Lease Question - Deducting Bonus from Royalty

I have been proposed a lease that has a comment that I am concerned about.  It proposes a 15% royalty but has a statement that if a well is drilled the paid up rental (I assume the paid up bonus) will be proportionally credited towards royalty payments based upon what year it is drilled after the lease is executed.  Has anyone seen verbiage like this or is this typical?  I would not think it is.

Thanks

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Permalink Reply by Steve on June 11, 2015 at 7:04am

Thanks for all the comments.  The way I see it we need to get that statement removed from the lease or we will have to work with someone else.

Thanks again

Permalink Reply by Josh Willis on June 11, 2015 at 8:31am

This is fairly common in the coal industry, it is called advanced royalties. When coal companies lease coal they can't afford large bonus payments and most leases are 10 years plus so as a way of getting a landowner to sign you offer so much advanced royalty that will be recouped from production some years down the road. If it is never mine you keep the money.

Because of competition in the oil and gas business I don't think that this will become common here... hopefully!

Permalink Reply by Kyle Nuttall on June 12, 2015 at 4:30am

It's not typical any more.  That used to be standard in leases.  When they paid a Delay Rental they would pay you once a year and if they drilled a successful well in that year they would recoup the rest of that year's rental payment from the royalties before they paid you any royalties.  Now the Paid-Up lease is far more common.  I'd ask for that language to be removed, and I wouldn't expect a big fight from the company over it.  I've looked at well over 100 leases for clients over the last few years, and only seen maybe two that I recall that had this kind of language in them.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on June 12, 2015 at 7:03am

Steve,

   This is the first time I've heard of doing this (Deducting Bonus Payment from future royalty payments- GIVE US A BREAK), but O&G companies can get creative when it comes to short changing you payment for your minerals.

Back when this all started DPS Penn employees said "The Bonus is nothing, the Royalty is Everything".

I didn't believe them and took a maximized bonus.

Since we leased to Chesapeake, "The Bonus is Everything and the Royalty is nothing".  Update: Buck well 1H Royalty Payment - Drum roll please- Rounding to the nearest dollar, which is rounding up this month, we got a whopping $16 per acre this month.

Call the governor, you'll never lower taxes for the rest of the state on what Chesapeake is paying. Of course they sold  to themselves and will resale for fair market value and make a nice profit. I won't mention all the deductions they are taking that are contrary to our No Deductions leases.

Steve maximize your Bonus Payment, there is no one in the US that is going to stop the O&G companies from shorting you royalties, "It's what O&G companies have always done." You will sue your producer, get back a small percentage of what you were shorted, then share 30 to 50% with your friend, the lawyer.

Permalink Reply by Joseph-Ohio on June 12, 2015 at 7:25am
We've been on all those buses from first learning about the Utica Leasing practices.

We're still on those buses and will be until they take us to where it is they're going.

Good luck to all of us - seems to me we need it.
Permalink Reply by Mud Flaps on June 18, 2015 at 7:19pm

basically a royalty advancement.

Permalink Reply by JLG on June 19, 2015 at 1:55am

Yeah, like Mud Flaps said, it's an Advanced Royalty Signing Bonus.  This method was very popular in western PA a few years ago when signing bonuses / delayed rental payments weren't as high and the lessors wanted a large sum up front.  I'd be willing to bet that language exists in the lease describing this.

Permalink Reply by Kyle Nuttall on June 19, 2015 at 5:09am

I'd just like to chime in and agree with Ron Hale.  It's possible that the bonus will be the only money you ever see.  Royalties can be good if the well produces a lot and the company isn't deducting loads of post-production costs.  But that's only going to happen if they drill a well, and they don't always drill a well.

There really isn't any way to stop the companies from taking post-production costs.  It's a simple business calculation for them.  They will make more money charging post-production costs and settling with the few lessors who call them on it or sue them than they will by not charging post-production costs.  It's wrong in every way I can think of, but it's the way it works.  I'm looking forward to taking post-production costs to court.  I suspect it's going to be a rather lucrative part of my business.  I feel bad for the people I'll represent, though.  It's always the little guy that gets the raw end of the deal.

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