Royalty

What kind of language is in everyone's leases about gross royalties? I just got an updated offer from CHK for gross royalties with the following language....what does everyone think of this statement?

Landman: I have received authorization to offer the 20.00% royalty rate as presented or a 19.00% royalty rate with the addendum cited below. The addendum below is the sane as what most people refer to as gross royalty. Please note that the market enhancement would result in a higher value for the gas or oil sold and after deducting the cost for the enhancement the landowner would get more royalty money than they would have gotten without the enhancement.

 

Addendum: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this Lease shall be paid without deduction, directly or indirectly, for the costs of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to extent such costs are necessarily incurred to transform the product into a marketable form; provided, however, any such costs which result in enhancing the value of already marketable oil, gas or other products may be deducted from Lessor's share of production proceeds so long as such costs are reasonable and do not exceed the value of the enhancement obtained by incurring such costs.

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Permalink Reply by Ben Elmore on April 4, 2012 at 3:59am
0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 10:38am

Ben,  I found this online...adding brine is considered 'enhancement' and if you look online just about every product, pipeline , process, is considered an 'enhancement' for making the gas more marketable.

http://water.epa.gov/type/groundwater/uic/class2/

It appears that there are many products considered 'enhancement' to make the gas more marketable and cleaner..

http://oilandgas.dow.com/news/2009/20090615a.htm

but enhancement may also mean a speedier pipeline journey as well...not always a product to enhance but a better pipeline for speedier to market...so what does enhancement mean on your contract?

I think all the owners that have this clause should get together and form a letter to the oil companies with a copy to the state asking for disclosure of this 'catch all' clause on their contracts instead of waiting til they get cheated and try to go it alone with a battle in legal dispute.

Permalink Reply by melissa humphrey on April 4, 2012 at 7:36am

This is a BIG issue. It is said Chesapeake has executed many, many leases over the last 2-4 yrs, on the premise

the provision provides they do not deduct post productions costs but finer tuned reading of the language and Chesapeake all along knows it is royalty paid after post production costs.

 

We need help with this, it is extra significant.

 

Chesapeake midstream charges .59 cents / MCF for gathering et al.

so 220 gas or 1.61 ??

I will dig around, be careful.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 10:16am

Let your state legislation know of the 'catch all' part of the market enhancement clause.   They understand that in Pa. ...it is state law that a business is not to conduct business in a 'catch all ' way.

Pls let them know and the more of you that send emails or regular mail or even links to our discussions will let them know that the people are very unhappy especially when they don't even know if they can cash the first check with this clause on their contract.

Permalink Reply by Mike h on April 4, 2012 at 9:14am

Note the last part:

"...so long as such costs are reasonable and do not exceed the value of the enhancement obtained by incurring such costs."

 

So basically, they cannot charge you more than the value of the enhancement. I see no downside in such an addendum clause and there could be an upside. IANAL.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 10:18am

The only upside is if the charge for the enhancement is fractional on the dollar...look at the below example.  and Mike H   do some example figuring yourself..and see what the cost would have to be under for you to still see a better profit with enhancement costs being shared....for at the example below it would have to be fractional in cost..but how would you know what it is?

 but being unknown it cannot behoove the Lessor to take their chances with that...it must be disclosed with the cost before enhancement ...so include that in the contract.   That the Lessor must approve of the enhancement as a price change that would result in more royalty profit for the Lessor...would they agree to that???????

look what one company did to someone expecting a fair market price for their royalty check...

http://gomarcellusshale.com/forum/topics/should-we-need-to-purchase...

Permalink Reply by Mike h on April 4, 2012 at 3:16pm

VG,

Your lease should allow you the right to perform audits. You should really do that. When my property ends up in a unit I plan on having an audit done as appropriate (certainly first year or so - it depends on when it actually goes into production. After that we'll see.).

The thread you refer to is a different issue and would require a different clause in your lease to protect yourself. That clause would require arms length transaction and reference prices to prevent what happened as described.

IANAL - Do your own homework even if consulting with an attorney.One good starting point is "Oil and Gas Law in a nutshell" published by West, author is John S. Low.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 5:54pm

the right to perform audits...hmmm   You have to wonder what kind of company one is dealing with that we as landowners have to make sure that we even can look at the books persay...    I know a few dry cleaners that might give you a receipt and even a list of the chemicals..but probably won't let you in to check their books.

thanks Mike h.   but my lease (which is inherited) has no clause regarding audits and i suspect any lease in that area of NE Pa that was signed without a land group or atty. in 2007 or earlier doesn't either.  

You know it is one thing to negotiate a contract for bonus and royalties but when one finds out later that EVERY clause had some tricks to them....then it is really a disappointment in modern times of how these particular corporations treat their prospects even those prospects who are U.S. citizens who pay tax dollars to help in the gas/oil handouts from the government.

 This is the very first kind of contract lease I have ever seen in so many ways to "trick so we can entreat ourselves" contract for new uninformed landowners....and I have been on earth over 60 years...and have seen many types of contracts.  Of course I must also mention that the pipeline contract was also similar to the 'trick so we can entreat ourselves' contract...almost identical.   You have to wonder where they found the lawyers that can come up with so much wording that would confuse anyone that read it without knowledge of oil/gas production.  

