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 November 6, 2013 at 11:19pm

Farmhouse,

Really great comments and advice! The only bad thing is sometimes people thing they are doing that and they really are not.  The " Market Enhancement Clause" is a time bomb just waiting to go off in the land owners face. And there absolutely has to be something done about licensing and regulating of land man. There is no accountability for them. They can go out and lie and twist and there is no governing agency to hold them accountable. Like I have said in these writings before I have a lot of contract experience and sales experience through out my professional career and they pulled one over on me. And it was done with malice he new exactly what to say and where to say it. In my past line of work he would be up on charges and the state would be prosecuting him. When are the land owners that are fueling this economic boom going to become important enough to have our rights and property protected?

Permalink Reply by Joseph-Ohio on November 6, 2013 at 11:23pm
Right On Brother.
Permalink Reply by Greg K on November 7, 2013 at 3:14am

Oil and gas companies use the landman as a buffer. " hey we never said that" etc. I agree with you Kevin, it was absolutely intentional. He wasn't a new guy....he was slicker than slick!!

Permalink Reply by Joseph-Ohio on November 7, 2013 at 3:33am
Is ' slicker than slick!! ' a synonym for ' lyin' sack ' ?
Permalink Reply by george m. on November 7, 2013 at 5:51am

Signing a lease is like signing a marriage license.  it is a commitment that can last forever.  There is no prenup...even with a good lawyer.  Check your statements.  Make sure you understand how the payment was calculated.   One thing is for sure, you will never be surprised on the upside!

Permalink Reply by Larry Pearce on November 7, 2013 at 9:10am

I few things to clear up here, "production" costs are covered by the operator, the upstream company.  This includes, R&D, construction, drilling, fracking etc..- "Post Production" costs are what are affected by "Market Enhancement"  AND, the Market Enhancement clauses were jammed into our face by ATTORNEYS! NOT the operators, our operator would not accept it.   In our leases, the deductions can only be shown if it is to create a positive revenue above what it would be without them, (meaning processing, CREATING MARKETABLE PRODUCTS FROM YOUR SLUDGE.  In no other industry are costs not shared.  

Cattle:  You have $50000 of appraised head of cattle, I buy it and pay $10000 to process it, and them sell it all for  $80000, and I cut you in on the additional $20000.  Why should I do that for free?  You pay 20% of the $10000, and I pay 80%, how's that not fair?  that simple, make 20% of the additional $20000.  So if you want no costs at all, then you should ONLY be paid the initial $50000

ALSO, the operator does NOT make the remaining 80%!!!!  At 8 mil per well, they have to recover before they net any profit, which is about 7%, if that.  Also costs for EVERYTHING are going up, and gas isn't much so you are all whining about a pretty crappy market right now.

AND as I see the math, KEVIN!  You are netting about $242 per acre per month, on a one well 640 acre pad!!!  One well on 650 acres sucks too, our operator does them tighter, and is getting 8 wells on 1000 acres.  Sooooooooo, shut the front door KEVIN, you are doing well my friend.

As a 9 year landman in Western PA, I have acquired about 700 leases, and have had no legal, ethical, or substandard results from my career choice, READ what you sign, and maybe through some blame at your attorney.   am aware of hundreds of landowners that are happily receiving royalties, as we do it best in the industry.  I do no lie to people and some people INSIST on popular language as stated in this thread, I have never recommended it, and you were an insurance salesman?  Oh, you're ethical! 

Permalink Reply by Joseph-Ohio on November 7, 2013 at 10:47am

Larry,

Not speaking to Kevin's specific circumstances but just saying in basis - I for one ' don't like your math '.

1t place, as I understand things and what you're suggesting, any landowner bound by your lease would not be paid for production ( prior to ' processing ' ) as might be in the case of ' cattle ' ( I guess likened to ' on the hoof ' money ).  But, your system would charge a royalty % pro-rated processing costs for production. 

That's an ' apples to oranges ' comparison right there to me - it just isn't the same.

 

Permalink Reply by Joseph-Ohio on November 7, 2013 at 1:15pm
Not even ' apples to oranges '.

Maybe ' bricks to carrots ' ( or something ) ?
Permalink Reply by Larry Pearce on November 7, 2013 at 1:51pm

Missed the point completely, I never said there wouldn't be pro rated charges.  The Cattle math was to make my point, the O&G math was based on 80 acres in a 640 acre unit, he said $14574 was about 20% of the royalties.  So total of about $72870, netting him $58296 for 3 months, / 3 months, then  / 80 acreas = $242.90 per acre per month, on a crappy unit.  I'd bet if you could get a price at the wellhead, (which in Marcellus rich or super rich Wet gas you cannot) it would half of his net now, even factoring the deductions.  If I misunderstood his acres and unit size, my bad, but based on these numbers, $242.90 NET per acre aint half bad for a WEAK unit at best.  Sorry

Permalink Reply by Joseph-Ohio on November 7, 2013 at 2:18pm
I miss your point and you miss mine.
That's the real point.
Landowners (as Mineral Owners) seek leases to profit as best they're able.
The marketplace is landowner hostile to the point of being insulting.
As always only IMHO.
Permalink Reply by Joseph-Ohio on November 7, 2013 at 1:58pm
Seems to me ( in fairness ) if processing costs are incurred prior to market that the lease fixed landowner royalty percentage would default to be applied to the ' net ' receipts.

Thinking this way especially since the landowner has no say in who / what entity the production is sold to.
Permalink Reply by Joseph-Ohio on November 7, 2013 at 11:41pm

After reading Kevin's post immediately below I see that the ' fix ' I write about above does not address the E & P / O & G company having the ability to sell low to itself / it's subsidiary and then paying the Lessor / Landowner a lowball royalty and afterward selling the production at fair market value - basically cheating the Lessor / Landowner out of fair return.

If there isn't, there ought to be a law against that tactic.

Sounds larcenous to me.

IMHO 

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