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 January 6, 2014 at 5:14am

The politics of envy are prevalent and destructive for any individual and for society.  Don't forget, landowners pay real estate and personal property taxes for years and years.  If they, or their grandchildren,  do receive royalties, it seems fair to me.  Everybody wins, except the Mideast oil sheiks. 

Permalink Reply by Jimmy Wilson on January 6, 2014 at 5:45am

Thanks Kevin

I am a little north of Phillip and Evan and have about 2500 acres worth of neighbors considering our options... we appreciate your candor and parlay on the matter....

 

Jimmy

 

George.... not really sure what  you are talking about or referring too. I certainly hope it's not making a negative connotation or reference to any of us in this recent conversation.

 

 

Permalink Reply by Victoria Smith on January 6, 2014 at 11:29am

What is most troubling from the perspective of an equitable business arrangement between the Lessee and a lay Lessor, is that the market enhancement deduction is 100% of such costs.  So, for example, say the Lessee in an effort to market its gas decides to host an all expense paid golf outing to Hawaii for the potential buyers, with such potential buyers also being invited to bring their families or assistants, or offers to sponsor certain potential buyers on an all-expense paid trip to a conference on global energy in Europe, etc.  This cost could still be less than if the Lessor agreed to share a cost of production, but just having the language describing these post-production deductions as "any such cost" needs to be a red flag even to those Lessors who have hired an attorney. 

 

This is very creative accounting lease language, and without any type of cap on the calculation of such post-production expenses a Lessor could end up receiving $0 in net revenue as the undefined unrestricted post-production costs include everything that can be thrown into the kitchen sink plus more.   Without a cap, the Lessee knows it can be extravagant with the market enhancement budget and as long as the expenditures remain the same or less as what the Lessor is due in royalty payments there will be no cost to the Lessee for such extravagance.   

 

The quoted deduction language would be more ideal from the Lessor's point of view if the "any such cost" language contained a monetary or percentage cap or specifically excluded certain post-production expenses e.g. 'any such costs providing no gifts to potential buyers may exceed $1,000 to each buyer', or 'advertising may only be deducted in proportion to the production royalty percentage received by Lessor'. 

 

Your deductions were $14k+ but with this language they could amount to 100% of your royalty.

 

And if you're reading the rest of the language and see it says "Lessor shall not receive a price less than Lessee" and say then how could the Lessee absorb 100% of my royalty with post-production enhancement if I am to receive the same price as the Lessee, the language says you will receive the same price, not the same net revenue position.

 

Blessings.

 

 

 

Permalink Reply by Joseph-Ohio on January 15, 2014 at 4:50am

Let's not forget the new laws on the books that seem to be working hand in hand with the O & G E & P intrusions / trickery.

Another facet / perspective / inquiry pertaining to the forced pooling / unitization laws in Ohio has re-appeared to me and I would like to share it with everyone on these pages.

How is it not an uncompensated seizure (by the State) of the control of privately owned rights to develop ( or to not develop) privately owned natural resources ?

In our instance we purchased / invested in our land with all 'Mineral Rights' (including gas and oils) fifteen (15) years ago. Now control of the sale of the right to develop these minerals  has basically been seized by the State's new set of Laws which did not exist when we purchased our land and 'Mineral Rights'.  We liken this to State Seizure by way of 'Eminent Domain'; except as we understand 'Eminent Domain' owners are paid a fair market value for the property seized.

My problem here is that no landowner that I've read or heard of has been paid / compensated by the State for the loss of their right to sell or not to sell their gas and oil developmental / drilling rights.

Anyone read or hear differently ?

Permalink Reply by Shon Lenzo on March 30, 2014 at 3:06am
Straight from the horses...or Geologists....mouth...
ODNR says
http://oilandgas.ohiodnr.gov/industry/mandatory-pooling
Permalink Reply by adam sorell on April 12, 2014 at 8:34am

Here is Gulfport's  offer to me

The question is what " Lessee's   ACTUAL COST?" it could be anything. Maybe i should just wait. I'm guessing there will be many wells drilled this  year. If numbers are good it will be sellers market. (i'm wishing)

Market Enhancement Clause: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, dehydrating, transporting and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; HOWEVER, any such costs 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

Permalink Reply by Kevin in Belmont County on April 12, 2014 at 9:23am

If you are in a wet gas well, when the wet gas is sent to the plant to be cracked and broken down into the different gas's, that is considered enhancement. Then what ever your decimal interest of ownership is according to your division order is the decimal interest that will be deducted from your royalty's to cover your cost of the enhancement cost. The dry gas deductions are minimal, the wet gas deductions ad up very quickly. The "However" in the clause is the game changer. From what I have been hearing there are not many companies signing a lease without the clause in there.

Permalink Reply by adam sorell on April 12, 2014 at 2:09pm

Yes no one will sign a without the clause in there. Only one is that land group in Bridgeport EOU/Great River.. I drove past there other day and advertisment sign is down. I spoke to someone my neighbor who got paid. She said she was in the first signing. I forgot to ask her if her lease was no deduction lease.  Because I signed up later. GRE renged stiffed many people.  Like the saying " If something is too good to be true it usually is not."  The GRE lease is everything someone could want in a lease but of course they aren't honoring it, which makes me wonder why they offered it in the first place. I know GRE profited from their scheme but I don't know how. Maybe someone here could chime in.

attached is the GRE lease.

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