Help with lease interpertation .

Thanks in advance .

 I am considering buying a small parcel in NY that has an older gas lease in existence.

 As many know the lease has a few pages , here is the part that I am looking for comments on .

 " The royalty shall be 1/8  of the proceeds realized by the lessee   from the sale there of calculated at the wellhead , provided that the lessee shall have the continuing right to purchase such production at the then prevailing wellhead price "  

 They way I read this paragraph the gas royalty paid is without deductions . Agree , disagree ?

 Thanks again for responsible comments.

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Permalink Reply by wyalusing jim on August 15, 2013 at 8:47am

the lease term, "at the wellhead", usually means that there will be deductions unless specific or all deductions are explicitly excluded within the lease.

even when some or all deductions are explicitly excluded, in some cases, such as recent court rulings in texas, deductions may still be legal.

the bottom line is, absent recent case law within the jurisdiction of the lease location, it's a minefield if the lease says "at the wellhead".

if you think it through, in order to arrive at a wellhead price, one must take the price at the point of sale in an arms length transaction, and deduct all costs to get the gas from the wellhead to that point of sale.

in order to fully understand this, I would take the lease to a competent qualified lawyer of good repute.

good luck finding that lawyer too.

wj

Permalink Reply by jett on August 15, 2013 at 9:43am

WJ,

Do you know where I can find information on these Texas cases? I know I've read them but can't find them again. Any help toward finding them will be appreciated.

Your explanation of how 'at the wellhead' price is calculated is also appreciated by those of us who aren't familiar with oil/gas terminology. 

Permalink Reply by Mark McGrail on August 15, 2013 at 10:03am

The simple answer is I disagree.

At the wellhead means they can charge you to move the product to the point of sale, and they will.

Permalink Reply by bungalow_steve on August 15, 2013 at 10:09am

The "prevailing wellhead price" clause indicates this is an old lease (pre 80's), when the wellhead price was regulated by the government. In the old days you got whatever the government set the price to be.

Nowadays, wellhead price can be intepreted to be the price received by the gas company minus the post processing costs. That is, the gas exits at your wellhead then goes through some pipes and processing (which increases the value of the gas), gets sold, the company then figures out what the wellhead price is by substracting the processing cost. The intent is to figure out what the gas is worth as it exits your property, the problem is the gas is not sold at your property, but miles away at some other point. So they have to estimate what it is worth at your property, that is where the deductions come in. For example, they sell the gas at $4, but it cost them $1 to get the gas from the wellhead to the point of sale, so they give the landowner $3 for his gas (1/8 of the total output, in your case).

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