Royalty Language

Hello:

This is my royalty addendum language. Does it sound okay? What does market enhance gas clause mean?

 

Lessor’s Royalty: For all Oil and Gas Substances that are physically produced from the Leased Premises, or lands pooled or unitized therewith, and sold, Lessor shall receive as its royalty seventeen percent (17.00%) of the sales net proceeds actually received by Lessee or, if applicable, its affiliate, as a result of the first sale of the affected production to an unaffiliated third party, less this same percentage share of all production, severance and ad valorem taxes. In the event Lessee compresses, treats, purifies or dehydrates gas, including casinghead gas or other gaseous substances (whether on or off the leases premises) or transports such gas off the Leased Premises, Lessee in computing royalty hereunder may not deduct from such price the actual charge incurred by Lessee for each of such functions performed. However, if gas is processed or gathered, transported, or treated by an unaffiliated third party before or at the point of sale, then Lessor shall receive its royalty on the net proceeds received by Lessee after such third party gathering, treating and transportation charges. For royalty calculation purposes, Lessee shall never be required to adjust the sales proceeds to account for the purchaser’s costs or charges downstream of the point of sale.

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1w1vl8clda7t4Permalink Reply by 1w1vl8clda7t4 on August 4, 2012 at 4:44pm
Two things you should have in your lease:
1. Lessee can not "Net Back" cost to Lessor;
2.Lessee can not charge "Enhancement Charges" after product becomes "Marketable."
Permalink Reply by time will tell on August 5, 2012 at 1:29am

Good advice BGJ .

I won't be fooled again .I still have a good amount of land left to lease .

Permalink Reply by Frank Walker on August 5, 2012 at 1:37am

Agreed, time.  Please refer to my post here from yesterday:

"Market enhancement" is poison

However, importantly:

Landowners reading this discussion must take to heart that once the industry becomes aware the term "market enhancement" no longer works for them as a ruse, they will change the term, the wording, slightly so as to make their thievery less obvious.  The are a pack of jackals.  They will employ scare tactics and misdirection at every opportunity to lease you on the cheap.  And they will do everything in their power to saddle your royalties with endless, indefensible, unfair deductions, even to the point where the deductions are larger than the amount of royalty remaining!!!

Industry people often portray themselves as folksy friends.  All too frequently, they are instead your worst nightmare, an extreme threat to your welfare and prospects, and those also of your progeny.

Permalink Reply by Frank Walker on August 5, 2012 at 2:09am

Here, once again, the link to that important article.  Every landowner needs to read this:

Link to article

To be fair, there exist a very small number of "good guys" out there.  Such companies do not have shills posting on websites such as this.  For them, it is unnecessary since they are dealing honestly with landowners.

It's interesting to me the honest folks are not Americans.  The worst of the worst are the American companies from the Christian heartland of the American southwest.  These two-faced hypocrites live their lives one way on Sundays, and an entirely different way the rest of the week as they lie to, cheat and steal from landowners.  It's no wonder so many of these miscreants are heavy drinkers.  I'd be a heavy drinker, too, if I lived my life like that.  I'm no Christian Bible thumper, but God blessed me with success anyway.  What I take most pride in, though, is that my success did not come at the expense of my fellow human beings.  It's no shock to me these hateful industry people are so sensitive and defensive.  If I had done unto others in my life the harm they have done, I'd definitely be considering suicide.

1w1vl8clda7t4Permalink Reply by 1w1vl8clda7t4 on August 5, 2012 at 3:21am
The best protection any landowner can have against royalty discrepancies is to make sure the denominator is fixed and can never change on a per unit basis when calculating royalty payments, and the royalty payment will never be calculated on the total acreage on a "consolidated lease" basis. Otherwise, and how most O&G companies word their leases, your denominator will be based on whatever the total acres are in the "consolidated leases," they record at the courthouse...and under Ohio law this number can be infinite in nature, and can change like the wind. One day your 100/640....the next it's 100/1500 etc. In their leases they state no unit size is to be over 640....but that's not what they base your royalty on.
Permalink Reply by Kenny on August 5, 2012 at 4:15am

BGJ

Your royalty percentage is always based on a per unit basis.  These numbers are figured during the division order process.  Example:

You leased a total of 100 acres to Company A with a 12.5% royalty clause.

-Company A forms South Unit which is a total of 640 acres.  Of that 640 acres you have 64 acres in it.  So, you have a total of 10% of the unit.  10% of 12.5% is 1.25% or 0.0125.  That is your royalty of the South Unit.  So if the well made $1000 in a month, you would get paid $12.50 and the other landowners would get their proportionate share as well.

