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 Kevin in Belmont County on October 22, 2013 at 12:59am

Is there anyone else out there that signed an oil and gas lease with Gulfport Energy that contained a "Market Enhancement Clause", and during the signing of the lease were told by the land man that this was a no "No Production Cost Clause" and that there wouldn't be any production cost deducted from their royalty? If so contact me through this website!

Permalink Reply by Johnny Football on October 22, 2013 at 9:12am

Sounds like you dealt with a newb landman that didn't know the definition of an enhancement clause. It is my understanding that the enhancement clause simply deducts the costs of improving the quality of O&G extracted, while omitting the costs of transporting etc. Additionally, I can't help but think you may have acted a bit impulsively if you did not have an attorney review and clearly explain a lease involving 80 acres. With that much acreage two years ago you more than likely received around a quarter million dollars in bonus money. With that much money at stake, I would think you would want to be as educated and informed as possible before signing something. You also mentioned a Pugh clause, which has nothing to do with your royalty deductions....I can understand your venting, but maybe an attorney could explain/review the deductions from your royalties to help you better understand what's going on....

Permalink Reply by Kevin in Belmont County on October 22, 2013 at 1:27pm

Thanks for your thoughts. First let me start by saying I absolutely did not act impulsively. I actually did a lot of research on this before I signed. When the land man came out with the original canned lease I told him positively that I would not sign any lease that required me to pay any of the production cost period. And I am quite aware that the Pugh clause has nothing to do with the production cost, and as a matter of fact neither one of these addendum's has anything to do with the bonus money that I was paid in advance. The Pugh Clause was requested by me so the O&G company couldn't hold any of my land in production that was not included in a production unit. Back when I signed my lease's there wasn't a lot of information about the Market Enhancement Clause because the O&G companies were only starting to use it because a company, that I won't mention here was involved in a law suit brought by land owners and lost. After the lawsuit the Market Enhancement Clause was born to take advantage of landowners because of the very vagueness of this clause. Now not all of the O&G companies are interpreting  the language the same. Some are not taking advantage of landowners with this clause, some are. There is a civil action in Pennsylvania pending right now against a major O&G company in that state over this exact clause.

Now back to my particular case . I have requested a detailed print out of my royalty statement with details for royalties paid and deductions taken and to date, I have not received one and my counsel and I don't believe we will without a formal request through the court. And I actually believe when I do get it I should be able to interpret it myself. When the land man called me the next day and said the O&G company was agreeable to my terms for my lease's we set a time and he came out. When he showed me the lease I told him that I was not satisfied with the language in the Market Enhancement clause. However, he assured me that it was exactly what I wanted and read through it with me indicating that the first part stated clearly that they could not charge me for any production cost and all the language after the however in the clause meant, that if they chose to advertise to enhance the selling price of the products that there would be a small cost to me, but it would benefit everyone involved because the price received for the products would be better. I have negotiated thousands of contracts through out my career in business and no matter which way you slice this one up it is clearly fraud and misrepresentation. The only person who benefited from this clause was the land man because he got the lease's signed. Should I have signed them, absolutely not but I did. But I did under coercion and it is not right. I have already informed the O&G company personally that I don't care if I make another dime from either of these lease's, but I absolutely refuse to stand by and watch this happen to one other land owner if I can help it. One of the main operating policies we had at the company I retired from was, " You always do the right thing, because its the right thing to do!".

 

Permalink Reply by searcherone on October 22, 2013 at 4:00pm

"and all the language after the however in the clause"

The explanation of however is: it is used to introduce a statement that contrasts with or seems to contradict something that was said previously.

Every landowner needs to be looking for the howevers in these leases.    Kevin is giving us all the benefit of his experience with the however clause.  Guess we have to pay attention to every word in a legal document.

 

 

 

 

 

 

 

 

 

 

 

 

   

Permalink Reply by Kevin in Belmont County on October 23, 2013 at 12:47am

You are exactly right you need to scrutinize every word of an oil and gas lease before you sign it. An do not think just because you have a O&G attorney review it that something won't get slipped through. I have had people contact me on here that have had attorney's review their lease's and still signed it with a "Market Enhancement Clause". If you would like some interesting reading, go onto Google and type in Civil litigation Chesapeake Energy Pennsylvania vs. landowners. It basically states Chesapeake has tried to settle this case for violations of this exact clause, but now a another attorney has stepped into the case and has filed a motion to have it stopped because he claims the settlement amount they are offering the land owners, isn't enough to compensate them for what has been illegally taken from them. I am not a rebel rouser by any means. But we as land owners in some cases gave the O&G companies 80% of the production from the minerals under our property. You would think with 80% of the proceeds from sales the O&G companies could turn a profit without coming back and taking 20% of your royalty payment but  in fact they did just that to me. Lessors beware, do not let the O&G companies do this to you!

