Market enhancement clause

I have a market enhancement clause on the addendum page of my lease and it reads pretty much like this:

 

Market Enhancement: It is agreed between the lessor and Lessee that all oil, gas or other proceeds accruing to the lessor shall be without deduction. However costs may be deducted form lessors pro rata share of production, so long as such costs are based on lessees actual cost, and have the effect of enhancing the value of the marketable oil, gas or other products, which results in receipt of a better price for the oil, gas or other products.

 

Do you guys feal that the last part of this clause is a good thing or not. I think that they are going to try to get me to change my unit size from 640 to 1280 and I was thinking that maybe I could try to have this removed if it is a bad thing. I feel that they will try to sneak in some deductions through this clause. I think that I would be happier with not allowing any deductions at all.

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Permalink Reply by Larry Pearce on August 13, 2012 at 3:34am

Really? Where?  There is no way to calculate a value at the wellhead and our client pays no lessor this way.  This is dry gas thinking, not Marcellus WET gas. No one buys unrefined WET wellhead gas.

The general "feel" here is that the operators are pushing this language, this is not my experience.  It is typically being pushed by attorneys.  I am not saying it is good or bad, but our client does not allow our landman team to use it.

Permalink Reply by melissa humphrey on April 4, 2012 at 7:52am

What you want i a royalty paid pre post production costs.

 

This is trick, sounds smooth,  "we want it marketab;e  ..."

reality, implied covvanent THEY have to market the gas, they pay the trnspo and othr costs..

 

It is doubtful they drop the clause just for 1280, but try.  

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 8:46am

to add to your comment Melissa.....they dropped the clause many times for those who utilized gas/oil lawyers.   I think they might listen to those with legal representation.  How is it that the rep says they cannot remove it for those without legal representation but they can for those who are paying an attorney???huh??   At least have them define 'enhancement' as is it a product, process, additional labor, how often used....AND HAVE THEM PUT IT IN WRITING AS A DISCLOSURE.   even if you elect to sign an amended contract they should still disclose that clause to you or remove it.   It is being used as a trick if they won't disclose the cost of such...and in some states esp. Pa. that is considered a form of 'unfair business practices'.

 Pennsylvania law states what is considered unfair business practices in their rules/laws and has an item in the law list regarding 'catch all'.

This use of the 'market enhancement clause' causes 'confusion or misunderstanding in its meaning' and because of the 'catch all ' clause that it appears to be ...some of you would be better to study all this now.  I found this info online (it is an excerpt of the actual info).  Now your state (if not Pa.) may have other laws regarding the' Catch all' wording on contracts or verbal representations:

The "Catchall" Provision. 

Although the Act is awash in detailed definitions of unfair practices, it is the UTPCPL's most vague definition that is most often relied upon by plaintiffs' attorneys. The Act's twenty-first unfair trade practice definition, its "catchall," is "any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding." Before the 1996 amendments, the catchall provision addressed only "fraudulent conduct," requiring a plaintiff to prove the elements of common law fraud, including proof that a misrepresentation was made intentionally or with reckless disregard of its truth. 

 However the 1996 amendments expanded the catchall provision to include a wider variety of unsavory conduct within the reach of the UTPCPL. Curiously, the Pennsylvania Superior Court has since ruled that a plaintiff suing under the catchall provision still must prove all elements of common law fraud, despite the 1996 amendments.
The scope of the catchall provision and whether it permits claims for "deceptive" conduct falling short of actual fraud remains unsettled.
In actual practice, even when the challenged business conduct does not fit any of the specific definitions of unfair trade practices, a plaintiff's lawyer preparing a complaint for breach of contract or transactional misrepresentations will often include a claim of unfair trade practices under the catchall provision."

People that lose on their royalties by paying any part of 'unknown' 'enhancement' charges should be able to complain to the court under the 'catch all' that is in the Pa. law.   But more and more people that have these clauses need to be informed that it would most likely fit into the 'catch all' defined under Penn law.   It is time to tell your neighbors before they end of paying charges to turn their 'gross' royalty into a 'net' royalty.   Now if indeed the oil company can prove that the market value was less (without selling the product to one of their sister companies and then paying you the royalty like chesapeake did to one man..and then selling the product again at a higher market rate).....if indeed they can prove that 'enhancement' would give you the Lessor a higher rate of return...then it would be ok....but you don't know that as you have misunderstanding about what that clause means and they know you don't know to their advantage.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 8:26am

Hi Jim Pollock...such a good thing...to look at that clause now ...but where were we all when we or someone signed it?  and what were we being told that didn't understand it?   why on earth would any of us agree to either absorb full costs or partial costs of a cost that is UNKNOWN?   This was a trick clause of the oil companies and some really have words on it that could cost them their entire royalty part depending on how much their royalty is and if the oil company decides to beunfair.   

