I do have an Attorney to help me but he is out of town for a week and I would like other opinions. This is a renegotiation of terms of a current lease. My Attorney has asked that the original Market enhancement clause be removed so that there are NO Deductions of any kind. The original lease reads:

Lessee shall pay Lessor a royalty equal to 17.5% of the gross proceeds recovered by Lessee for the sale of oil, gas and related products produced and sold from the leased premises and accruing to Lessor under this Lease, such royalty to be calculated without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating , treating dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced from the Leasehold: provided, 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 such costs are based on Lessee's actual cost of such enhancements and further provided that in no event shall Lessor receive a price that is less than, or more than the price received by Lessee.


The O&G company wants to remove the part in bold (above) and replace it with:

Except for the costs incurred by Lessee from a third party to transport the oil, gas and other products from the Leasehold to the point of sale.

I think that what the O&G company wants to replace it with is worse that what I already have.  I think I would be better off with taking my chances of how they can manipulate based on proving enhancement costs rather than third party transportation costs on all products.

Am I missing something?

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Any language allowing for deduction of any cost of any type is going to be trouble.

Inclusion of the language allows for manipulation of the royalty paid.

The royalty is not a part of the Working Interest and should not incur costs/deductions.

Royalty should be paid on 100% of the gross income generated by sale of the product.

No deductions, period.

Just my thought and belief.

Agree 100% Barry D.

I've developed a new term: double back..

Thanks Barry and JK and I understand that any deductions leave an opening for abuse but if they will not agree to a no deduction lease change is it better for me to keep my current lease's Market Enhancement clause instead of letting them change it to all transportation costs incurred by Lessee from a third party ?

@Dott

Is the Amendment and ratification from a company new company, or the original Lessee?

Many times when a company has a lease assigned to it, it will ask for changes.

Is there also an extension of time for the lease?

Not the original Lessee. It all began when they asked for an increase in Unit size from 640 to  2400 with the right to do more if needed.  So we they decided if we give them something we should get something in return hence us asking to eliminate the Market Enhancement Clause so that there would be no deductions at all and that is when they came back with :  Except for the costs incurred by Lessee from a third party to transport the oil, gas and other products from the Leasehold to the point of sale.

I think I would do better with my Market Enhancement Clause left in and that is my question to everyone.

I wouldn't agree to that unless they are paying lots of money.

Additionally, market enhancement clauses generally don't benefit the Lessor, if enhancing the produced product brought extra money over market rates, the operator is going to do it as part of their process to maximize return.

I would recommend a new attorney.
I would also beware of any ratification language in your "amendment and ratification". There may be something technical wrong with the lease that could make it invalid. If that is the case, a refusal to ratify would require a new lease and lease bonus.

Thanks for your input Marcus.  Do you mean there could be something technically wrong with the new amendment and ratification language that could then make the lease invalid or that my original lease may have wording etc that makes it invalid and by refusing to change it would require the O&G company to call for a new lease? I know they want to change a lot of wording in our current lease to match all of their standard leases.  At this point I am paying so much for an Attorney to negotiate changes and the O&G company keeps adding more changes to deal with.   I am ready to just tell them no.  The main thing that they want is the increase in Unit size from 640 to 2400 acres, but I feel that I should get something in return.

Dott,

I went thru something similar years ago to what you're saying. Rex Energy wanted to change my lease unit size from 640 to 1280 acres. This is after they drilled a lateral under my property from a pad on an adjoining property. That instantly put me in the unit and they wanted to add a bunch of other neighbors (whose leases were about to expire) in the unit which would take it above 640 acres. I got my lease terms changed with agreeing to the expansion to 1280 acres. Changed to: no deductions, non surface lease, $1000.00 signing bonus per acre, and a 2 1/2% increase in royalty. I don't know your exact circumstances, but if they need you, you can get anything changed! LewPa 

Thanks LewPa. The Landsman said I am at the end of  a Unit. The Landsman was not threatening but said he did not know how important my parcels were to the O&G company and that they could just cut a lateral short and not include me. He said you really want to be in a Unit no matter what. I know you can't believe everything they say. Also I think when you had your negotiations everything was booming.  It is a different story now.

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