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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Permalink Reply by eric place on August 2, 2012 at 2:40pm

Greg,

  Our lease has similar language.  We have an addendum that prohibits deductions for transportation, gathering, etc. etc..  The lease only allows for "enchantment" cost deductions.  They are deducting from our checks for gathering.  When I questioned the company about the deductions and the legitimacy of them, the response was "Natural gas has no value at the well head, therefor it needs to be sent to a distribution line to arrive at market where it HAS value (ergo enhancing it's value) and the landowner should share in the costs." This is the part of the story when I start using cuss words.  So I will stop right here.

Permalink Reply by Frank Walker on August 3, 2012 at 8:37am

Guys, speaking to you as a fellow landowner:

The so-called "market enhancement clause" is one of the oldest ruses in the book.  It is poison.  I first recall seeing it in PA.  A group there several years ago, in or nearby to Wyoming County, somehow let Chesapeake sneak this clause into their lease.  This was horrid lawyering of the first order.  But in those days some lawyers knew a lot less about O&G leasing than many know today.  Anyway, you can sum this clause up in one word:  trouble!!  It provides an opening for any gas company to lard up your royalty payments with never ending deductions.  And the opening is as large as the proverbial "Mack truck"!

Permalink Reply by Kenny on August 3, 2012 at 8:43am

Frank

Typically gas is not of a quality to be sold straight from the ground and it has to run through several processes for it to become a marketable product.  Landowners are a part owner in the gas that is produced from the ground and it is only fair for them to pay their proportionate cost to make the product marketable and able to sell it at market.  It is a standard clause that has been part of oil and gas leases for as long as they have been producing gas.

Permalink Reply by Frank Walker on August 3, 2012 at 8:56am

It sure isn't in my lease, pardner.  I saw very carefully to that.

This is a landowner website.  Bear that in mind when you post.  We do not support the industry viewpoint here on matters like this.

You are correct that clauses such as this have been inserted into the leases of unsuspecting landowners forever.  Some landowners actually signed such leases without consulting a lawyer.  In other instances, as I alluded to above, lawyers themselves were not smart enough to ferret out crap like this.  There is a whole raft of items of this nature which cost honest landowners money and which line the pockets of gas companies.  Read here if you want to see how we like being treated as you believe we should be treated:

Learn how the industry is treating some landowners

Are you smart enough to understand we will never smile as you attempt to rape us?  Instead, you (gas industry) will come to feel the sharp, stabbing pain from our shiny blade.  We will fight you to the death over injustices like this.  And the fight will be in our courts, not in yours. 

Permalink Reply by Kenny on August 3, 2012 at 9:04am

Frank

It sure seems like someone has definitely jaded your point of view.  So what your saying is...the oil/gas companies should cover ALL of the costs for making YOUR oil/gas a marketable product?

Keep in mind that not all deductions from royalties are as a result of market enhancement.  Oil/Gas companies are also required to deduct the landowner's share of severance, conservation, petroleum and other production related taxes.  That is Uncle Sam, not the gas company.

Again, I am not on here to tow the company line...I am here to help educate landowners so they can make more informed decisions.  I don't and won't actively solicit landowners on behalf of my client.

Permalink Reply by Frank Walker on August 3, 2012 at 9:31am

Yes, of course that's what I am asserting.  From our standpoint that is the best outcome.  Of course we want what is best for us.

But perhaps more importantly, I want other landowners to know that a great many Lessors have the kind of lease to which I'm pointing here.  I have one; thousands of others do as well.  Industry shills will try to sell you on the unfairness of their having to pay for finishing and marketing of the gas.  That's silly!!  It's not fair and it's not unfair.  When you are doing a lease everything is negotiable.  Efforts to persuade landowners to pay these costs are merely a mechanism gas companies routinely employ to enhance their bottom line.

Here is an important point:  There is nothing whatsoever wrong with any gas company attempting to shift costs to the landowner.  If I were a gas company, that's what I would do.  What is astounding is for landowners to accept such crazy bullfeathers and sign their name.  What landowners need to do instead is walk away.  If we all did that, the gas companies would be forced to treat us respectfully.

