Gross vs Net considerations

Our attorney pointed out something interesting today. We were offered a gross, no deduction lease for some property in a couple counties. It was gross "at the wellhead". One county is dry gas only (Doddridge) and one county could be either wet or dry (Tyler). The interesting part is that we might want the price at the wellhead, not at the point of sale if it is dry, since the point of sale price might be lower.  If it is a wet gas well, the price would probably be higher at the point of sale after processing. However, if we want that price, they want to take out processing charges. The thing to remember is that just because they offer you a gross, no deduction lease, THAT might not be the best way to go if you had to pick one or the other. Obviously, we all want a no deduction either way, but if you had to choose AND you are in a wet gas area, the choice is not as easy as it looks since you might be better off with the processing fees taken out and getting your money at the point of sale. You need to find out how the company determines wellhead pricing. Also, we have one well in Wetzel which is producing wet gas and another well just a couple hills away which is only dry. Makes the choice that much harder. Any thoughts about this?

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Permalink Reply by Joseph-Ohio on April 11, 2015 at 6:50am
I've read about landowner royalty calculations based on prices paid by buyers in 'arms length' transactions (taking that to mean no sales to subsidiary / sister companies would be permitted).

All of your questions are important considerations but I don't know if any answers would be made available to any landowner / lessor and especially so if the lessee is out to hoodwink the lessor in the 1st place.

Too tough to call until you see an offer to lease and even then it may be / probably would be.

Looks to me like all a landowner / lessor can do is hope for the best and settle for whatever he / she can get.
Permalink Reply by Kyle Nuttall on April 13, 2015 at 6:07am

I know that Antero's Market Ehancement clause includes language that says that the lessor gets what the company gets, no more, no less.  What the lease says and what happens in real life could be quite different, of course.

Permalink Reply by Joseph-Ohio on April 14, 2015 at 11:57pm
Yeah - I read ya loud and clear.

Who can tell especially factoring in all the horrer stories we're all reading about.

Some of the posts and replies I'm reading describe how folks (landowners / lessors) sign up into what are thought to be great contracts; and turns out they also describe how their counterpart (lessees) just don't honor the terms and it all ends up in the courts anyway.

The essence of any contract is to preclude / eliminate argument / court battles - that's supposed to be the entire purpose that contracts and leasehold agreements exist in the first place !

Alot of gaming going on looks like to me - way too much.

Actually any gaming in business is too much.

It's all reading like a lot of bad jokes as opposed to sound industrial effort to me and it seems to get worse with each passing day.
Permalink Reply by Leo S on April 17, 2015 at 12:55pm

Thank you.  I wonder if it includes hedges, derivatives, and kickbacks.  These are important because an E&P it seems will drill and pay lesser royalty amounts, when prices are down, but still capture higher revenues due to its hedges, etc.  I am ok with getting what the company gets, and I would want to include all financial instruments for the well. Not sure that is truly the case.

Permalink Reply by Gary L on April 3, 2015 at 2:44pm
Permalink Reply by bo boboski on April 4, 2015 at 12:19am

Who, may I ask, goes to the wellheads and buys gas,or oil,or wetgas products????

Permalink Reply by Barb Smith on April 4, 2015 at 12:54am

There is no such thing as gross, wait till you are unitized and placed into production and you see the royalty statement, there will always be this column called deductions with no explanations what they are for, its a fact of life in the oil and gas business. The only thing that is GROSS is the amount of money they will take out of your royalty check.

Permalink Reply by Frank Walker on April 4, 2015 at 1:13am

Hi Barb

Your assertion is not universally true, though it is true in far too many instances.  I myself, for example, with a no deductions lease, have never had a deduction taken out of my royalty payments;  at least not yet over three or four years.  And trust me, I'm far from being alone.  I do think deductions might lie ahead for me, though, in the future.

Also, as I've just written nearby, there is another way for the gas companies to penetrate a "no deductions" lease, by changing the point of sale.

Permalink Reply by Kyle Nuttall on April 9, 2015 at 9:30am

If your lease does not specify deductions, then the company cannot take them.  Take some time to read the Tawney vs. Columbia Natural Gas case.

If they're taking deductions, and they're not specified, then you are getting ripped off.

I suggest you read through your lease, and if you're not sure about what it says about deductions, talk with your attorney.  If you need an attorney, give me a call.  304-473-1403.

Permalink Reply by Frank Walker on April 4, 2015 at 12:59am

Hi Bo

Natural gas, traditionally and historically, has never been sold at the wellhead.  But this is not to argue it cannot be accurately valued at the wellhead, provided the "netback" calculation is done in an honest and forthright manner . . . . which too often it is not!

But there is more, and this should be cautionary for us landowners:

Simply because natural gas is not today sold at the wellhead, one would be unwise to assume this never will or could happen.  Believe me it could, and not too much imagination is needed to envision how!  Moreover, for most of us, should wellhead sales ever commence, our leases will not protect us from receiving for our gas a price attributable to the lower value of gas at the wellhead.

The only leases which protect from this are those which specifically prohibit wellhead sales.  Very few leases contain this provision.  Personally, I've never seen even one such lease, though I know a few exist.  I can tell you I do not have that provision in my lease.  I surely wish I did!

Permalink Reply by bo boboski on April 5, 2015 at 4:27am

Check my lease out.

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Permalink Reply by Kyle Nuttall on April 6, 2015 at 11:04am

20% royalties!  Very nice!

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