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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0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 5, 2012 at 7:20am

That is why they have postings of the 'days trading price' ...because that is supposed to be 'fair market value' ....yet you might buy laundry detergent at the grocery store for 3.99 gallon and the same laundry detergent is for sale at 2.99 in the same city at another grocery store.

So it is with the sale of NG ...and they know it.   And the best thing the landowner has going for them is a willing investor to check the prices to see if they are getting their investments worth from the oil company...and then you have to depend on their business tactics as well. 

If some WWII veterans had come home to find these things in their America after spending years over in countries risking their lives and some receiving losses of their own physical bodies...if they came home to this type of transaction distrust in their own homelands/towns...they would clearly have wondered if their fight for freedom was even worthy of who they were fighting for....yet you have to wonder what the new vets must think of when they come home and see huge drill rigs out their front door and then learn that their mom and dad were signed into a 'catch all' contract that they dont' know what to do with.

Permalink Reply by JDM on April 16, 2012 at 6:21am

This is the response I got from a landman representing CHK when I asked about the 20% gross royalty offer that had an enhancement clause:

Any enhancement means that they will be able to sell the gas for more than they would be able to sell it for without the enhancement. Therefore you will be entitled to more royalty money because the amount the gas would be sold for is more. Even after deducting your portion of the expense of the enhancement you will receive at lease as much as you would have received if the gas was sold without the enhancement.
 
 
Permalink Reply by Jack Straw on April 16, 2012 at 9:31am

In that case, CHK should not object to guaranteeing you (in writing - in the lease) something to the effect “20% gross royalty or 18% net royalty, whichever is LARGER”.

Something tells me that they will balk. If they do, throw the Landman’s statement back in his face. If what he said is true, it should be be a win-win for both you and CHK.

 

All IMHO,

                 JS

Permalink Reply by JDM on April 16, 2012 at 11:16pm

I just sent an email to the landman asking that exact statement....can't wait to see what he comes back with. Thanks

Jim ShoosPermalink Reply by Jim Shoos on April 16, 2012 at 9:33am

You might as well come to grips with the fact that you are going to get hit with paying your proportionate share of whatever post production expenses that the operator has to pay for... this is just fancy language inserted to make you feel better about it.  From a more fundamental perspective I "get it" that a royalty owner would rather be paid his/her royalty percentage on a higher amount of $$... but why should that royalty owner (who pays absolutely nothing to drill the well and therefore incurs absolutely no capital risk) be paid on a price that is actually higher than what the operator receives?  Oh wait... I recall now, being a member of the lucky sperm club entitles you to do so! 

Permalink Reply by Billy Park Whyde on April 16, 2012 at 9:56am

  Jim ya know at times your train of post in here does more harm than a single peeved off land owner can do. You only drill when you have land to drill upon thanks to a land owner. Your inconsiderate choice of derogatory notions towards land owners at least in my opinion if I heard it coming from a Chesepeake official I would tell them to go to China before I would lease to them!

  What is not being said which I will say is why should a Land Owner sign a deal in which there is a blank check being written upon their account? Why should a landowner be paying for a enhancement process that might just be a process that the company owns, which can set a price like it or not!

  Enhancement is a cost of production just as trucking the product or pipe line. There are many people in this GOM that would help you out if ya put the WHITE ESPENCADE in a ditch out here in the country side.  Why try the class warfare?

Jim ShoosPermalink Reply by Jim Shoos on April 16, 2012 at 10:06am

Ruffling feathers is one of my favorite pastimes.  I am amused by the feeling of "entitlement" that landowners possess.  The point is, a landowner had nothing whatsoever to do with whether or not the land has a valuable resource under it.  Its called "serendipity".  Whether the land has been in your family for 150 years or you bought the land 150 days ago, the landowner did nothing to "earn" the right to have a valuable resource that might underlay the property.  Your best friend who has a farm 30 miles away might have absolutely no Marcellus or Utica Shale underlying his land...hence the reference to the "lucky sperm club".  That said, I do not suggest that the landowner should be taken advantage of or that he/she should sell for less than a fair price... but why would you expect to get paid on a per Mcf basis, more than the operator receives... the guy who actually spent the money and took the risk to produce the resource.

Permalink Reply by Jack Straw on April 16, 2012 at 10:30am

The reality is that a "creative" Oil & Gas Accountant can think up all sorts of dubious charges that could be charged back to the Royalty owner under the guise of an Enhancement Clause.

Unless the Royalty owner has the right, ability and resources to employ a forensic accountant to go through the Operator's books; they are ripe for plucking.

