Replies to This Discussion

Permalink Reply by Philip Thackray on December 30, 2013 at 12:30pm

RB

If it costs 20% of the sales price to process and transport the gas then the gas is only worth 80% of the sales price at the well-head.  While I wish it were not true it is reasonable to deduct those costs before calculating the land owner royalty.

The “no deduction” movement (and I say go for it if you can) is really about getting the highest possible royalty.  I’m sure many of those shooting for a no deduction clause don’t know what typical deductions are.  The other attraction about the “no deduction” is that these deductions are not understood (I haven’t learned exactly what they cover and how they are calculated) so “no deductions” means no worries.

I had the very lucky chance to renegotiate my royalty with Phillips/XTO about 2 years ago.  At that time I gathered Rex stubs from a club I belong to that is leased to Rex.  I calculated the deduction percentage and its effect on “royalty relative to gross” and set my royalty negotiation goals accordingly.  (That was during the transition from Philips to XTO – lately XTO is holding to very hard line positions.)

Phil

Permalink Reply by RB on December 30, 2013 at 12:42pm

Phil,

It is my understanding that pre production costs are not to be considered for deduction, only costs from wellhead to point of sale.  It is worded something like that.  I do understand that no deduction is a greater value, duh, but couldn't get a no deduction.  Yet it remains the unknown variable.  REX stubs would be of interest.  I guess most keep it under cover.

I take it you are not, as yet, part of a drilled unit? Where are you located?

Permalink Reply by Philip Thackray on December 30, 2013 at 12:48pm

RB,

I am in the Marburger B unit which went into production in Oct 13.

Phil

Permalink Reply by RB on December 30, 2013 at 1:14pm

Phil,

I think I missed a part of what you were referring to in your calculations.  After reading your info on your lease, it appears you had the deductions limited to 2% of the royalty. 

Mine does not state that and is unknown.  Looks like it will be 20% based on what you said about the others.

Thanks.  RB

Permalink Reply by RB on December 30, 2013 at 1:45pm

Good luck with your well.

tried to edit above.  i meant 15%, not 2

Permalink Reply by Philip Thackray on December 31, 2013 at 1:44am

RB,

There are a lot of percentages flying around!!  Unfortunately, the paragraph from “a current XTO lease” that I tried to copy and paste (below) was truncated on the right side so it is missing a few words.  The way these leases are written today, they state that whatever your royalty is – 15% in that example – you get 15% of the gross $ minus 15% of the gross deduction $.  If you look back to my original calculation on page 12 the total gross deductions were $60K and 18% (the royalty in that example) of that was $10.8K.

Phil

Permalink Reply by Philip Thackray on December 28, 2013 at 9:30am

GM, Yes. From a current XTO lease:   b) to pay Lessor as a royalty, for the native gas and casinghead gas or other gaseous substances (including shale gas), produced from said land and sold or used beyond the well or for the extraction of gasoline or other product, an amount equal to fifteen percent (15%) of the sales proceeds actually received by Lessee from the sale of such production, less fifteen percent (15%) of all "Post Production Costs," as defined below, and less fifteen percent (15%) of any and all taxes, including without limitation, production, severance, and ad valorem taxes. As used in this provision, Post Production Costs shall include, without limitation, (i) all losses of produced volumes (whether by use as fuel, line loss, flaring, venting or otherwise) and (ii) all costs actually incurred by Lessee from and after the wellhead to the point of sale, including, without limitation, all gathering, dehydration, compression, treatment, processing, marketing, and transportation costs incurred in connection with the sale of such production. Lessor acknowledges and agrees that this lease (i) expressly provides that the Lessor shall bear part of the costs incurred between the wellhead and the point of sale, (ii) identifies with particularity the specific deductions Lessee intends to take from the royalty, and (iii) indicates the method of calculating the amount to be deducted from the royalty for Post Production Costs; and   Even the old leases that did not include such language are now treated this way.  For some reason the above clip did not wrap the sentences and cut off the part on the right.  If you need the whole paragraph I sure I can do that. The point is, there are deductions and the type of deductions and means of applying them are defined. Phil

Permalink Reply by GM on December 28, 2013 at 9:53am

"Even the old leases that did not include such language are now treated this way."

That can be done even if there is no addendum to change the language? 

