?????? 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 !

Views: 3216

▶ Reply to This

Replies to This Discussion

Permalink Reply by time will tell on May 23, 2012 at 11:15am

Classic pic  USA !

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 26, 2012 at 8:15pm

thank you Ridgeman..

this is not one of my favorite subjects cause I like it....but it is clear to me that it shouldn't be in the contract at all, especially a 'gross royalty' negotiated contract.

I keep hoping that Pa state will require that Market Enhancement Clause a 'catch all' clause that was created just to confuse and effectively create a way to use it to take royalty monies from the Lessor so their royalty isn't that much even though negotiated to be...and I hope that there is a recall of every contract that has that clause to make the clause null and void.  A crafty clause indeed that does not at all represent fair market negotiation between two parties...mostly because it is an unknown commodity and an unknown value.   Many elderly and ignorant folks bought the land agents statement that it wasn't to be marked through or negotiated out or no deal....and that was a very false statement meant to coherse the Lessor into believing that the entire contract would not be able to be done without the clause (which is what many were told)...a trick used even in that land agent book that was found in Ohio.

Permalink Reply by time will tell on May 27, 2012 at 12:50am

I'm glad it has brought attention to this matter and you are welcome.I like others have found out the hard way on lease language and there results .

I am finding that no one can just trust anyone trying to sell something without really knowing them or past performance  when the dollar amounts are so high .

I have said it time after time in my opinion the Arbitration clause is the real devil

in this process .

3uq96odaochmjPermalink Reply by 3uq96odaochmj on May 26, 2012 at 7:53am

the "Enhancement Clause" means that they will enhance the production to get a higher price on the market.  The secret on how they do this is to add some ethanol (corn fuel) to the gas stream so that it burn hotter, thus generating higher Btu's, and subsequently commands a higher price on the market.

Jim ShoosPermalink Reply by Jim Shoos on May 26, 2012 at 9:44am

That is pretty much a crock of crap assertion.  The ONLY instance in which anything is introduced into the gas stream would be if the Btu content were to be below the minimum required by pipelines.  High nitrogen or high CO2 gas production is frequently below the minimum required Btu.  I haven't seen any Marcellus or Utica Shale production that has any low Btu issues. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 26, 2012 at 8:20pm

Jasper, only if they really would list that as the method, the value as they surely do not list what the product is or the value of such.   But clearly if it was the method you describe then pls do you know the cost of that 'ethanol' (corn fuel) in what amount typically is used and how much it would cost?

Jim mentioned on page 3 of this discussion:

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.

so Jasper, are you stating that you know of the method of corn fuel as an enhancement that would make the BTU higher than 980?  pls, where do you obtain this info?   is there a link to the method online and is it referred to as 'enhancement'.   For even if they do this, how does the Lessor know that is the only charge for the enhancement in reference to the market enhancement clause?

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 26, 2012 at 8:46pm

If you go to page 38 thru 42 of this pdf file link you will find a good description of the processing of natural gas to the transport, etc.   Pls anyone, can you tell me where the enhancement is ? and why is it that even in this very thorough description (and it is thorough) that not even the word 'enhancement' is mentioned as a way to enhance the market value?   why would the Lessors have to contribute to such an unknown unlisted hard to find process described as enhancement?

ftp://ftp.eia.doe.gov/pub/testdmr/Pipeline_a.pdf

This is an excellent link to understand the process and transport of Natural GAS.

 

I see this enhancement clause as a bonafide way to state that whatever (WHATEVER) the oil company merits as 'enhancement' is what the Lessor is stuck paying if the Lessor has this clause in the contract.  That is entirely a 'catch all' clause and is against Pa. state law in contracts...see Pa. law regarding 'catch all' clauses.

Jim ShoosPermalink Reply by Jim Shoos on May 27, 2012 at 4:38am

You are expending way too much of your gray matter (brain tissue) over this issue.  You are not going to succeed in getting an O&G company to list specific enhancements for two reasons.  One is that they are almost too numerous to list... and even if they did list them they would throw in qualifying language that says: ...not limited to the specifically enumerated items.  Secondly, they know that it would open a Pandora's Box if they listed gathering fees or transport fees as one of the enhancements that they could pass along to a lessor. Every well, every situation is unique.  What could legitimately be considered as an enhancement to the price in one case wouldn't necessarily be considered legitimate for a well five miles away. 

Don't obsess and spend your time worrying over things that have one-one hundredth of one percent chance of occurring.  Neither Marcellus nor Utica Shale production has low Btu issues... if anything they are occasionally too high and require processing to lower them, which is a good thing, because then there are liquids to be sold which fetch a price higher than the residue dry gas.  Corn ethanol added to a gas stream....please... do you have any idea how expensive it is to produce corn based ethanol... way more expensive to produce and buy for the purposes of adding it to a low Btu gas stream than you could ever hope to recapture in the way of an upgrade for your gas sales.  EVEN IF somebody was foolish enough to add corn based ethanol to raise the Btu content, and EVEN IF you knew what corn based ethanol costs per gallon, you would still be completely oblivious as to how much corn based ethanol was going to be used in order to increase the Btu value... how much got added would be totally dependent upon how low your Btu was to start with.

Believe me... you have far greater things to spend your time fretting over than this issue.  If you wanted to accomplish something beneficial (assuming you have the leverage with the O&G company) spend your efforts attempting to eliminate the enhancement clause all together, and simply structure royalties on a gross proceeds basis.  You may find yourself facing an uphill battle on this issue.  You have already seen links provided on this site to the cash flow problems facing companies like Chesapeake... they are not the only company that is suffering from low natural gas prices.  If a producer can cut its losses by having the lessor bear their proportionate share of post production expenses then they are going to be very reluctant to eliminate an enhancement clause.

Alternatively, what I would recommend, and what I would be willing to accept as a producer, is to have post production expenses be tied to the price of natural gas.  Propose to the O&G company to allow proportionate deductions our of your royalty for post production costs, but only for periods when the sale price is below "X" dollars per MMBtu.  If their sales price were to rise above "X" dollars per MMBtu then the obligation to pay your proportionate share of post production costs goes away.  This will require a little bit of accounting software work on the part of the producer but its a win-win situation which justifies the time and expense on their part.

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service