Some of us here at gomarcellusshale spent days of research and we picked that clause apart...we also found that some had wording of 'partial share' and wording like you have 'pro rata share' of the enhancement expense and some had wording of 'all the enhancement cost'.....but no one could figure out the enhancement cost cause it is UNKNOWN until the oil company wants to fill in the blank of the unknown cost.  Pls read the entire discussion as some of us ended up challenging the others til we all decided that it was something that will have to be dealt with when the oil companies use it and how they use it will depend on where it goes then.

http://gomarcellusshale.com/forum/topics/cracker-plant-in-phili-i-m...

 "may be deducted from lessors pro rata share of production"

Notice Jim that your clause and others have the word , "MAY be deducted"...does that mean that it is at the mercy of the oil company to determine if it will leave you any royalty payment at all?   Fortunately there are two clauses in my contract that specifically state that no monies for any production (and enhancement is still a part of production) shall be expensed to the Lessor.   I find it tough to believe that this clause wasn't meant to reduce the gross royalty down to net when the Lessee used the words, 

any such costs which result in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from Lessor's share of production

(where is the pro rata or the partially share part of the clause as it is on some of the contracts?)...by reading the link above you can see we did pick at the clause and went online and did research and we did come up with some answers but not what the enhancement cost is...we still do not even know what is meant by the individual oil company that we contracted with about what they consider 'enhancement'...thereby we were fools to accept that statement and that statement should have been disclosed entirely or left out.   Of course the Elexco reps stated that 'oh, no you cannot do business with the oil company at all unless you leave in that statement/clause...and yes others who had attorneys were taking it out...and we did not know that and deceitful tactics were used by allowing these reps to lie to people.   That was an outright lie as some people who were using lawyers were taking out that clause.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 9:30am

Please some of you take the time to consider the math about this with the 'unknown' value of enhancement.

If the market for Natural Gas is 3.00mcf and the oil company decides to enhance beyond to get a better price and uses some added value product or process and increases that amount per mcf to let's say 6.00mcf but the cost of that 'enhancement' amounts to 2.00per mcf.   The new enhanced market value is now at 6.00 but your royalty , let's say is 15%gross (notice I said gross, there will be other costs if it is net) then your royalty payment on the new market value enhanced at $6.00mcf  would be 90cents per mcf minus your part of the enhancement cost of $2.00per mcf.   Which would give you the Lessor perhaps owing the Lessee for .10cents per mcf rather than the .45cents you would have received at the 3.00mcf sale rate.  How has that helped you?   Why not add to that clause if you are unable to delete it that you the lessor retains the right to decide whether or not to enhance the gas based on your profit not being an expense to you without profit.

   and if the cost is to be completely absorbed by you the Lessor then you do the math...it would leave you owing them $1.10 each mcf enhanced.   So you see why you need to have disclosed to you the value and means for 'enhancement'.  Notice the royalty owners at net are going to see very little of their royalties if enhancement is at a high cost as they will also pay for other production costs, etc.   For the oil companies to enhance the product they still gain if you are paying at least half and surely they gain if you pay all.  Now I used in this example a cost of 2.00per mcf enhanced...what if it was 3.00mcf instead or maybe more....see, we don't know...it could be maybe even a fraction of a dollar...we just don't know, why, cause it was not disclosed and was meant as a 'catch all'.

Should we just hope and pray that enhancement is not as high as this example?   should we think that enhancement only means when they send to a Cracker plant for processing (and who would pay that transport cost for enhancement?)...you see, we need to know ahead of time or they need to remove that clause from every contract they have done.   In Pa. our state senators should be making sure that the landowner or royalty owner has a Minimum of 12.5 percent of the sale regardless of the type of net or gross or enhancement...there should alwasy be the result of a minimum of 12.5% royalty paid to the Lessor.   These types of clauses like the market enhancement one was to override what the state had done to legislate a minimum royalty...and somewhere the state of Pa. fell under the bus and didn't see this and establish that it should still be a min. of 12.5percent royalty compensation.   Pls tell you state legislators about this.

And for those of you that work at oil companies say this is just outrageous...then you tell me what is enhancement and when does it take place and how much could it cost .....as it is real quiet from you all on these discussions of 'market enhancement clauses' except those that pipe in and say, 'stay away from that clause."   where oh where is there any disclosure or informed info in the value of this clause ...I see it as absolute "catchall".