Permalink Reply by Nancy LeNau on October 22, 2013 at 4:17pm

Thank you, Kevin.....   You have just helped MANY !  God Bless...

Permalink Reply by Johnny Football on October 23, 2013 at 4:16am

Interesting. Those sixty thousand dollar royalty checks must be nice. I have no idea what the average deduction percentage is, or what a good/bad percentage on the deduction would be. That's something I would very much like to know.  It does seem to be a red flag that the company won't release an itemized deduction report, but fraud, misrepresentation, and coercion are some hefty allegations.

Permalink Reply by mlb on October 24, 2013 at 6:07am

Hmm not good.  Hopefully you will still do okay despite there misleading you on those issues.   I had no luck with the landman that came knocking either.  I did join a landowners group led by a law firm and I am pleased with my lease ( no royalties yet, so will see how pleased I am ).

 

My royalty clause seems straight forward but not being in the business of selling gas or oil curious if anyone can break it down better.

IT says.  "lessee shall pay Lessor free of cost, a royalty equal to 15% of gross proceeds received by Lessee for the sale of all oil, gas, or related hyrdocarbons produced and sold from the Leased Premises.  It is understood and agreed that to the extent Lessee sells oil, gas or related hydrocarbons to an affiliate, the price upon which the royalty shall be based shall be the greater of: a.) the price paid by the affiliate,; or b.) the price that would have been received from the sale to an unaffiliated third party under sales arrangement for like quantity, quality, term and at the same point of sale to the affiliate."

 

It says " free of costs"  I am not sure why the other information regarding point of sale and third party sales etc was included.  I am hoping this is not some back door way that Chesapeake used to fool the attorneys and later take deductions.  It doesn't appear so but I'm not a lawyer.  The can contact the law firm and have but they have been hard to reach once the landowner agreement was over with.

 

Thanks for any input!

Permalink Reply by searcherone on October 24, 2013 at 6:50am

mlb,

Keep in mind that I am a landowner trying to apply what I have learned in the past two years regarding leasing.

Jack Straw who always posted great info on GMS once replied to how a royalty clause should read said:   gross at the wellhead in an at arms length transaction to an unaffiliated third party.

The affiliated  company is a unit of the original company. Personally the phrase "shall be based" gives me hesitation, is it a solid 15% or 15% of a derived at figure that you have no control over. Also the words "it is understood and agreed" implying that you agreed to this affiliated arrangement.

Jack Straw we need your contributions to GMS.  mlb I hope it all works out well for you.

Permalink Reply by mlb on October 24, 2013 at 7:52am

I agree.  I was fortunate to get a new lease at all as I had some odd circumstances to overcome so I did gain quite a bit with my new lease ( up from 12.5% ) and many other provisions.  As many do I left some of the technical parts up to the attys representing us.  Over 100 landowners were involved and signed and I do not recall objections at the time but as things have unfolded I have read royalty clause many times and never reach a 100% conclusion.

 

However, I know they need me for a pad but can't put it inside of 500ft residential and I have them pinned in and out of room unless I grant approval in writing.  Any such approval will come with a string attached from me which is no deductions and I will ask for 20% or they can try and put the pad elsewhere.  Use every tiny bit of leverage that you can I say.  Read every line in the lease and if you can use a part of it to your benefit.  So if anyone has an offset restriction for proximity of a building to a pad in your lease...use it!  The spud fee won't be worth what you might gain otherwise in my opinion.  Politely inform them that you will work with them under the terms of the lease which include the distances they agreed to but any variances with have to be renegotiated.

Permalink Reply by searcherone on October 24, 2013 at 8:17am

mlb,

I total agree with you on using every bit of leverage that you can, after all this is just a business deal and terms have to be negotiated.   Never give away for free anything that you can negotiate into a better situation or more money for yourself.  And get it in writing, no matter what the O&G company says.   It will be interesting to hear your outcome.

Permalink Reply by mlb on October 27, 2013 at 2:12pm

Reading it again, it seems to me that " the same point of sale to the affiliate" makes things not 100% 15%.  It says free of cost....but this is free of cost at the point of sale, not from the well to the point of sale.  That is how I now interpret that line.

 

I will call the law firm and see what they say but it looks suspicious.  But even if that is the case I am quite happy with the other provisions in my lease such as setbacks which are written in a very clear manner.  Its vastly better than my old lease in that regard.

Thanks again.

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