You would think Nancy Pelosi would know to buy stock in the oil companies in the Marcellus...it was reported that Nancy stated about the healthcare program..we have to pass the bill, then you can find out what is in it'.....so goes the lease signing for some before the rest of the patrons caught on.

http://www.youtube.com/watch?v=KoE1R-xH5To

couldn't help but add that, really is a complete analysis of signing a gas/oil lease in ignorance...Excuse me, but I am trying to have a good attitude over losing thousands of dollars...and at the same time warning those who have yet to sign gas/oil contracts and helping those that have signed to again take a look at the clauses.

Permalink Reply by Mike h on April 5, 2012 at 12:00am

VG,

It is a complex business negotiation/contract. This is why you keep on hearing the advice to retain legal consul.

I agree people have signed some dumb leases.... but people have the right to do that. The right to make choices inherently includes the right to make bad choices.

I know one person who signed to get the signing bonus (a pittance of what he would have gotten if he had waited even a couple months) because the signing bonus would cover his credit card bills from buying Christmas presents. People get bedazzled by the signing bonus money and lose sight of everything else.

 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 9:39am

Hi, I see that there are two discussions online at this forum regarding the same subject.   The Market enhancement clause...and I am glad to see others discussing this...but for some it is too late to discuss as it is signed on their lease...so what can we do about it.   we can ask our state legislators to look into this type of non-disclosed 'catch all' clause in the natural gas lease.  Even forward our discussions to them or excerpts to them to review.   here is the link to the other discussion:

http://gomarcellusshale.com/forum/topics/market-enhancement-clause-1

I have written the below so you can really take a look at what you are doing...now remember to read the other discussions here ...but do know that most people with a lawyer did not get that market enhancement clause on their contract...so why should you?

Please some of you take the time to consider the math about this with the 'unknown' value of enhancement.

If the market for Natural Gas is 3.00mcf and the oil company decides to enhance beyond to get a better price and uses some added value product or process and increases that amount per mcf to let's say 6.00mcf but the cost of that 'enhancement' amounts to 2.00per mcf.   The new enhanced market value is now at 6.00 but your royalty , let's say is 15%gross (notice I said gross, there will be other costs if it is net) then your royalty payment on the new market value enhanced at $6.00mcf  would be 90cents per mcf minus your part of the enhancement cost of $2.00per mcf.   Which would give you the Lessor perhaps owing the Lessee for .10cents per mcf rather than the .45cents you would have received at the 3.00mcf sale rate.  How has that helped you?   Why not add to that clause if you are unable to delete it that you the lessor retains the right to decide whether or not to enhance the gas based on your profit not being an expense to you without profit.

   and if the cost is to be completely absorbed by you the Lessor then you do the math...it would leave you owing them $1.10 each mcf enhanced.   So you see why you need to have disclosed to you the value and means for 'enhancement'.  Notice the royalty owners at net are going to see very little of their royalties if enhancement is at a high cost as they will also pay for other production costs, etc.   For the oil companies to enhance the product they still gain if you are paying at least half and surely they gain if you pay all.  Now I used in this example a cost of 2.00per mcf enhanced...what if it was 3.00mcf instead or maybe more....see, we don't know...it could be maybe even a fraction of a dollar...we just don't know, why, cause it was not disclosed and was meant as a 'catch all'.

Should we just hope and pray that enhancement is not as high as this example?   should we think that enhancement only means when they send to a Cracker plant for processing (and who would pay that transport cost for enhancement?)...you see, we need to know ahead of time or they need to remove that clause from every contract they have done.   In Pa. our state senators should be making sure that the landowner or royalty owner has a Minimum of 12.5 percent of the sale regardless of the type of net or gross or enhancement...there should always be the result of a minimum of 12.5% royalty paid to the Lessor with no costs deducted from that.   These types of clauses like the market enhancement one was to override what the state had done to legislate a minimum royalty...and somewhere the state of Pa. fell under the bus and didn't see this and establish that it should still be a min. of 12.5percent royalty compensation.   Pls tell you state legislators about this.

And for those of you that work at oil companies say this is just outrageous...then you tell me what is enhancement and when does it take place and how much could it cost .....as it is real quiet from you all on these discussions of 'market enhancement clauses' except those that pipe in and say, 'stay away from that clause."   where oh where is there any disclosure or informed info in the value of this clause ...I see it as an absolute "catchall".  which in some states is considered unethical business practices.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 5, 2012 at 6:54am

but how can one know (esp. if it isn't in their contract to know)...and how can a landowner trust the oil company to give reliable information regarding their royalties and even what the NG marketed for?    I read that one man found that Chesapeake was selling the NG at below market cost  to a sister company of Chesapeake, paying the royalty at that price, and then selling the NG to another company at market price.

 

Permalink Reply by Kathleen on April 5, 2012 at 7:08am
That's what some eagle ford landowners are complaining about. They said its chesapeakes way around gross % with the wording at arms length sale at well head. I have that wording so it worried me. Who's to,say what fair market price is anyway if the wording of, at that days trading price is not added to the clause.

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