Market Enhancement Clause and Question about Liability

Can anyone tell me the purpose for the second part of the Market Enhancement Clause in a lease?  I understand the first part is requesting royalty without deduction for a number of expenses... such as processing, treating, etc.  It is the second part that confuses me... "however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from the Lessor's share of the production so long as they are based on the 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 the lessee." 

 

Do I want that second part?

 

Also do we need anything about liability in a lease?  Could we be held accountable for any accident to nature or man causes by a gas company?

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Permalink Reply by Frank Walker on November 11, 2010 at 12:00pm
I shied away from that "enhancement" wording in my own lease. It provides a loophole large enough to drive a drilling rig through for the gas company to reduce your royalty check. I would avoid that enhancement stuff like the plague . . if you can. When it comes to royalties, get as close as you can to "no deductions" for any reason. And after you think you have achieved that, ask the gas company rep straight up whether there can be any royalty deductions for any reason. When it comes to royalty deductions, the gas companies are extremely creative. And it can cost you REAL money!

But at the same time:

The ability to avoid royalty deductions is heavily correlated to your overall bargaining position. If you go in weak, you are not going to be able to avoid the deductions. And that same weakness will also lower your bonus and your royalty percentage.
Permalink Reply by Buddy on November 11, 2010 at 1:23pm
Thank you, Frank. Would you say simply that the royalty is based on the gross proceeds (at the well heald????) without deduction?
Permalink Reply by Frank Walker on November 12, 2010 at 11:35am
I would not say "wellhead". I would say at point of sale.

However, what I say is of scant little importance. This is absolutely a matter where your lawyer must guide you. This is a region of the lease where your lawyer, provided it is the right lawyer, will earn her or his fee. It is true of the entire lease. But on royalty language in particular, you don't want to be listening to some hack on the internet. You cannot afford to get this wrong . . and neither can your kids or heirs. This is by no means a simple matter. Of that I am certain.

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