It would be naive to pretend that an Enhancement Clause has not frequently been used to abuse.

It would be hoped that most Operators will treat Royalty owners in an honest fashion; but there are no guarantees in that regard.

And, due to the potential of a Lease being re-assigned at some future date - there is no assurance that a future Operator will not abuse an Enhancement Clause.

As they say "You can trust me, I'm a Landman" (pause for laughter).

 

All IMHO,

                   JS

 

 

 

 

Permalink Reply by JDM on April 16, 2012 at 11:18pm

JIm Shoos- Wow...very harsh....I take it you signed a lease that only has "net" royalties!

Permalink Reply by Kevin in Belmont County on October 13, 2013 at 6:24am

Jim, Let me first start by saying what gives a landowner the right. I agreed to give the O&G company 80% of the gross income from my mineral resources on my farm. I didn't give them 50%, or even 25% I gave them 80% of working capital of my mineral rights. That's what gives me the right to negotiate a fair contract. So a land man comes out to my farm shows me a standard lease and I say no. I want a Pugh clause in this lease and I will not sign any lease that includes any production cost to me. Land man says I will have to check with the company and see if I can do that. Calls next day says company is ok with the changes, makes an appointment to come out and review the lease. Comes out with lease reviews changes. While reviewing the changes I say all no this market enhancement clause isn't what I wanted. And he replies oh know that is exactly what you asked for, see right here we cant deduct any charges for production, marketing, moving, separating anything and this part after the however just means if we would have to advertise and market the gas to get a better price there may be a minimal charge, but in the end everyone involved will make more money .But, I don't even see us having to do that because there is such a high demand for these products. See, under the law that is fraud, Period!  I have already contacted state and federal representatives about introducing legislation that protects the land owners from greedy O&G companies that will do and say what ever they need to say just to get your lease signed.

l

Permalink Reply by Philip Brutz on October 13, 2013 at 1:14pm

Is Gulfport willing to document in writing exactly how they "Enhanced" the value of your gas?  Or is it just revenue enhancement for Gulfport?

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 16, 2012 at 10:17am

JDM...thanks for the post..

but what if your market enhancement clause did not state 'proportional "

 Even after deducting your portion of the expense of the enhancement

but was a cost of ALL the enhancement cost for the Lessor?

I found that not all market enhancement clauses in their typed on the contract form are equal.

Pls people read your market enhancement clause and see if it is 'portionally expensed'.  thereby you are sharing the expense but what if it mentions Lessor pays all?   how can you control that?   it could end up being in court over such and it could also just be a typo from the secretary who prepared the form.  How many of you would want to pay all the unknown 'enhancement costs so the profit is higher...how would you know if your profit would be higher if the Lessee isn't sharing the cost with you?   And what if you owed them money cause of the enhancement cost being higher than your royalty amount per month?  Pls take the time to read your entire enhancement clause and see if there is a statement that Lessor may pay ALL the enhancement costs as you must be prepared of what to do before they use that clause against your royalty.

...........

 "but why should that royalty owner (who pays absolutely nothing to drill the well and therefore incurs absolutely no capital risk) be paid on a price that is actually higher than what the operator receives?"

and btw....what about the fact that the surface owner has to put up with the noises, lights, trucks, safety, environment changes, etc.....being that they are not paying for the production as Jim Shoos states in his comment above....all those things are monetary driven when they deflect the enjoyment of the property....that is a sacrifice that the surface owner is having to deal with and that is also what no one actually knew about when they first started signing the contract leases/....no lucky sperm club.  Of course the one that initially provided all that sperm...is holding everyone accountable in the entire play and ploy of things...and what if He thought it was unfair?  a little too late then to pay the landowner their fair share of the somewhat forced partnership though no one wants to consider them a partner in the scheme of things.

yet Jim you have told us the truth...finally it comes to the light...

You might as well come to grips with the fact that you are going to get hit with paying your proportionate share of whatever post production expenses that the operator has to pay for... this is just fancy language inserted to make you feel better about it.

Fancy language with a contract stating NO DEDUCTIONS ...as it is a GROSS ROYALTY contract.

Now the truth...it is another 'catch all' clause to hook the lessor into thinking they have a gross contract royalty when in 'fancy language' they actually have a 'net' royalty contract and some even have to pay ALL the expenses of the enhancement cause I guess they got fancier language on those special clauses maybe for the bigger fish?  or my dying dad.  Your statement does sum up what I have been waiting to hear here at this forum...that the market enhancement clause is a real 'fancy' clause ...thereby...a confusing clause meant to hook a misinformed landowner and it did...many in fact.

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