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Permalink Reply by Mmmarkkk on September 25, 2009 at 10:21am

Greg: the actual net after expenses depends on what expenses are allowed, the individual contracts involved if some expenses are deducted, etc. Some leases allow the deduction of taxes (production/severance), some allow the deduction of transportation of the gas to a pre-determined sales point, some allow the deduction for compression, treating, etc... The expenses to be charged should be outlined in the lease; if it is silent on expenses, you are in for a lot of headaches as the operator will define this using their interpretation and you may have to get nasty to sort it out.

While the Friendship lease is good from a royalty owner standpoint, it may slow down the amount of drilling as it puts the operator at a pretty big disadvantage relative to other leases. All things being equal, would you drill a well on a lease that allows no expenses to be deducted and carries a 25% royalty, or would you drill on a lease that allows the deduction of reasonable expenses to make the gas "sale-able" and only carries a 12.5% royalty? I know which one I'd drill on first!

But most are trying to get everything they can in the lease and if a company is willing to sign it, why not!

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Permalink Reply by terry hazlett on September 25, 2009 at 12:56pm

Greg, Mmmark is right about expenses. if not outlined in leases they could deduct everything & anything, could turn out profitable for them, but not so much for you! your 12.5% could end up being 3-5% ! But i don't think Fortuna would be paying out the big money if they did'nt plan on drilling every inch of property they could! I think the bar has been raised , and co better deal with it or get left in the dust by fortuna and chesapeak.

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