?????? What does the enhancement clause really mean ?????

Is there anyone who can explain what the enhancement clause really means .

I have been approached by O-G company and they are telling me that they wont pay on the gross but they have the " enhancement clause " that is just as good ? 

I smell something fishy !

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0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 19, 2012 at 9:14pm

Ridgeman ,   when in a land group most will not sign a 'market enh. clause' contract.   So if you are going alone on this I thought I would tell you that the oil company will tell you that they cannot remove that clause and that is BS.   Why would we sign a contract with an open chargeable cost that is not disclosed? esp. when doing a Gross royalty contract.   Also pls take a look at your extension clause on your contract and there actually are other clauses that really need reviewing very thoroughly...   If you are doing this without a good Oil/gas atty I recommend you obtain one...others here would agree as they already did the wrong thing.

http://gomarcellusshale.com/forum/topics/extension-of-term-clause

here's a good check list from online...

http://www.tlma.org/oilgasleasechecklist.pdf

I hope you do well.   If you google doug clark in pa. website he has audio tapes and blogs about many clauses...do you well to review each clause thoroughly...and don't let them talk you into not being able to change them...they do with land groups and attorneys.

 

Permalink Reply by time will tell on May 20, 2012 at 2:24am

Thank you USA . I agree totally with you . Yes there is a o-g company that is trying to get me to sign up 

and I see the value of land groups . They are saying just what you have written . 

Permalink Reply by time will tell on May 20, 2012 at 9:25am

Its nice to hear from you again USA !

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 20, 2012 at 8:53pm

thank you ...that was nice to hear.

Permalink Reply by JDM on May 20, 2012 at 11:42pm

I talked to an O&G lawyer from Texas about the enhancement clause...he stated that its a standard operating cost for the O&G companies.....that is was not a good thing. He said that based on some of the wording in leases, you could end up oweing the O&G company money or not a get a royalty payment. He recommended avoiding the enhancement clause.

CHK also wanted to force this clause on me....they wouldn't negoiate so we told them no and now we are talking to other O&G companies.

Permalink Reply by time will tell on May 21, 2012 at 2:09am

lDM , sounds like what Gulf Port is trying to do to us . I'm not going to do that clause .

I would like to lease our ground but not under those terms . 

I already trusted one O-G company to follow the terms of our  lease and they let greed make there decision and dumped 100,s of thousands gallons of spent frac water on my organic farm .

I trust none of them ! 

One must make it perfectly clear of what they want and the penalty if not followed .

Thanks for your comment , it is well taken !

Jim ShoosPermalink Reply by Jim Shoos on May 21, 2012 at 4:23am

IDM... that's about the biggest crock of crap I have ever heard in my life.  If you talked to a Texas lawyer and he actually told you that, then he must be an ambulance chasing personal injury lawyer and totally devoid of any oil and gas knowledge. 

First off,  there is no possible way that a lessor could end of owing a producer money as a result of having to pay their proportionate share of post production expenses.  The costs of post production expenses are NEVER, I repeat NEVER going to come anywhere close to equaling the value of the production itself and there is nothing in the various enhancement clauses that I have looked at that would ever allow anything but a deduction from the royalty payable... certainly not an assessment of any amounts in excess of what the lessor royalty share is.  Secondly, the lessor only accounts for a minority of the income stream from product sales (likely no more than the 20% royalty).  So, 80 cents out of every dollar goes to the producer.  What sense would it make for a producer to incur post production costs that would serve to reduce the income stream to the extent you portray???  The lessor and the lessee (if you were to accept an enhancement clause) pay post production costs in proportion to their respective interest... the lessor does NOT pay a disproportionate share of any post production expenses... EVER.  If by chance there was a crook of a producer operating on your land I suppose it is conceivable that they might allocate you an incorrect percentage of post production expenses... but regardless of whether you had a lease with an enhancement clause or not, a crook is going to cheat you anyway and doesn't need an enhancement clause to do so.  You cannot contractually wire around somebody that is hell bent on cheating you.

All this being said, I wouldn't sign a lease with an enhancement clause either!

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 21, 2012 at 3:57pm

Hi there everyone.

Jim, can you pls give an example of an 'enhancement' and even an example with some figures to give an idea what that would be and is it often used?   You know everytime this item comes up for discussion most no one gives any real examples.  It is an 'unknown value' on a contract that should be finite when the contract states 'gross not net'.   Also would the cost to send the NG upstream to a cracker plant be a cost of enhancement for all the Lessors in the unit that have a market enhancement clause?   I mean, if one lessor has a market enhancement clause and the 30 other lessors in the unit do not....how does that one Lessor absorb that cost even if it is proportionate?

Some contracts do state 'any such costs of enhancement may  be deducted from the Lessor's share of production" doesn't exactly state what that means...and that is confusing and open ended for whether it is a percentage or 'all' the cost.  

