement between Lessor and Lessee? 

Permalink Reply by Dan Warfield on February 12, 2012 at 11:23pm

The lease states...

...however, any such costs which results in enhancing the value of the marketable oil, gas or other products to receive a better price may be proportionally deducted from lessor's share of production so long as they are based on lessee's actual costs of such enhancements.  However in no event shall lessor receive a price per unit that is less than the price per unit received by the lessee.

As I read the clause, I see this as an option for the company (Antero) to deduct "something" from the royalty, although, a new product would actually be in production...lets say it is a modified natural gas or a modified crude oil.  The way I read it though, you still "may" have to share the cost on that type of processing...probably would include the wet gas processing as you spoke of above VG.  To what point may be arguable?

...and for all of you out there wondering, no I haven't signed this or any lease yet.  Most of you know I am a part of another landowner group (S-G).

 

Permalink Reply by USA Landowner on February 12, 2012 at 11:44pm

Hi Dan...how excellent that you haven't signed a lease yet..    glean , glean, glean from gomarcellusshale.   do introduce to your land group admin about this and tell them about the proposed Cracker plant for Pittsburgh or W. Va. as the oil companies will be greatly utilizing that when built (but it will take a while to build it).     Also make sure you mention that they should write in the bonus money paid on the contract or addendum (and record it) instead of leaving the delay rental payment of $5. per acre on the contract...and the shut-in payment of $5 per acre per year is a joke for 2012.   There should be a recorded document of the payment of the bonus monies and there isn't in some that are recorded.

You know that make so much that you have to wonder why don't they just use only 'GROSS' royalty with no prod. costs at a very decent percentage for the Lessor and move forward.   They spend more of their time and your time in negotiating and then even expensing it takes money on their part.    These 'trick or treat' clauses are getting too involved.

It is a pity that there are those out there with12.5% royalty  at net and having to pay so many expenses...while others are negot. for much more bonus money and higher percentales...I feel sorry that the oil companies who knew what they have in their hand couldn't have established a better pricing when they started the leasing process.   Those that didn't do as well were used as a stepping stone to get the leases started...but if they knew what they were signing then it wouldn't be so awful...but so many were told that they didn't need to learn the gas/oil jargon just know that they could renew with even new bonus at the end of five years.   did you see the link about the 'training letter' that was found of a land agent's agenda (not all land agents have this tactic but it is surely one that was used on my dad).

http://glasscityjungle.com/2011/04/fedor-calls-for-investigation-in...

You know some say that the market enhancement clause is a trick clause to make you think you have GROSS (no expenses) but a way to really make the royalty into a NET royalty.   Surely some lawyer needs to stand up to that clause and state it is deceptive practices....even a disclosure of what an enhancement might be and its cost should be with the contract.   In fact Dan there is a discussion here at the site about 'disclosures for the Lessor'.

http://gomarcellusshale.com/forum/topics/disclosures-made-in-leasin...

 

Permalink Reply by Dan Warfield on February 13, 2012 at 12:00am

VG... I'm now looking at an old Wishgard lease that many people signed back in 2011 and it just makes me sick...

This lease reads...

...however, any such costs which results in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from lessor's share of production so long as they are based on lessee's actual costs of such enhancements.  However in no event shall lessor receive a price that is less than or more than the price received by the lessee.

Another good reason to read the lease ten times and then take it to an Oil and Gas attorney who has your best interests in mind.

Thanks again VG for the eye opener.  This will sting a lot of people on Monday.

 

Permalink Reply by USA Landowner on February 13, 2012 at 12:07am

now the real question is ....are they referring to just those products made in enhancement at the cracker plants?   or are they speaking of anything that is enhanced for whatever reason?  will they also include transport to the cracker plant or wherever it is enhanced as part of enhancement costs?...  see the definition of enhancement should be a disclosure on the contract...listing even an example of such....rather than rely on a land agents guess or statement.   If your people in your group are relying on the land agents statements then make sure you cross out the clause that states that no verbal representation is part of the contract...otherwise record the statements and obtain permission and place it in the contract agenda.    I wish we could have.

 

and if you think you have thought of everything....take a look at this article:

http://www.oilandgaslawyerblog.com/postproduction-costs/

and if you read this entire House Bill it may help you put together a better .contract wording... (i hope it passes)

http://www.legis.state.pa.us/CFDOCS/Legis/PN/Public/btCheck.cfm?txt...

 

 

Permalink Reply by Dan Warfield on February 13, 2012 at 12:15am

Do you think there would be an actual "good" Market Enhancement Clause"?

... or would it be better to just do away with the Market Enhancement Clause completely?  I don't see one in the ALOV or Shell/Guernsey County lease and I think I read on here the other night that someone from PA had just simply posted "get rid of the market enhancement clause" in a reply.  I think that response sounds best.  Your thoughts?

Permalink Reply by USA Landowner on February 13, 2012 at 12:21am

Of course it would be better for the Lessor with only a GROSS royalty clause...and no market enhancement clause.   Yet some land agents will refuse to take that clause out.   That is why i suggest if you cannot negotiate out (which you probably can but I don't know at that high of a percentale of royalty if they will...though that should actually be the rate of royalty for all).............then do have them include a disclosure of identifying what enhancement is , an example to show when it is used and the kind of cost(s) involved, and make that part of the contract.   In fact they need to prove to you that GROSS royalty is actually GROSS...not list what you don't pay on the same paragraph of what they may deduct.

 

All the clauses need greatly defined....and there are so many addendums and clauses for addendums ...it is a difficult chore to think of all that is needed.   I recommend really spending time on every clause to really define what it means (without a doubt to you or the other landowners)....it may take longer but they didn't make these contracts for the landowners to really understand.  (purposely for their gain).

Permalink Reply by Dan Warfield on February 13, 2012 at 12:30am

Strangely enough VG, going back through some of my older notes from when I sent the Wishgard lease into my attorney to look over, I had noted that I didn't particularly care for the Market Enhancement Clause, stating, "they could add the air that we breath every day to the natural gas, put it in the line, ship it and charge us a fee for doing so".

Companies could add anything (and probably do) to the oil and gas and charge us through this clause, with us never expecting a thing until we see the deduction at a later date!!! 

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