Beware of all the gas companies!

I signed two lease's back in 2011 with Gulfport Energy on 80 acres that I own in Belmont County, Ohio. Let me start by saying don't believe anything that any of the land men tell you, the are working for the gas companies and their own benefit not yours period. While I was negotiating my lease with several companies at the time in 2011. I clearly explained to them that any lease I would sign would require a Pugh clause, and that I would not except any lease that required me to pay any of the cost associated with the production or marketing of the finished product from any wells drilled onto my property. I ultimately ended up signing with Gulfport Energy because of the higher bonus payment and higher royalty percent, and the land man assured me the Pugh clause and the deduction clause weren't a problem, that a lot of people were requesting it. Well the land man was lying through his teeth after receiving my first royalty check and statement there were $14,574.11 in total deductions. Beware of any lease that includes the language below.

 

"All oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without monetary deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other proceeds produced hereunder to transform the product into marketable form; however, any such cost 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.  However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee."

 

It was explained to me that this was exactly what I wanted and that the second part of this clause only meant if they did any advertising to enhance the selling price of the finished product I would have some associated cost from that. Well I have since found out that this is the language that the big oil companies have adopted to lead land owners to believe that they are getting a no expense deducted clause in their lease. If you find this language in your current lease be assured be ready to pay every single cost that is associated with bringing the product to market. Don't sign it! Ask clearly for a no production cost clause and have it reviewed by a gas royalty attorney.

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Permalink Reply by Karla on October 4, 2013 at 5:53am
Kevin,
I am one if the Landmen you are referring to. It's troubling that we get such a bad name in this business. We are simply doing our job. Market Enhancement, which is the clause you were given, has a lot of stigma associated with it. Just Google the clause and you will find that it is very cumbersome. Unfortunately, at least at this time, there is no way for a land owner to get around assuming costs for production of the product. It's that simple. The Landman that you worked with should have been upfront and forthcoming with you about this. The only way for a land owner to avoid these costs is to not sign a lease at all. Correct me if I'm wrong but, I have yet to hear of any OG company that pays the land owner solely based on gross instead of net. Yes, it may seem unfair but this is the reality. I go out of my way to help the land owner in any situation I have, short of jeopardizing my due diligence with the current OG company I may be working for. Our role in this industry is like many other sales jobs. It comes down to the person you are dealing with. Even certain attorneys are not looking out for their clients best interest. It helps for the land owner to feel comfortable with their Landman and/or attorney. If we as landmen are not upfront and honest that stigma gets attached to the lot of us. I tell land owners I'm working with to ask their neighbors about me. Ask me for references. Anything to make you feel comfortable. And, if I can't answer a question for you I don't tell you what you want to hear. I go back and ask my supervisor and get back with you. A lot of landmen lose credibility right upfront blatantly lying to land owners.

I hope this blurb helps shed some light on what a Landmans role is and what we should be doing. I'm sorry that you had a bad experience with the Landman you were working with but the reality is we are not all as you portrayed.
Permalink Reply by TG7891 on October 4, 2013 at 6:12am

Cabot's new leases are gross with no deductions in PA

Permalink Reply by Kevin in Belmont County on October 4, 2013 at 6:27am

I also have a background in sales. I was a regional manager for a major insurance company for many years . I know there are good and bad in all industries. I don't think any of us are gullible enough to believe that everyone is honest. My point is and always has been that what I and the land man agreed to was put into the contract according to him. I had three witness's at the signing of the contract and the land man was asked about those exact terms before I signed and he explained the market enhancement clause away exactly as  I stated in my original writing. He flat out lied period. I have did a lot of research on the enhancement clause as to its origination from a suit filed against another gas & oil company some time back. In the insurance business we call that " twisting" which is illegal and heavily regulated through state regulation. I think the gas and oil industry needs to be much more heavily regulated. As far as I know and someone can correct me if I am wrong, but anyone can become a land man for a gas and oil company. there is no license requirement, back ground check or rules and regulations to govern their actions.