  Some contracts state" any such costs of enhancement may be deducted proportionately from the Lessor's share of production" which at least defines that it is based on I suppose the same royalty amount as a share of production involves.   The word proportionately missing from the other contract (such as the one I have) really doesn't define definitely if it is a percentage or the entire cost for all Lessors in the unit (or depending on what each lessor has on their contract)...though it clearly should not even be there on a 'gross' contract.

But clearly an example of what would be an enhancement and what that could be in a situation in the percentage of the expense to enhance.   Such as if a mcf is at 3.00mcf and a 1.00 could go to enhancing to make 6.00mcf ...then at least we could have some idea....but if enhancement does not usually cost that much such as in the example it may only be a 25cents expense per mcf then that would help understand.   But if enhancement is really all charges of production and transportation from the well site after the well head....then it really is a 'net' contract.

 And really like I stated above...if there is only one or two lessors with the market enhancement clause in their contract in a unit of about 1100 acres...isn't that clearly a big charge for the one or two Lessors to absorb for the whole unit to make more money?   I think this 'market enhancement clause' could end up with many in litigation in courts in all the Marcellus...seems to me like a 'recall' by the oil companies about that clause could save them mucho dollars than pay to go to court about such.

any input would be appreciated.

Permalink Reply by time will tell on May 21, 2012 at 4:28pm

Factors to consider when structuring an oil and gas lease royalty.docx Factors to consider when structuring an oil and gas lease royalty.docx, 

Hi USA , not sure if you saw this link that Jim posted . I't answers some of my questions  .

I found it helpful .

You bring up a excellent point with the 1100 ac unit and how it would it work out .

I have a problem with the trust factor , relying on the on the companies or the next owner of ones lease .

My experience so far hasn't been so rosy .

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 21, 2012 at 6:54pm

thanks,

you know it is one thing to have different royalty amounts in percentages....it is another thing for some to have 'net' (with deductions) and some to have 'gross' (no deductions) and then with the enhance factor some to have ???? either on their already 'net' royalty or their 'gross' royalty.   Why not just have a minimum amount that is always promised whether gross or net?  In fact, I thought the state requirement of a minimum of 12percent was made into law for just that reason...yet some that have 1/8 (or 12 percent) on their contract have a 'net' contract with deductions for production costs and transportation and perhaps even 'enhancement' costs...so you know that they are not even getting a min. of 12 percent...I feel sorry for those folks as most were maybe ignorant of what they were signing or of course elderly but all trusting in the land agent to explain it....and of course some may have even had lawyers who didn't know the oil/gas process.

thanks for bringing up this discussion...I think it is good to have that question often here at the forum for esp. newbies signing.

I read the link and I must say...it still doesn' t  define an example of an enhancement.   Why is it so difficult to get an example?   i have went online several times and cannot find any description of an example of 'enhancement ' charge.   This is why I think it is a dollar sign increase of all production and transportation not necessarily a 'chemical additive' though it could be that as well.  

Would someone pls post an example?   Or is this some bogus amount that already was figured in the production and transportation cost ....I mean if you were the oil company and your lessors paid the enhancement cost for you wouldn't you ALWAYs 'enhance it?

Permalink Reply by Sam Moore on May 22, 2012 at 3:57am

The enhancement clause would not bother me if I trusted the company.  There is the problem.  Example: Parent company needs a piece of equipment to enhance the product that cost $100,000 instead of buying the equipment they have a shell company they own buy the equipment and then they lease the equipment from the shell company for $50,000 a year.  The equipment has a 20 year life and the company has just skimmed $180,000 profit from the landowners.  $1,000,000 lease payment - $100,000 equipment cost= $900,000 x 20% royalty= $180,000.

Jim ShoosPermalink Reply by Jim Shoos on May 22, 2012 at 4:15am

I read the link and I must say...it still doesn' t  define an example of an enhancement.   Why is it so difficult to get an example?


USA... maybe you should have read the attachment more carefully.  I provided you with an example of an enhancement when I described H2S (sour gas).  Without treatment, gas that contains H2S is unsalable. 

At best, the term "enhancement" is a nebulous concept, which is why I don't like it.  There are a number of things that could be considered to provide enhancements to natural gas (i.e. make it more valuable).  Processing of wet gas is required because an interstate pipeline will not accept a Btu higher than 1080... or less than 980.  If you can't put your gas into an interstate pipeline to reach a market... then you can't sell your gas and it theoretically has no value whatsoever.  Interstate pipelines also have many other "spec's" that you cannot violate.  There are restrictions on inert gases such as nitrogen and oxygen.  Dust, gum forming constituents , water are all items that are not allowed in the gas stream entering an interstate pipeline.  If your gas does not meet spec's... then again, you get shut in and cannot sell your gas and anything that a producer has to do in terms of treating gas to make it conform to the specifications of an interstate pipeline are "enhancements". 

I will address your other issues in a separate response...

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