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Permalink Reply by 0l1a6laz7smpf on January 12, 2011 at 4:22am

thanks...I guess I will just go ahead and type the entire clause as some other landowners out there in marcellus land may have this specific clause as this one came from a fairly large group signing with Chief and it was supposed to be that these clauses are in the addendum to support more rights of the landowner and wasn't of the main body of the contract and the group did use a lawyer.  For in the main part of the contract is a standard net royalty clause but this addendum is stated that if there is conflict between provisions in the lease and the addendum that the addendum provisions prevails.   Here are the two clauses in the addendum as the lease itself has a statement at net for the Lessor (which we should have crossed that out instead of left on the lease)....the addendum states that the Lessor receives Gross. 

 

Item #4. Royalties- Gross vs. Net

"All royalties payable under the lease shall be payable at the point of sale or use, and there will be no assessment or deduction from the royalty share, including specifically, without limitation of the foregoing, charges made against the royalty share for transportation of product (Payable royalties are based on gross royalties)."

  

Item #9  Market Enhancement Clause

It is agreed between the Lessor and Lessee that, not withstanding 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, separating, treating, dehydrating, compressing, processing, 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.   However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee.

 

There was much discussion with the landman about the however statement above with a cost to the Lessor and I must say that the landman refused to remove it and our lease was done separately from the group's lease though the same lease language was used (we were told) so I don't know if they had any success in removing or changing the above however statement regarding 'enhancements'.

 

So if any of you out there have such clauses on your contract I suppose we could discuss those further but perhaps the land agent is right about those times of enhancement are not that often used as that was what we were told.  You have to wonder why they didn't just make it more clearer and just allow the landowner to receive the benefit of the royalty at gross with no 'howevers" as they are getting a more clearer profit right now even in the assign sales.

 

I am just hoping that 'enhancement' doesn't mean paying the cost for products to 'frac' as they are not splitting the cost according to this addendum but are charging the full price of 'enhancement' to the Lessor.  This clearly is an example of a contract provision that practically is contradicting itself from what I can see....as clearly the clause states that the Lessor does not have to pay for production costs and then that 'however' about enhancement is thrown in.  And of course at the time of signing we were trusting the landman due to our lack of knowledge though we were calling who we could to find out more ...and I surely was new at using the computer and didn't know how to google search then or I certainly would have.

 

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Permalink Reply by 0l1a6laz7smpf on January 12, 2011 at 4:49am

.....

now I found this article about enhancement (as it shows that it is different than the normal process)....I see now that we were not told directly or we would have either said no...or asked to split that cost with the lessee...for even though the sale may gross more the lessee would not be bearing the cost at all...but charging the Lessor for the products of enhancement and possibly the use of them also.

http://www.highplainsgas.com/general.php_category=News+Events=press...

I think we have been taken advantage of on this particular item and I am sorry that they went that route as they knew we didn't know what they do in their O & G procedures but we did know and expect that we were signing up for gross not net profit and without deduction.   Now if they choose to up the production to always using enhancement products and we the Lessor are supposed to pay the full price of the enhancement before our 'gross' revenue from royalties...how is  it that we are getting a lease with no expenses for production for the Lessor?   We were told that the enhancement was rarely used...yet I see from google search it is the way they are heading in most all production....it is these type of terms that we the innocent landowners who did not know the process or terminology (and even some of the lawyers were new to it) that I feel that the O & G companies took advantage of our lack of knowledge in this area...  So to find out that the royalty after deducting the entire cost of production enhancement may not be the royalty amount so expected when we thought we were doing a great job at negotiating...they had their laugh I guess.

 

A new thought about what if the unitization of group pools comes and the cost of enhancement for the group drilling well is the owner with the enhancement clause  such as above going to have to bear the costs for the whole group?...or just their percentage of it...I think some lawyers will be needed to sort out these contraditcting terms used in these leases at the beginning when it comes time for the royalty checks...but I hope it doesn't have to go there.

 

If any of you are from the Bradford/Sully group as this lease is from that negotiation with Chief...pls take the time and see if you completed your negotiations with the 'enhancement' charge being placed on the Lessor....even though you negotiated for no charges for production...take a look now and not wait til the royalty time comes.   I know having a piece of the pie is good even at a better profit ...but if you are paying for the pie ingredients and the process to add those ingredients and not splitting those costs with the other that is eating of the pie...then you bear more of the expense and might not have any profit from it...this is a major concern if this enhancement starts being used for all production.  What we are not being told is if the O & G company is going to seek a profit for us landowners with lessor paying expenses for enhancement...as they know that they are charging the lessor for all the expense of enhancement (if they get away with this) and they may sell at a price that won't reflect a profit for the lessor but only for the lessee cause they could sell it at any price and they have no expense for the enhancement.  This is not a gross royalty as promised if they start using it for all production....we were lied to...period.   Any of you out there that have this clause in your contract...how about gomarcellus emailing me and let's speak to an attorney....while writing this I see that we were lied to as that process is what they oil companies are starting to ramp up to....instead of rarely used.

How disgusting for these companies to take advantage of the lessors that many have worked their lands for years and had in their families since the beginning of the USA...they knew they were going to make a profit almost immediately from the assign clause and now I see that they also knew about the enhancement.

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Permalink Reply by 0l1a6laz7smpf on January 12, 2011 at 5:11am

http://en.allexperts.com/q/Energy-Industry-Oil-2441/2008/9/Enhancem...

I am going to hope that item #4 above in the clause regarding gross will prevail against the O & G's convenient 'however' part of item #9 as they are in the same addendum as item #9 states 'not withstanding any language herein to the contrary'...   

I certainly thank Loren Good for starting this discussion.

   Everyone reading this whether you have net or gross in your contract pls read at the two links above in my replies above especially if you are about to lease.

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Permalink Reply by 0l1a6laz7smpf on January 12, 2011 at 9:22am

I know I have posted a few in a row...but pls do read about this 'market enhancement clause' stuff as I just found out today about its wording and the importance of how that affects your gross or net of royalty check....though clearly back in 2008 we discussed this and were told not to worry.  yeah.   Just found this link here at gomarcellushale about the topic and of course it affects what is deducted..

http://gomarcellusshale.com/forum/topics/market-enhancement-clause-and

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