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 george m. on November 9, 2013 at 10:12am

Kevin,

Instead of a 20% deduction, you should have INSISTED on a 30% or 40% deduction.  You would have made out even BETTER.

Permalink Reply by Kevin in Belmont County on November 10, 2013 at 2:14am
Yeah if they dont get well on other 50 acres within first five. I have a pugh clause I will take nothing less than 50 percent deductions. I will be a fat cat then!
Permalink Reply by Joseph-Ohio on November 10, 2013 at 3:13am

Mr. Kevin and Mr. george,

This deduction you write of - what deduction are you writing about ?

Must be intra-personal / inside humor.

Anyway, I don't follow.

Care to clarify ?

Permalink Reply by Kevin in Belmont County on November 10, 2013 at 3:21am

Sorry Joseph,

Yes, it was just some sarcasm about the production cost deduction being taken from royatly checks.

Permalink Reply by Joseph-Ohio on November 10, 2013 at 3:19am

Wrote this a couple of minutes ago under a previous reply and it may be hard to find so I'll repeat it here for easier referral:

"   What would be wrong about language inserted in the lease to the affect that if a subsidiary of the lessee, owned in whole or part by the lessee, or other entity working in concert with the lessee; purchases lessor's production and then enhances and sells it on the market that the subsidiary or other entity also pays the lessor royalty ? Especially if the lessor must pay enhancement costs ( in whole or part ?) by application of the previous agreed to language.

Of course this is only functional if the subsidiary sells production for a profit covering the lessor's enhancement costs and generating a net positive return for the lessor. If it does not then the subsidiary does not charge the lessor enhancement costs.
 
Gets complicated doesn't it ?  "
 
Should have written:  It gets even more complicated doesn't it !
 
J-O
Permalink Reply by Kevin in Belmont County on November 10, 2013 at 3:37am

Joseph,

I think that would cut in to the O&G Companies profits, and they wouldn't like that. I do tend to agree with what some have said on here. The O&G companies are going to find a way to pay you the minimum amount that they can. Regardless of what they have to do. I actually talked to one of Mark West gas line inspectors about a month ago. We actually spoke for a couple of hours and to be honest, I think if more companies conducted business in the O&G industry as they do. I think the industry and the land owners would be much better off. From what I was told by this gentlemen, he said if Mark West finds out that a company is not holding up to their leases with the land owners they will refuse to take their products. He seemed like a stand up guy. Of course I cant verify these comments but I hope its true. Like I have said before, the company I retired from has many motto's and one of their main ones is "do the right thing, because its the right thing to do"

Permalink Reply by Philip Brutz on November 10, 2013 at 3:56am

Kevin,

I agree with you about MarkWest.  They just finished putting in a gathering line across my property in Guernsey Co.  It actually looks better than before they started.

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Permalink Reply by Joseph-Ohio on November 10, 2013 at 6:38am
Guess there's nothing in it for the lessor / landowner to sign a lease with a post production / market enhancement clause then.

Back to square one for us then.

We don't sign such.

Taking it another step a landowner who doesn't sign such ( like we would be ) still may be 'force pooled' into a unit that has the clause. That doesn't seem like it would be the right thing there does it ?
Permalink Reply by Joseph-Ohio on November 10, 2013 at 7:05am
Also wondering what kind of lease agreements the large landowner groups in our neck of the woods are promoting.

That's one of the main reasons we chose not to sign up (no lease presented to study).

BTW our land is in the northern tier (southeast Ashtabula County).

I know you fellows probably don't have a handle on what's going on up here (only sharing so you can get a better understanding of our perspective).

Thanks for attention.

J-O
Permalink Reply by Joseph-Ohio on November 10, 2013 at 7:15am
As landowners (speaking for me and mine) we're really feeling bullied / pushed around.

Guess it is what it is.
Permalink Reply by Darlene Newton on November 15, 2013 at 8:28am

Tell me about we landowners Pennsylvania, Ohio Virginia We MUST fight together!

Permalink Reply by Ginny S. on November 11, 2013 at 2:28am

Our lease has language that is supposed to address this problem:

"The royalty under the Lease shall be paid based on a sale at arms-length between unrelated parties and, except for Lessor’s share of production severance taxes, if any, shall be paid "gross" and free of all costs of any kind, including, but not limited to, costs of gathering, production, transportation, treating, compression, dehydration, processing, marketing, trucking or other expense, directly or indirectly incurred by Lessee, whether as a direct charge or a reduced price or otherwise."

The lease is with Chevron (Atlas first).  They are just starting to pull permits for our site, so I suspect it will be quite some time yet before we receive any royalty payments.  I'm not sure how we would know if they were selling the gas in "arms length" transactions or not.

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