Royalty

What kind of language is in everyone's leases about gross royalties? I just got an updated offer from CHK for gross royalties with the following language....what does everyone think of this statement?

Landman: I have received authorization to offer the 20.00% royalty rate as presented or a 19.00% royalty rate with the addendum cited below. The addendum below is the sane as what most people refer to as gross royalty. Please note that the market enhancement would result in a higher value for the gas or oil sold and after deducting the cost for the enhancement the landowner would get more royalty money than they would have gotten without the enhancement.

 

Addendum: 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 shall be paid without deduction, directly or indirectly, for the costs of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to extent such costs are necessarily incurred to transform the product into a marketable form; provided, however, any such costs which result in enhancing the value of already marketable oil, gas or other products may be deducted from Lessor's share of production proceeds so long as such costs are reasonable and do not exceed the value of the enhancement obtained by incurring such costs.

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Permalink Reply by melissa humphrey on April 19, 2012 at 1:58am

Be careful and never believe a landman.

What makes sense to you or I may not be

interrupted in teh same fashion in the industry or court.

Mellisa

Permalink Reply by JDM on April 20, 2012 at 1:25am

This is the reply that I got from an oil and gas attorney about the royalties and enhancement clause:

Oil and Gas Attorney: It is all a number GAME.  The company is doing the enhancement and can charge what they want.  Reputable producers already know that they must modify the product that comes out of the ground so what they are doing is making a big deal of normal operating procedure.

You should ignore the "either/or" scenario and tell them that you have conducted your research and will lease to them for a very equitable rate of 25% with no deductions.

The point is that 20% net and 19% gross are not your only options.  Tell them you are interested in leasing but you want to get $XXX amount bonus and XX royalty for 3 years with no option.

Tell them you also want to limit the shut-in provision to no more than 36 cumulative months.  These last two paragraphs will show them that you know what you are talking about.

 

I hope this info helps someone....I'll keep everyone updated on how the landman for Mason Dixon reacted to this type of info....I emailed him this morning and he flat out said NO within minutes of my sending the email...he never even approached CHK about it...just said NO!  I did reply to him so I'll let you know what happens.

Permalink Reply by Billy Park Whyde on April 20, 2012 at 3:29am

JDM sounds like a call for a part of a Land Owners Standard Lease! 

Jim ShoosPermalink Reply by Jim Shoos on April 20, 2012 at 3:47am

Good luck with that ultimatum!  25% Royalty...equitable for whom, certainly for the landowner who typically receives a lucrative lease bonus check, but not so equitable for the company that expends millions for leases that may or may not even prove productive, or that spends on average $7.5Million to drill and complete a well, another couple of million for gathering infrastructure, and lets say a conservative $3,000/acre for 640 acres worth of leasehold, reaching a grand total investment of approximately $11Million... all in the name of receiving approximately $1.50/MMbtu (gross) for his gas.  Deduct 25% royalty you are demanding and that nets out to $1.12 to the producer.  A well that is fortunate enough to produce 7,000Mcfd over the first three years of its life will net the producer $8.5Million and that is before considering the monthly lease operating expenses and impact fees.  Payout on this investment would take 4 years.  Not many companies can survive on this business model. 

Permalink Reply by Paul Martinelli on April 20, 2012 at 3:53am

nobody is forcing them to come and drill in Ohio.....it must be profitable.

Jim ShoosPermalink Reply by Jim Shoos on April 20, 2012 at 3:57am

...and to the best of my knowledge, nobody has handed out any 25% royalty leases either.

If a company is fortunate enough to steer clear of the dry gas areas the economics change considerably, but that isn't always predictable.

Energy companies have always been, and likely always will be "roll the dice and let it ride" kind of guys... many companies are investing with the anticipation and the fervent hope that product prices get better and that drilling expenses will decline.  It will be years down the road before we know whether that game plan was smart.

Permalink Reply by Billy Park Whyde on April 20, 2012 at 4:04am

How many had heard of even 20%? But on the other hand how many farmers thought diesel would be over $4 a gallon?

Jim ShoosPermalink Reply by Jim Shoos on April 20, 2012 at 4:15am

Convert your tractor to natural gas!

Permalink Reply by Ben Elmore on April 20, 2012 at 4:27am

25% is the standard rate offered in the Eagle Ford Shale. 

Jim ShoosPermalink Reply by Jim Shoos on April 20, 2012 at 5:08am

...and in India an Iphone costs $800

Permalink Reply by Billy Park Whyde on April 20, 2012 at 6:05am

Eagle Ford Shale is America! I think that is where Ohio is located at. 

Permalink Reply by Joseph-Ohio on October 13, 2013 at 1:09pm
Reads like:

There will be no deductions but, there will be deductions.

Doubletalk.

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