Gross Proceeds at Wellhead; Terms, wording, good or bad ?

I am asking for feedback, opinions, recommendations and good or bad experiences with leases or negotiations with involving calculations and compensation based on proceeds at the wellhead.  I have found very little to no information in previous post regarding this type of lease so this would be a very beneficial topic for educating a lot of other members on this topic.

We received a Gross Proceeds Clause in a lease contract as follows:

"Gross Proceeds at Wellhead. It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, royalties payable on gas and gaseous substances, including casing head gas, shall be based upon the MMBTu value of unprocessed gas at the wellhead, free of all costs, charges or deductions of producing, treating, compressing, transporting and marketing said gas to such purchaser, which royalty, however, shall be subject to such production taxes and severance taxes as are properly allocable thereto."

Questions:

1) How is "Wellhead" gas valued or assigned a value ?

2) How would oil or other liquid substances be valued at the Wellhead ?

3) Is a "Gross Proceeds at Wellhead" an oxymoron being used as there will be no expense for treating, compressing, transporting and marketing.  Also should the production and severance taxes not be allowed on a gross proceeds lease?

Thank you for your replies !

Views: 4872

▶ Reply to This

Replies to This Discussion

Permalink Reply by Joseph-Ohio on December 2, 2015 at 9:46pm

'.........notwithstanding any language herein to the contrary, ...........'

That above phrase in itself (as I would interpret it) negates the intent of being paid on the basis of 'Gross Proceeds at Wellhead'  and also negates the following phrase : 'free of all costs........said gas to such purchaser,'.

Also (as I would interpret it), the last phrase of your sample paragraph : 'which royalty, however, shall be subject to such production taxes and severance taxes as are properly allocable thereto.' to my understanding, actually delineates / identifies / is permissive of those types of deductions from royalty payments.

Point is (as I interpret) those phrases are not representative of a 'Gross Proceeds at Wellhead / No Deductions' type of Leasehold Agreement, and totally open the door to deductions (should the lessee choose to levy such charges).

For those reasons I would interpret it all as 'doubletalk'.

To me doubletalk in a Leasehold Agreement is bad - not good.

JMHOs

Permalink Reply by Booger on December 7, 2015 at 7:34am

"notwithstanding any language herein to the contrary".........means that this takes precedence over anything else that contradicts.

it kindof sounds the opposite............but it does mean that it rules over any contradiction.

Permalink Reply by Joseph-Ohio on December 7, 2015 at 8:26am

I would read it / and interpret it to be / mean the opposite myself.

But that's just me and I'm no Attorney / Magistrate / Judge either but I'd bet it might just go that far.

I think it's at least arguable and I'd bet a nickel it has been argued and / or is being argued.

Bad language the way I see it Booger.

I wouldn't want it in my lease.

Good luck dude - we need it the way I see it.

Permalink Reply by Booger on December 7, 2015 at 8:32am

im no lawyer either....I read it just like you did at first.........but this is what a good lawyer told me........the term is used very commonly in many contracts..........

Permalink Reply by Joseph-Ohio on December 7, 2015 at 8:43am

Worrisome all this - spooks me out.

Permalink Reply by Joseph-Ohio on December 15, 2015 at 5:11am

Looked it up on line Merriam-Webster.

Notwithstanding | Definition of notwithstanding by Merriam-Webster
Merriam-Webster › dictionary › notwiths...
Mobile-friendly - preposition not·with·stand·ing \ˌnät-with-ˈstan-diŋ, -with-\. :

without being prevented by (something).................

Good luck as it seems to me to be (at least) arguable.

Permalink Reply by Buckets on December 15, 2015 at 4:36am

You're correct Booger.  It's a way of stating that, no matter what the rest of the lease states, this is the language that will be considered valid.

Permalink Reply by bo boboski on December 2, 2015 at 11:08pm

Well, since they don't sell the oil&gas,"at the wellhead", you open the door for a lower price. They sell it after it's been transported compressed, maybe separated&treated. So the value of it at the wellhead can be much lower than they actually get for it. Who determines the value "at the wellhead" ? Probably the producer, So that's a sneaky way for them to pay royalties with those deductions taken out. They caught us landowners unaware! A couple words in the lease can give them a loophole to give us the shaft!

Permalink Reply by Joseph-Ohio on December 2, 2015 at 11:44pm

Yes 'bo' - all that too.

For the Natural Gas (and historically) hasn't the 'Henry Hub' price been used to tie down the value (price per mmbtu) to calculate royalty paid to the landowner (for a 'No Deductions Gross Proceeds' type of lease) ? ?

Assigning a per BTU value to the Natural Gas would seem to stop the doubletalk from taking over seems to me.

Permalink Reply by mark on December 2, 2015 at 11:54pm

mornin folks
as I understand it at the wellhead gas is virtually useless as a marketable product  and totally agreeing with the gentlemen above that royality language is double talk and also look for the dreaded MARKET ENHANCEMENT CLAUSE just for curiosity sake are they offering net or gross for your percentage? good luck and keep us posted

Permalink Reply by Joseph-Ohio on December 3, 2015 at 12:57am

Thanks for your interpretation mark.

In the context of a Lease Agreement, I thought the words 'at Wellhead' (in reference to the Natural Gas Production), meant / was just Natural Gas slang / jargon used to define the total amount of the Natural Gas being produced by the well, which would include NGLs (Natural Gas Liquids) and NGC (Natural Gas Condensate) - that is to say that there are no other constituents being considered / paid for seperately.

You advise it is another play on words.

Perhaps all Leases should include a 'glossary' of definitions of key words such as this ?

But, the more words the more opportunities to twist them exist.

It's a mess out there.

Permalink Reply by Richard T, McFall on December 14, 2015 at 10:21am

My take is that this is about as good as you can get.  Gas at the wellhead is sold by the mcf or dth (decatherm) If it is sold by the MCF rate, the wellhead price is adjusted for BTU content. 1 cubic foot is held to contain 1000 BTUs.  If more, the price should be adjusted upwards based on BTU content which includes nat gas liquids.  A proportion if severance taxes is fair.  If you can get better, do it, but do not allow deductions for production or gathering costs or separation costs, as these belong to the producer and can be used to screw the landowner.

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service