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 January 6, 2014 at 9:40am

Marcus,

Thanks, I wasn't aware of that. I have done many 1035's but wasn't aware of a 1031 exchange. I will have to research that exchange. It seems to me then that someone who might not expect to get a gas well in the near future or for that matter even some one who will ,may be benefited by selling their minerals, at least from a federal tax stand point. Interesting. Thanks for the info Marcus 

Permalink Reply by evan on January 6, 2014 at 9:44am

Yes Marcus thanks for all the info.  Very informative for sure.. now what to do ?

Permalink Reply by Philip Brutz on January 6, 2014 at 9:54am

Some of my Amish neighbors are taking advantage of the 1031 exchange: http://www.reuters.com/article/2013/12/23/energy-ohio-amish-idUSL2N...

Permalink Reply by Joseph-Ohio on January 6, 2014 at 7:56am

Marcus,

A clarification please.

It seems to me that if a landowner (receiving royalty payments) decides to sell his 'Mineral Rights' it would seem to me the landowner is selling 'Title' to the resident Minerals and any and all Future royalty payments - correct ? 

It also seems to me the tax would have to be different for a sale of 'Title' as opposed to tax paid for income from actual royalty payments - as the value of the Future royalty payments are not known - correct ?

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on January 6, 2014 at 9:24am

Selling mineral rights is like selling property because minerals are considered real property for tax purposes.  The tax you pay on a property sale is subject to cap gains.

Permalink Reply by bo boboski on January 6, 2014 at 9:49am

If you use the $$$ from the sale of mineral rights, to buy more land with mineral rights,or just more mineral rights,there are no taxes. section 1031.. IRS code ... must be "like" what you sold. 

Permalink Reply by Joseph-Ohio on January 6, 2014 at 9:53am

My thank you to Marcus crossed your reply in cyberspace there bo boboski.

Any idea what a 1035 is ?

And thank you for your reply bo.

Permalink Reply by Joseph-Ohio on January 6, 2014 at 9:51am

Thanks Marcus.

Seems to me the right thing for a landowner / lessor to do would be the thing that returns the most / best for their own personal circumstance - just like always.

You mention something about a '1031 exchange' above and Kevin mentions something about a '1035'  - I haven't a clue what either may be.  If you have the time perhaps you could explain.

Thanks again.

Permalink Reply by Kevin in Belmont County on January 6, 2014 at 10:11am

Joseph,

A 1035 exchange is where one retirement account is rolled into another type of retirement account without ever physically having possession of the funds. When its done that way there are no tax or penalties because it was just simply rolled into another plan. As far as the 1031, I am not real familiar with it. What I looked at though after Marcus's comments  leads  me to believe, if you exchange one piece of real property for another of equal value there is no tax. But Marcus seems a lot more familiar with that then I am.

Permalink Reply by evan on January 6, 2014 at 10:20am

That is correct .. you can use the money to buy property of equal value.  If it's less value you just pay tax on the difference. Here's where knowing a good appraiser comes in handy maybe

Permalink Reply by Joseph-Ohio on January 6, 2014 at 10:33am

Thank you for posting and replying Kevin.

A pretty complicated jungle if you ask me.

Still don't completely understand / know how 'Mineral Rights' factor in - in either circumstance (1031 or 1035). 

Could (the land be) / is the land considered one thing and the 'Mineral Rights' another ?

Does the landowner have to 'Sever' the 'Mineral Rights' in either circumstance ? That could open the door to arguments about 'Severance Taxes' (and who pays them (perhaps) ?

Folks seem to be ending up in court battles over these things more and more often. Here I've been thinking all along that a good lease agreement was supposed to  keep everyone out of court !

Permalink Reply by Kevin in Belmont County on January 6, 2014 at 11:18am

Joseph,

A 1035 doesn't factor in to mineral rights. It is used when someone needs toll roll money from one retirement plan to another without taxes. As far as a 1031 I have never been involved with doing one but I could see how it may apply if you were swapping a piece of property for one of comparable value. They are both just exchanges to try and keep the governments hand out of your pocket.

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