Gross Proceeds

Is this a gross proceeds clause… Gross Proceeds at Wellhead
It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, royalties payable on gas and gaseous substances, including casinghead gas, shall be based upon the MMBTu value of unprocessed gas at the wellhead, free of all costs, charges or deductions of producing, treating, compressing, transporting and marketing said gas to such purchaser, which royalty, however, shall be subject to such production and severance taxes as are properly allocable thereto.

Any concerns?

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Permalink Reply by Nancy Mosley on July 27, 2023 at 11:52am

To me, the part about being subject to taxes makes this not a gross proceeds clause. I am not a lawyer.

Permalink Reply by Matt on July 27, 2023 at 2:33pm

Thanks Nancy. Makes sense

Permalink Reply by Dott on July 28, 2023 at 8:33pm

Matt, This is one of the most important clauses in your lease. Always have an Oil & Gas Attorney review it because the Landman twists the wording around to say one thing at the beginning of the clause but then the opposite  in another part.  Long term it will be worth the money spent.

You have to watch out for the " However" wording (never good). Appears to me the "However" allows the royalty to be subject to production costs. Many States allow the severance taxes to be taken out of the royalty and paid to the State on your behalf so that is OK.

Here is the "Gross" clause my Lawyer came up with that the Landman agreed to and put on a separate "Exhibit"page of the lease.

COST FREE ROYALTY:
 Lessee Agrees to pay Lessor’s royalty based upon 15% of the Gross Proceeds received by Lessee (or its affiliate) in a sale of oil, gas or other hydrocarbons produced and sold hereunder to the first non-affiliated third-party purchaser at the point of sale to said non-affiliated third-party purchaser. For the purposes of this Lease, “Gross Proceeds” means the total consideration paid for the sale of oil, gas, casinghead gas, casinghead gasoline, associated hydrocarbons, and marketable by-products, produced from the Leased Premises or payments for future production or delivery of production at a future time, or sums paid to compromise claims relating to payment obligations associated with the sale of oil, gas, casinghead gas, casinghead gasoline, associated hydrocarbons, and marketable by-products. Further, the royalties paid to lessor hereunder shall never be charged with any part of the costs and expenses for exploration, drilling, development, production, storage, processing, compressing, marketing, enhancement, or transportation. Lessee may only deduct Lessor’s proportionate share of any severance, ad valorem or excise taxes attributable to the production of oil and gas from the leased premises. To the extent there are post-production costs incurred between the well and the point of sale to the first non-affiliated third-party purchaser that are subtracted, netted, or deducted, directly or indirectly, from the Gross Proceeds paid to Lessee (or its affiliate), the such costs will be added back for purposes of calculating Lessor’s royalty.

Cody Smith is an Attorney with the Law Firm Emens,Wolper, Jacobs & Jasin 614-414-0888. They have a good price to review and give written recommendations on your lease with follow up phone discussions if you would be willing to deal with the Landman on your own. He will guide you throughout the process. It's a free 30 min consultation. If you want him to negotiate directly with Landman it will be more expensive of course. To keep prices down I asked him to help me to negotiate the 5-7 most important changes I needed to make to the lease I was offered so that it would benefit me. Good Luck

Permalink Reply by Matt on July 29, 2023 at 7:44pm
Thank you. Good advice. Im going to get a lawyer I have dealt with on another OGM issue.
Permalink Reply by David Cain on July 30, 2023 at 7:27pm

Matt,

I agree with Dott, the Royalty clause is extremely important and you need to get a good O&G attorney to run through it with you.  I am no lawyer, but I would be concerned about the "...at wellhead" portion.  What is oil or gas worth in the middle of your field?  I have heard that you should avoid at the wellhead clauses.  Again, an attorney should be able to give you an exact rundown of what the wording is actually saying.

Good Luck

Permalink Reply by Nancy Mosley on July 30, 2023 at 8:32pm

I am concerned with the severance taxes and especially ad valorem taxes being considered an ok deduction, and not one to be avoided. Until very recently, these were the responsibility of the producer. Of course until fairly recently the royalty % was not typically as high but was expected to be 1/8, or 12.5%. The producer gets its assessment for the production which becomes its property tax, or ad valorem. The mineral/royalty owner (technically this can be different but often not) gets his/her assessment which, at least in WV, goes into the calculation of the county assessment, which produces the county property tax. The mineral owner should not be paying the company's taxes, any more than the mineral owner should be paying post production costs, in a gross proceeds lease. At least as I understand it. If talking with an attorney, try to get an explanation of this. Perhaps other states have other ways of doing things.

Permalink Reply by bill h on August 10, 2023 at 7:02am

Nancy, which gas company do you work for?

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