When I did my lease it was on a "take it or leave it" basis.  I was fully prepared to just walk away.  Instead, my gas company agreed to my terms and we had a deal.  And let me assure you, they still made a pile of money from my land and I'm glad they did.  They deserved that money.  And I deserve the extra money that comes my way each month because I didn't sign a ridiculous "market enhancement" clause.

Finally, for the record, I didn't agree to any deductions at all, market enhancement or otherwise.  No way would doing so have been in my best interest.  Agreeing to deductions is like slitting your own throat.  If you doubt me, read the article I posted, above.  I feel sorry for those landowners.  They are great, hard working people.  They deserve better . . . . . . much better!!

Here is the link once again, for your convenience:

Link   

Permalink Reply by Kenny on August 3, 2012 at 9:53am

I have read the article, multiple times.  I do not agree with CHK charging back the post production costs but as the PA Supreme court stated:

"that post-production costs such as gathering, compression and transportation are "properly shared" by royalty owners through proceeds deductions, unless the lease expressly provides otherwise."

 


Most major operators won't sign a lease without market enhancement, most of the companies that do are the ones just looking to flip the lease.  There are however, some super majors that are looking into "cost free royalty" but they will reduce the amount of the bonus payment to offset the cost.

Permalink Reply by Frank Walker on August 3, 2012 at 10:38am

I see what you're trying to do.  You're trying to frighten and intimidate landowners. Your tactics are not appreciated on this landowner website.  None of what you assert happened to me.  I cannot go into detail because it is too personally revealing.  But I want others to know neither I, nor many, many others suffered the outcomes claimed by this industry person as regards diminished bonus, flipping, etc..  My bonus was very large.  I'm still with the same company that leased me years ago.  This kind of talk is intended to persuade landowners to do what the industry wants them to do.  It's not appreciated here.  It is pure, unadulterated, unfiltered, propaganda.  And when it works, as so often it does, decent, honest, hard working landowners are badly hurt.  We deserve better than the kind of tripe this industry insider is dishing out.  Do not deal with people like him.  You don't have to.  And you should not.

Permalink Reply by Kenny on August 3, 2012 at 12:27pm

Frank, I dont know who upset you to get you this up in arms but I can assure you that I am not trying to frighten nor intimidate any landowner.  I have always been up front and honest with any landowner that I have ever dealt with, they will all attest to the same.

What I said earlier about flipping leases and diminished bonus payments is a fact from what I have seen in the Utica over the last month.  I have read numerous company leases and have read their royalty language.

If you got a high bonus and cost free royalty, good for you....just know that it is not the norm.  You vehemently attacking people that work in the industry does nothing to promote a working relationship between landowners and the oil/gas companies.  At this point, you are acting no better than a landman that lies.

All I have tried to do is make sure landowners are educated and answer their questions, not once have I pushed an "agenda" on this MARCELLUS SHALE website....its not just for landowners.

0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on August 4, 2012 at 4:14am

This is a landowner website.  Bear that in mind when you post.  We do not support the industry viewpoint here on matters like this.

 


Wow.  Really?  Doesn't the industry sort of drive this whole play?  You're not drilling anything, industry is.  You're not taking any financial risk, the industry is.  It's not out of bounds for someone to post the opinion of an industry, especially when this website is for informational purposes.  Don't you want to know and understand why E&P companies do what they do?  Isn't more information--from any source--better for landowners?  Hasn't more information in the hands of landowners resulted in higher bonuses, higher royalties, better water protection, higher pad payments and a host of other things?  Exploration does not happen in a vacuum.  If you want to plug your ears and cover your eyes, ignoring everything that comes your way, that's fine.  But don't discourage others from learning all they can from whatever source is willing to talk.  

1w1vl8clda7t4Permalink Reply by 1w1vl8clda7t4 on August 4, 2012 at 12:14pm
I see your true colors are starting to show Marcus...if it wasn't for landowners you and your cronies would be flipping burgers at McDonald's....and don't forget it!
0i7okn54zwbdoPermalink Reply by 0i7okn54zwbdo on August 4, 2012 at 1:18pm

I'm not sure who my cronies are but I'm glad to see that have a total lack of respect for people who work entry level jobs at McDonald's.  Must be nice to live the high life and spew hate toward those who have a less fortunate lot in life.

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