Permalink Reply by Ben Elmore on April 4, 2012 at 10:03am

VG, see my reply above.  The enhancement clause is used to charge the royalty owner with post-production costs that the royalty owner otherwise intended to avoid with a cost-free royalty clause.  I am seeing it done in the Haynesville Shale and now in Marcellus. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 4, 2012 at 10:56am

After reading over this discussion at Haynesville shale from last year

http://www.gohaynesvilleshale.com/forum/topics/chesapeake-deduction...

I see that in one of the postings is the market enhancement clause only this time worded speaking of using an intra state or interstate pipeline for enhancing the market value.  

So perhaps this is really what they were speaking of...the sending of the marketable gas further for more processing to other markets or for refining at other locations to further 'enhance' the NG...  

Yet perhaps the secretary that typed the contracts was not feeling like putting that part of the sentence in all these contracts....or did they remove that part for more enhancement of their profit?   Just how is it that some of you even from the same oil companies are using contracts with many different forms of the same 'enhancement' clause?   huuh?  

Do any of you that have secretaries wish for them to change the clauses with new lines as they get them ready for your prospect??   so it confuses your prospect?   I doubt you do if you are a professional and ethical business person.....yet the oil companies need to get professional in their contracts with the landowners...instead of these flimsy 'catch all' schemes.  I am sure the investors' contracts don't have flimsy one liners that are 'catch all' or maybe they do and they better also look at their contracts as the oil company rep was smiling at them also as they chatted about the football game.

  Money isn't everything though with it one can have power and pay for things...but there comes a time when a good and rightous Maker says, 'enough'...these are the people I made for my pleasure and my pleasure does not rely on them being cheated by one another.

here's the clause that was in one of the comment posts at that link above...

 however any such cost incurred on an unaffiliated interstate or intrastate gas pipeline which results in enhancing the value of the marketable oil, gas or other products to receive a better price may be deducted from the Lessor's share of production so long as they are based on Lessee's actual cost of such enhancements. In no event shall Lessor receive a price that is less than, or more than, thje price received by Lessee.

Permalink Reply by Craig on April 5, 2012 at 9:07am

There is another portion to the Royalty clause that one should look at.  In many cases, the lease is written in such a way that the landowner RESERVES a percentage of the oil or gas produced as their royalty.  This means the landowner OWNS the oil and gas until it is sold.  That is how they have been able to charge the transport fees, etc. - because you OWNED the 12.5% to 20% of the gas or oil produced, and they moved it to market for you.  Now, change the wording - that the company shall pay to the landowner, 12.5% - 20% of the gross revenue received from the sale of all products produced (not realized).  This way, they own the gas, oil, NGL's, and you receive a check for the specified percentage of the amount that they sell it for.  You have then eliminated your problem with the enhancement clause, transport clause, etc.  This is a simplified statement, but, what most here do not realize, including the attorneys, is you have to know why and how the wording in these leases got started in the first place, then work to find a new way.  And in this way, the gas company is not being asked to pay for enhancing the value of YOUR gas, but theirs, and just paying you a percentage of the revenue received.  The wording that many want to include in their lease can cause a producer to violate certain SEC regulations, if they are paying to enhance the value of someone else's gas/oil, and if they enhance the value of your gas, and then take that cost out of the private invesors money's then the investor has participated in certain expenses that, depending upon the tyoe of monies being invested, they otherwise are protected under SEC regulations from having to participate in.  The other wording will eliminate this situation, and re-classify the expense, and eliminate all the lawyer bantering that gets them paid well, and money out of your pocket, making you think you cannot possibly know what is going on.

 

Permalink Reply by Jeffrey L kerr on December 22, 2012 at 6:07am

if we the land owner are paying for the enhancement of the gas to make it worth more why are we not getting a % of the more valuable gas. in our royalties. I have read where Chesp. has taken over 30% in the market enhancement of the royalties. its not right in fact its criminal. 

Permalink Reply by bo boboski on December 22, 2012 at 10:28am

A lot of leases say the landowners will get 12.5% to 205 royalties for the Oil&gas "at the wellhead".  Since it's not sold at the well,but at a refinery, after all the seperating,transporting,processing,enhancing,making it marketable happens. It will be worth alot more when sold at arms lenght. SO,all those costs can be deducted, cause it was'nt marketable "at the wellhead".  I read a lease from BP stating; 20% royalty from the sale of the product "at arms lenght'. That's AFTER the transprt & enhancements.  Much Better. I feel alot of people are gonna be pissed when the royalty checks star coming!

Permalink Reply by Jeffrey L kerr on December 23, 2012 at 4:24am

yea i think you are right bo boboski but I hope you are wrong. 

Permalink Reply by Joseph-Ohio on December 25, 2012 at 2:08am

When I read those words I walk away with the interpretation that I've read what I would define as nothing but pure unadulterated double talk.

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