What Per Centage Would You Take

If you had the choice between a lease with 15% Gross or 18% Net,

what would you consider, and why?

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Permalink Reply by FXEF on August 23, 2011 at 1:56pm

Thomas,

 

Not sure about a Gross or Net lease, but you want a "cost free royalty clause" in which you do not have deductions for treating, transportation, processing, etc. These deductions can vary depending on location, and can reduce your royalty 5% to 10%.

Permalink Reply by craig on August 23, 2011 at 3:58pm

I've pondered this same question myself.....I don't know the answer to your question and am not an expert, just a business owner. 

What I am thinking is that if you get paid gross at the well head, then the volume you get paid for would be greater, but the product would be worth substantially less considering it needs to be processed....especially if it has lots of natural gas liquids and oil. Processed and clean products would be worth more, albeit at a smaller volume. How would one determine the value, at the well head, of a mixture of gas/liquids/oil without processing it to get the volumes of each component? I believe you could get ripped off using either method...I put nothing above some of these companies.

Now a dry gas well is a different animal and I would think gross at the well head is best.

Permalink Reply by Jim Litwinowicz on August 24, 2011 at 2:06am

Thats a very good question. And I'm not sure which would be best but I think that I would take the 15% gross. These companies have the best accountants and legal minds and can find loopholes and hidden costs better than Stephen Hawkins finds extra dimensions.

 

No one knows the future or what they will come  up with.  And since people say there is a 2-3% difference form gross to net anyway, I'd take the sure thing if that was my choice.

Permalink Reply by Terry W. on August 24, 2011 at 2:22am

Jim,

in conversation with a land agent, if the % is based on the well head, then anything after that would

not be considered in the calculation.  That does not seem right if there are hydrocarbons in the gas

such as propane, you would not get your cut out of that.

Was told that there would most likely be all gas anyways.

Seems very tricky.  Do you want the royalty calculated, not at the well head, but at the final proceeds after all is processed, which then, I believe, would be a greater amount of royalty.

Seems that the more you stop and think, the more complicated it gets, and the land men/women are not going to straighten you out.....

Permalink Reply by Patrick DeBerry on August 24, 2011 at 3:29am
Good points all. A "Cost free addendum" for ALL costs involved in producing, gathering and transportation is a must. Also, never allow the words "At the wellhead" to define your basis for royality caluclation. Instead, use words like "At the point of sale". That will get the gas and other hydrocarbons (oil) to the closest point where the product is transfered from the producer to the transportation company (pipeline). We choose 15% gross at the point of sale. I'll let you know how that worked out after the first royality check comes (:
Permalink Reply by FXEF on August 24, 2011 at 4:20am

Patrick,

 

"At the wellhead" or in some leases "at the mouth of the well" will reflect the total volume of O&G produced (gross). This would be the numbers that the operator would report to the state, therefore one would have a source to check operators accountability. I'm not sure where "point of sale" would be located, but I can see a loophole for a dishonest operator. Royalty owners are at the mercy of the O&G operators anyway.

Permalink Reply by Terry W. on August 24, 2011 at 5:48am

fxef

at the mouth of the well......if that figure is used, it is before the processing of all

the hydrocarbons.....you will not get any money for the hydro's.

Same goes for 'at the wellhead'  This is what you always hear, but if you do go with

at the wellhead....no money either for the hydrocarbons.

 

Permalink Reply by Terry W. on August 24, 2011 at 5:50am

Patrick:

Good points you bring to light...

.......Royalty to be calculated at 15% gross at the point of sale.....

I just do not like the word 'gross'

If at the wellhead, no good

If at the point of sale as you indicate, seems ok

Permalink Reply by jeff k on August 24, 2011 at 9:14am

Lots of good points here. Our area produces mainly dry gas but we tried to cover this as best as possible in our lease...

 

"free of costs, in the pipe line to which said lessee may connect its wells" (royalty free)

"royalty of ** % of the proceeds received by lessee from the sale of same, calculated at the well , for all native gas and oil saved and marketed from the said premisis, payable monthly"

seems to cover things pretty well

not sure like fxef where "the point of sale" would be and consider other wells probably are tied in the the gathering system....

 

 

Permalink Reply by Terry W. on August 24, 2011 at 1:33pm

Jeff k\

Whar are are you talking about?

Permalink Reply by Patrick DeBerry on August 24, 2011 at 3:20pm
Thomas, Thanks to your original question posted here, some excellant disscussion has occured. After reviewing my lease and addendums, I do not find the word "gross" included. I was simply using that word to say that the sale of ALL gas and other hydrocarbons (oil) would be free and clear of all costs of production, gathering, transportation and all other post-production costs. As to the point of sale, let me make a few comments. Each well has it's own meter to measure the amount of gas flowing from it. If there are two wells, there are two meters and so on. These are the numbers that are reported to the state and that the land owners royality is calculated. Once your gas is turned into a gathering line and mixed with all the other wells in the area, it proceeds to a transport line which will take the gas to it's market location. It is subjected to various processes along the way to remove the oil and impurities. In our case, the point of sale will be at the end of the new sixteen mile gathering line just completed across Northern Preston Co. (WV). At that point the gathering line will connect to Columbia's Mason/Dixon line which runs to the Baltimore/DC market. We are to be paid for all product sold at that point or that was removed during a prior process. Sounds like an accounting nightmare to me. We'll see.
Permalink Reply by jeff k on August 24, 2011 at 4:33pm

the quotations is legal language that we have in our lease... basically it means what Mr. DeBerry explains above

we are in tioga co., pa...

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