Permalink Reply by Kevin in Belmont County on October 4, 2013 at 8:51am

The total deductions come out to about 20% of the total royalty

Permalink Reply by Mary Albert on October 27, 2013 at 3:35pm

actually oil & gas companies can lease for themselves but if they use a landman the landman should be licensed according to wv oil and gas codes. I think the IOGA site did a write up on in in 2008 or 2009

Permalink Reply by Greg K on October 27, 2013 at 6:51pm

Chesapeake used this to help solve their cash flow problem, in some cases reducing the royalty by 90%. Greed, that's all it is. Many times, right next door, another oil and gas company was paying the full percentage..with no deductions, ( And making money! )They take it because they can . They lobby and sue until they get their way. They have huge piles of cash to do this because the Oil and Gas industry is so profitable. Oh the irony.

Permalink Reply by Philip Brutz on October 4, 2013 at 8:35am

Karla,

The following is an excerpt from my lease with Gulport that KWGD negotiated:

Gross Proceeds: For purposes of this Lease, "gross proceeds" means the greater of the following and specifically excludes any expenses associated with the production, marketing, treatment or other standard expenses associated with the production, enhancement and sale of oil or gas.

Permalink Reply by Philip Brutz on October 6, 2013 at 1:03am

I should clarify that we were part of a landowners group and the contract was entirely written by our lawyers.  But it does illustrate that Gulfport will sign a lease without the "Enhancement clause"  

Permalink Reply by Kevin in Belmont County on October 6, 2013 at 2:05am

I think that anyone who signs a lease with any oil and gas company should have that specific clause put in their lease. I thought that I had it covered because that is specifically what I asked for . I told them I wouldn't sign a lease without it.The land man said ok he would have to talk it over with the powers to be. He called the next day and said what I requested would be fine. He said he would print out a new lease with the clause's in it the" Pugh Clause" and the "No Deductions for production or enhancement clause" and he set an appointment to come out the next day to have me sign it. When he showed up at my house he had the clause's I listed in it that I have printed earlier in this post. When I looked at the lease everything looked ok to me but the "however" being in the "Production & Enhancement Clause. He was slick, a very good liar without missing a step he said " oh no that has nothing to do with producing the gas or enhancing it, that's just if we would market it or advertise it for a better price. That's the only time we could charge you any cost and it would be minimal and you would make more money because we would be getting more for the gas and oil". My point is don't trust anything the gas and oil companies say, the are not your friends by any means. All your property is to them is business, and they could give a good rats behind if your treated fairly or not. Its all about the money to them, Period! And whenever you do have any conversations with a representative from the oil and gas companies, make sure you have witness's and plenty of them. I know with out a doubt that I am going to end up in legal proceedings about this lease and honestly I can live with that. And to the person in this conversation that said previously "well look at all the money your making, a lot of people would like to be in your shoes" this person doesn't know anything about me. It has nothing to do with the money now. Its about the principal of lying. Its about the bully taking advantage of the little guy. I have been a part of literally thousands of negotiations through out my career in the insurance business and can honestly say I have not or would have never lied to place a product or get something signed. Its not about the money anymore. If I never get another penny from this lease I can live with that. What I couldn't live with was knowing that other people were out there signing the same lease that I did, thinking they had their self and there interest covered only to find out they didn't. You have to do the right thing because its the right thing to do!

Permalink Reply by Philip Brutz on October 6, 2013 at 3:05am

Thank you for posting this. 

Permalink Reply by Joseph-Ohio on November 12, 2013 at 2:05am

Philip B.,

Does your lease agree to pay you a royalty percentage of the "gross proceeds" of either your land's pro-rated percentage of the "drilling unit" or it's pro-rated percentage of the "production unit" (whichever of the two is greater); and of course "excludes any expenses associated with the production, marketing, treatment or other standard expenses associated with the production, enhancement and sale of oil or gas." (as you write above) ?

Permalink Reply by Joseph-Ohio on November 14, 2013 at 2:03am

Looks like that's the bus we would want to catch to ride thru the blizzard / white out on

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