-Company A forms North Unit which is a total of 640 acres.  Of that 640 acres you have 36 acres in it.  So, you have a total of 5.625% of the unit.  5.625% of 12.5% is 0.703125% or 0.00703125.  That is your royalty of the North Unit.  So if the well made $1000 in a month, you would get paid $7.03 and the other landowners would get their proportionate share as well.

In situations like this, you would get paid royalty for each unit separately (even though they would probably be on the same check)

1w1vl8clda7t4Permalink Reply by 1w1vl8clda7t4 on August 5, 2012 at 4:51am

I'm not arguing that point…the point I’m arguing is the “floating” denominator. A “Production Unit” that ODNR puts together and that is on the Well Summery Card is not the same unit O & G companies figure royalties on. O & G companies figure royalties based on the “consolidated leases” or DPU filed at the courthouse. And unlike the unit ODNR approves…the DPU that O & G companies record can and do change because of the language in their leases. For instance, the Eichelberger Well in Ashland County has 381.4 acres on the Well Summery Card, but the royalties are figured on a much larger denominator of 627 acres. (Consolidated leases recorded at courthouse) We will assume for the sake of simplicity that a landowner owns 100 acres and a gross 12% royalty:

(100/627).12=1.9%

(100/381.4).12=3.1%

Now we will assume O & G company decides to increase their DPU to 1500 acres:

(100/1500).12=.80%

This is why it is imperative to stipulate in your lease what the denominator will be on a per unit basis when calculating royalty payments.

 

Permalink Reply by Kenny on August 5, 2012 at 4:08am

Posting on this site does not make a oil/gas man a "shill" as you call it.  I am on this site simply as a way of keeping up with what is going on in the play and to try and educate landowners.  However, it makes it pretty hard to educate landowners who are convinced that everyone they talk to is trying to screw them.

I was successful before getting into oil/gas and I will be successful without it, I have proven that.  I take great pride in being honest with landowners and I tell all of the landmen that work for me that they will be fired on the spot if I find out they are lying to landowners.  You will ALWAYS know what is on my mind whether you like it or not but I will NEVER lie or tell half truths.

If you don't want to lease, then don't lease...that's your right but don't go out spewing hate about an industry that you know nothing about.  I wouldn't belittle your knowledge of the career you chose...

Permalink Reply by Frank Walker on August 5, 2012 at 5:08am

I leased all my land several years ago to be drilled for natural gas production.  And I know a great deal about your industry and about people like you.  I studied the subject intensively for over two years prior to leasing.  I turned down many lease offers for over ten years before I finally signed.

I have witnessed firsthand the damage you have done to my neighbors and their unhappiness.  It is residue of the unbridled greed of your industry.  Your industry is known for the lying and cheating that is your hallmark, and for the absence of honest dealing that characterizes so many of you.  Do not anticipate you can rape landowners and then be loved, adored, and respected.  Such beliefs are delusional.  You are what you are.  Landowners need to know in advance what you are and to deal with your venal kind accordingly.

1w1vl8clda7t4Permalink Reply by 1w1vl8clda7t4 on August 5, 2012 at 5:22am

Here is an ODNR "Developmental Lease" that could be used as a model lease. Is it 100% with no holes…absolutely not, but it is a solid lease. O & G companies will say they won’t sign a lease with this language in it…don’t let them fool you. Land is land…100 acres owned by ODNR is equal to 100 acres owned by any individual landowner. The only difference is POWER. Most individual landowners don’t have the power or a Harvard Law school graduate representing them like the State of Ohio does…stand up for what is yours.

 

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Permalink Reply by Frank Walker on August 5, 2012 at 6:06am

Good post, BGJ.  I hope it is helpful to the OP.

To tell the truth, though, the only way I've found for landowners to have any chance for success against the gasco behemoths is by forming up into groups.  And group formation runs contrary to the instincts of many rural folks, myself included (I'm about as rural as they come - have lived rural all my life except when I was a college undergrad.  Even managed to live "on the land" when I was in grad school (at a different institution - long commute but worth it to avoid the city).)

Here where I live it was the groups that finally broke the stranglehold gas companies had on us for so long.  It was groups that got our offers routinely up over (often well over) the $5000/acre barrier (that was tough to do back in the day).  And it was groups that broke through on lease language and won us the better terms I write about here from time to time.

Rural folks are often not keen on groups.  But without 'em the gas companies play their divide and conquer games "all night long".  And they are masters of those games, threatening landowners, pitting one landowner against his neighbor,  promising non-development or stealing of gas if the landowner does not sign a really bad lease.  They have a bag of despicable tricks larger than Santa's sack.  It breaks my heart that so many rural people have been their victims.    

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on August 5, 2012 at 5:18am

 I remember brown marconium aka marcus  taking a jab at me when he had no clue of what he was  talking about .

 


I'm thoroughly confused.

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