 

 

Permalink Reply by Philip Thackray on December 28, 2013 at 10:44am

GM,

That is what I am told by the legal people.

Here is the royalty clause from a legacy Phillips lease (circa 2007):

 

                ROYALTY.  IN CONSIDERATION of the above demise, lessee agrees to market the oil produced from the premises, provided the quality of said oil is acceptable for marketing and the amount of production is deemed sufficient by lessee to economically market the same.  Lessee further agrees to pay lessor a royalty equal to one-eighth (1/8) of the proceeds received from time to time by lessee for all oil so marketed, less lessor’s pro rata share of any severance or excise tax imposed by any governmental body.  Payment of said royalty shall be made on or about the 25^th day of the month for all oil so marketed during the preceding month.

Should any well not produce oil, but produce gas and the gas produced therefrom be sold off the said premises, the consideration to said lessor for the gas from each well completed and from which well gas is produced, metered and sold shall be as follows:

Royalty equal to one-eighth (1/8) of the proceeds received from time to time by lessee for all gas produced, metered and sold, less lessor’s pro rata share of any severance or excise tax imposed by any governmental body.  Payment of said royalty shall be made on or about the 25^th day of the month for all gas produced, metered and sold during the preceding month.  The time and method of producing, metering, delivering and selling gas produced from any well on the leased premises and the amount thereof that shall be used or sold within any period of time shall be entirely within the sole discretion of the lessee.

 

Even though the clause lists severance or excise tax as the only deductions, where leases like this one have gone forward into production for “wet wells”, XTO is deducting all expenses between well head and point of sale as described explicitly in their more recent leases.  My lawyer, Wil White at Dillon McCandless K C & G (an Oil and Gas guy) says that nobody has been able to beat this.

 

Phil

Permalink Reply by GM on December 28, 2013 at 11:07am

Well, pun intended, that's my lease language verbatim, you answered my question. Thank you!

(and I have the same firm as "well") 

Permalink Reply by FairMktValue on December 31, 2013 at 2:25am

Phil, RB, GM ......

I have been following the discussion on this for the past few days and swore I was not going to chime in but....lol

Short and sweet of it - way too complicated for the average person to even have a clue as to if the deductions are being correctly applied.  Phil, you and RB  (and I consider you both to be knowledgeable people). have sliced and diced this quite well and if I am reading this correctly......you are still not 100% certain ya got it right !   LOL

Phil, I am gonna quote you because I believe you hit the nail right smack on the head...

The “no deduction” movement (and I say go for it if you can) is really about getting the highest possible royalty  I’m sure many of those shooting for a no deduction clause don’t know what typical deductions are.  The other attraction about the “no deduction” is that these deductions are not understood (I haven’t learned exactly what they cover and how they are calculated) so “no deductions” means no worries.

Once the royalty checks start coming in substantial numbers around here  ... this topic is gonna get really hot.

I am certainly adamantly in the "no deductions" movement.  The "no worries" sums it up quite simply for me. 

I am currently in "negotiations" with Rex if you can call it that. The landman has been here 4 times in the last mouth. Rather friendly discussions, but I made it very clear from the start that "no deductions" is the only thing that is non-negotiable on my part. They have not said yes, but they have not said a "firm" no yet.   " I will take this back to Rex and see what they say" 

So far I have held the line on the bonus money and royalty % - but I did let him know I could move some on those. Awaiting the next "no" - but we might be getting closer - or not. lol

The landman somewhat agreed that my "terms" were not unreasonable (Rex has paid more and done "no deduction" leases)  just not gonna do it right now. 

I am "going for it", whether "I can" or not is the question !  LOL 

Cheers

Permalink Reply by Philip Thackray on December 31, 2013 at 2:56am

FMV,

I have seen the deduction numbers and I’d pin them at 18% +/- of Gross $ sales.  From there the mathematical effect on your royalty relative to Gross $ sales is quite clear.  And the “base” royalty you would need in your lease to receive the royalty percentage relative to Gross $ sales that you want can be calculated. That is what I did.  The unknown is exactly what are these deductions and how are they calculated?  Can they be challenged and thereby reduced?  Of course with a “no deductions” lease none of those questions would matter.

At any rate, going through these calculations gives one a better perspective on what a “no deduction” lease means to the landowner and to the G&O company.

Good luck with your lease!

Phil

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