Deductions from Royalty Payments

What is the expected deduction from royalty payments?    Does anyone know what the deductions amount too such as compression, dehydration, gathering, transportation, etc?

 

Thanks,

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Permalink Reply by paleface on December 21, 2010 at 9:50am

 I would call or email your gas company and ask what they think it would be for your area?

Permalink Reply by melvin t morris on December 22, 2010 at 6:47am

Correct me if I am wrong but if your lease reads royalty at the wellhead, there

should be no deductions.

 

 

Permalink Reply by Mike Knapp on December 23, 2010 at 7:23am

Janice,

 

That's one way to look at it.  Another way would be to say "these people paid me big money to come on my land and invested millions of their dollars to help me develop my natural gas resources,  i think that it is reasonable that a small portion of the cost of preparing MY gas to be sold into a pipeline could be deducted from my sizeable royalty payment".

 

Does it mean that the landowner is going to get less?  Yes. 

 

Is it reasonable to ask for this to be negotiated into a lease?  Yes.

 

Is it reasonable for a gas company to reject this change?  Yes.

 

Is it unfair?  Certainly not.  

 

Permalink Reply by bill h on December 26, 2010 at 3:13am
Mike, what level of deductions have you seen in your experience, and what range do you believe to be fair? (I'm especially interested, regarding the dry gas in NE PA, that goes straight into the interstate pipeline, unprocessed)
Permalink Reply by Mike Knapp on December 27, 2010 at 3:26am

Bill,

 

Unprocessed dry gas feeding directly into a sales market should have minimal (if any) deductions.  The only expense I can see there is going to be compression, which when spread across a system of wells will be barely noticeable.   As far as what is "fair"... well, that's very subjective.  


Permalink Reply by bill h on December 27, 2010 at 3:33am
They aren't doing any compression yet either.  What about marketing costs?  I guess I need to reread the lease again.
Permalink Reply by Mike Knapp on December 27, 2010 at 9:48am

Janice,

 

I'm not trying to defend anyone, just trying to give an additional perspective.   Yes, big gas and oil companies make large profits.   If they didn't, they would not be in business.    Gas drilling isn't an investment like gold or silver or some other sort of tangible commodity that retains worth.   It's sold, it's burned, it's gone..   They need large profits in order to be able to continue to drill wells and keep the supply chain working.  You want them to pay you top dollar for your gas rights, and you want them to invest tens of millions of dollars to develop your property, right?    Where do you think that money comes from? 

 

You can call it nickel and dime-ing, but I still don't understand how it would be considered unreasonable to think that a landowner should have to pay his or her fair share of the costs associated with preparing THEIR gas for market.   The gas company has paid you to come on the land, they have paid to drill the well, they have agreed to give you a sizable royalty percentage.  

That being said, it should not be an open loophole for gas companies to scam landowners out of their fair share. 

 

I did not reply to Mr. Morris's question.  I try not to comment too much on other companies leases and what the implication is, especially when I only have half of a sentence from it.  I try not to get too close to what could be considered "legal advice". 

 

-Mike

 

Permalink Reply by Country Bumkin on December 28, 2010 at 1:44am
Where you are wrong Mike is that there is NO proportionate cost associated with deductions.  If there was, it would be spelled out in the the lease.  Here's where I have issues with the deductions.  Let's say company A puts in a gathering system for 5million dollars.  Why should the company come back and make everyone in the Unit pay for that pipeline system?  Isn't that the price of doing business?  So you think it's okay for landowners in the end help pay for everything?  What happens when the gathering system is paid for?  Do the O/G folks put more back into your royalties or do they keep deducting? 
Permalink Reply by melvin t morris on December 28, 2010 at 4:30am
I agree with you Bumkin.  Also, in response to Mikes' previous reply to Royalties at the wellhead, "MY" lease states that additional costs from wellhead to end user are to be absorbed by the "LESSOR" as written up by an O&G laywer. In my opinion, that should cover any costs that are incurred.
Permalink Reply by Mike Knapp on December 28, 2010 at 5:48am

Mr. Morris,

 

You are the Lessor.   The gas company is the Lessee.   Are you sure that you didn't get those two mixed up?  

Permalink Reply by melvin t morris on December 28, 2010 at 6:24am
Sorry, I stand corrected for the typo.
Permalink Reply by Mike Knapp on December 28, 2010 at 5:46am

Mr. Bumpkin,


Every lease is written differently, which is why I don't comment on what something means unless I have the whole lease in front of me.  Some deduction clauses are more equitable than others.   They can range from completely fair to highway robbery.  

 

Most of the deduction clauses I have come across are basically net vs. gross.  

 

For example, let's say that a well makes $100,000 in a month on a lease paying a 15% royalty with deductions.  There are $5,000 worth of expenses involved with preparing that gas for sale.    That means the landowner receives 15% of the NET ($95,000) instead of 15% of the GROSS ($100,000). 

 

That equates to $14,250 per month vs. $15,000 per month.   So yes, it is proportionate.  The landowner is only paying 15% of the cost of preparing the gas for market.  

 

 

 

 

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