Market enhancement clause

I have a market enhancement clause on the addendum page of my lease and it reads pretty much like this:

 

Market Enhancement: It is agreed between the lessor and Lessee that all oil, gas or other proceeds accruing to the lessor shall be without deduction. However costs may be deducted form lessors pro rata share of production, so long as such costs are based on lessees actual cost, and have the effect of enhancing the value of the marketable oil, gas or other products, which results in receipt of a better price for the oil, gas or other products.

 

Do you guys feal that the last part of this clause is a good thing or not. I think that they are going to try to get me to change my unit size from 640 to 1280 and I was thinking that maybe I could try to have this removed if it is a bad thing. I feel that they will try to sneak in some deductions through this clause. I think that I would be happier with not allowing any deductions at all.

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Permalink Reply by Ben Elmore on April 3, 2012 at 3:50pm

That clause effectively nullifies the first sentence of that paragraph.  It is not a good clause.

Permalink Reply by Bill on April 3, 2012 at 4:29pm

That clause efffectively negates any "royalties with no deduction" clause you may have in the lease. I'd delete it.

There are many available on the forum similar to this one::

Royalties shall be paid without deductions for the costs of producing, gathering, storing, separating, treating, dehydrating, compressing, transporting, or otherwise making the oil and/or gas produced from the lease premises ready for sale or use.  All oil and/or gas royalty shall be delivered free of cost into the tank or pipeline (for oil) and into the pipeline (for gas), with the exception of Lessor’s prorated share of taxes, measured by volume, on the oil and/or gas royalty.

 

Good luck!

 

Bill

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 3, 2012 at 5:39pm

Jim ...this discussion has much info about that clause.   The oil company will tell you that the clause has to stay...if you are not in a land group leasing...or with an attorney.....I recommend that you find one even if you are just cleaning up an amendable lease.

http://gomarcellusshale.com/forum/topics/cracker-plant-in-phili-i-m...

also there is a list of audio lectures at this link regarding market enhancement and even unit size...see if you can get it to work...i tried to copy and paste the link to the specific audio and couldn't

http://www.pagasleaseattorney.com/radio-show-archive.html?start=25

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 3, 2012 at 10:07pm

well if your contract states that you share the cost of enhancement with the oil company...then that is better than stating that the Lessor bears the ALL the cost of enhancement...some contracts have it worded that the Lessor pays all enhancement costs....not a fair deal at all.

Permalink Reply by Jim Pollock on April 3, 2012 at 10:40pm

Thanks for the replies guys. In my first post I did not copy the lease word for word but here it is word for word. Does this look any better at all?

 

Market Enhancement: It is agreed between the lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, seperating, treating, dehydrating,compressing,processing, transporting and marketing of oil,gas and other products produced hereunder to transform the produce into marketable form. However costs may be deducted from lessors pro rata share of production, so long as such costs are based on lessees actual cost, and have the effect of enhancing the value of the marketable oil, gas or other products, which results in receipt of a better price for the oil, gas or other products.

Permalink Reply by Jim Pollock on April 3, 2012 at 10:51pm

I don't know for sure but I listened to the radio show that was suggested above and the lawyer on that show suggested that this clause means that they cannot deduct anything to make the gas or oil marketable but then once it is marketable, they can then deduct for anything that is done to the gas or oil to increase its value.

 

I hope that this means that the gas will not be marketable until after it goes to the new plant in Kensington and the wet gas is seperated from the dry gas. So hopefully they can't deduct anything for seperating the wet gas from the dry.

Jim ShoosPermalink Reply by Jim Shoos on April 4, 2012 at 9:45am

I understand the intent, it is rather straightforward, but as is often the case in life, unscrupulous individuals or companies can take unambiguous contractual language and use it as they interpret it (generally to their advantage).  I recall first seeing this in the Barnett Shale and it seems like it was a Chesapeake generated product. 

If you had the opportunity to delete it from your lease, I would do so.

Permalink Reply by Ben Elmore on April 4, 2012 at 10:57am

Arguably it is marketable at the wellhead.  That is at least the interpretation that can be made, such that all costs incurred thereafter increase its marketability and are charged to the royalty owner.  Not a good clause to have in your lease.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 3:34pm

How is it marketable at the wellhead Ben?   it must go downstream and be processed to meet the specifications of who is buying it.   That is why some contracts state that the market value is at the place it is sold not at the wellhead.  If enhancement included all processes from the wellhead...why have a clause that states that the contract royalty is at gross and doesn't include transportation, production,..etc.  such as what Jim posted:

shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, seperating, treating, dehydrating,compressing,processing, transporting and marketing of oil,gas and other products produced hereunder to transform the produce into marketable form.

These things do not happen at the wellhead...they start after the NG reaches the wellhead.  If those are not enhancements to make the gas marketable i don't know what is....as they haven't disclosed what 'enhancement' past those processes are...   could it be that a product is added to make it into another product?   anyone from an oil company that knows how about adding the info here.

Now if I take a very good cookie mix (even bought at the store) and I then add chocolate chips and marshmellows to it...and I offer to sell these cookies to my neighbors but i want to cover my expense for the additional ingredients then I would add the cost of the chips and marshmellows to what I paid for the cookie mix originally.   Yet the cost of my labor should stay the same as I was intending to bake the cookie mix anyway.    

this is why we do not know what 'enhancement' they are speaking of...it must be a product or even an additonal labor that takes the process past the marketable.   but if you do not know that cost....how is it that you can arrive at a reasonable royalty percentage in negotiations when you cannot discern how often the process is used and how much of your part of royalty will cover it...esp. if the Lessor is being charged the entire cost of enhancement.

Permalink Reply by Ben Elmore on April 4, 2012 at 4:57pm

Sales often do take place at the wellhead.  What is really the issue is the interpretation of the clause on its face.  Post-production costs for compression, processing, transporting, marketing, etc.. are what the royalty owner intends to avoid by asking for a cost-free royalty clause.  But the enhancement clause applies to charge these same costs back to the royalty owner.  Make no mistake, it is these post-production costs that the lessee claims enhance the marketability of the product.  Thus, the enhancement clause renders the cost-free portion  meaningless. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 5:09pm

But Ben, the rep would explain that they cannot remove it...like they did to dad...yet clearly the land groups and those with legal representation are being able to negotiate gross royalty contracts without that clause.  What prejudice to remove the clause for one who has legal representation and to tell the ignorant not knowing that they have to sign and accept it to be paid or they would just go around them and capture the gas underground by the neighbors instead.   Their contracts are an absolute disgrace to them wanting to tell the people we are now in your communities and we are your friends...huH?

I really think the oil companies should recall and delete those clauses before many start taking them to court for misleading and using 'catch all' clauses/phrases in order to cheat someone of monies that they thought they were negotiating in a no charges to Lessor contract.

Just as you stated above...

 Thus, the enhancement clause renders the cost-free portion  meaningles

the oil companies need to do a recall....as most of them hired people to negotiate and they used these one sided 'catch all' and 'as many as you can catch' contracts.   AND THAT PEOPLE IS THE TRUTH....you should see the other clauses that they duped an 86 dying man to sign.

Permalink Reply by Ben Elmore on April 4, 2012 at 5:13pm

The oil companies are not going to delete the clause.  And there is a reason the lawyers for large land groups and individual landowners refused to accept that clause.  The same reason I, as a lawyer, refuse it when offered to my clients.  It does not add value to the royalty, and only provides an avenue around the cost-free clause.   

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