Royalty

What kind of language is in everyone's leases about gross royalties? I just got an updated offer from CHK for gross royalties with the following language....what does everyone think of this statement?

Landman: I have received authorization to offer the 20.00% royalty rate as presented or a 19.00% royalty rate with the addendum cited below. The addendum below is the sane as what most people refer to as gross royalty. Please note that the market enhancement would result in a higher value for the gas or oil sold and after deducting the cost for the enhancement the landowner would get more royalty money than they would have gotten without the enhancement.

 

Addendum: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this Lease shall be paid without deduction, directly or indirectly, for the costs of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to extent such costs are necessarily incurred to transform the product into a marketable form; provided, however, any such costs which result in enhancing the value of already marketable oil, gas or other products may be deducted from Lessor's share of production proceeds so long as such costs are reasonable and do not exceed the value of the enhancement obtained by incurring such costs.

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Jim ShoosPermalink Reply by Jim Shoos on April 16, 2012 at 10:45am

and btw....what about the fact that the surface owner has to put up with the noises, lights, trucks, safety, environment changes, etc.....

What about the surface owner... how did they get thrown into this equation???  Assuming your point is that he/she owns no mineral rights.  As I have said many times previously, you should think long and hard about buying a piece of property when you are acquiring surface rights only as you may likely be subjecting yourself to being the passive, and not the dominant estate... meaning that the mineral owner and his/her lessee can utilize as much of your surface as is reasonably necessary in order to extract the minerals.

Gross is gross...and net is net.  It is one or it is the other, it cannot be both so don't think that you have protected yourself when the lease says gross, but the addendum (which is recited to control in the event of a conflict with the lease itself) has a market enhancement clause.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 16, 2012 at 10:53am

Jim,   thanks for the input.

What if the market enhancement clause is on the same addendum with two other clauses that define that there are no deductions whatsoever to be made to the gross royalty.   they are all trump clauses?    the contract I have has three clauses on the addendum stating that the royalty is 'gross' and in one of the clauses is the enhancement clause. Do you then count the clauses and if two trump the one with the enhancement..then that's the controlling clause?

Also...I used surface owner...as sometimes the Lessor is an owner but their family members (daugher, son, etc.) may be the ones living on the surface yet still the same family interest regarding the lease.  You see, if the land agents had come fully prepared to also be disclosing to the ignorant of the process landowners...like, with a video especially for those that did not have computers....then it would have been a fair deal of decision for the landowner to make that decision.   But most of the landowners in the beginnnings of this gas rush into the area had no idea....did not even know that their entire land could be used except a few hundred feet from their homes...they were listening to some landagents who most likely were told not to tell them if they didn't ask.  And you know that's the truth.

Here is a way to express what I think is a problem and it can be solved by having some rules ...and adhering to them ....regarding the leasing of the land in these states.  An example that has happened to some before and similar to what has happened in the Marcellus in the early leasing stages:

If a man was on the planning commission of a city and knew that a transportation route was being planned and installation would begin in a three year span....and he had some cash to purchase up the properties along the transportation route well ahead of any publicity about the matter....would that planning commissioner get charged with cheating people?  In some cities they would.   If he knew that the city would indeed pay for the people to not only have fair market price and also pay for the move to a new location for the people...as some have mortgages to pay off and would still need funds to move...yet he proceeded to go in and offer less than fair market value (with a tough economy knowing the people would be in dire need of financial strengthening)......yet the blame is on the people for signing their land over to him though they were not properly advised that the man knew that the land would be worth much more within about 3 years.    In some cities that is called fraud and deceitful business practices.

I was a realtor for many years...if we knew that a transport route  or any plan of the city or even anything detrimental to the value of the site was ahead or present...then we had to disclose that info on paper to the seller and buyer at the time of the sale.   If we didn't know we were not held accountable...yet some realtor agents didn't always tell what they knew...like when condo developers had hired agents to sell future planned condos and sent them into the neighborhood to purchase up the houses at a cheap price compared to what it would be worth if the people knew a condominium was planned.

this is why there must be more disclosure in the leasing of our natural resources...yet it is too late for many....the condo is being built already and the people that signed away the resource  didn't even know the complexity of the worth of those condos persay.  This is an example that would honestly fit the picture of what has happened in the leasing of the Marcellus....and if rules and order of conduct had been put in place ahead of time...the people would have been more informed rather than the newest lessors receiving the mostest cause they heard what had happened to many of their neighbors before they signed.  Some did the research as they found the tools available to do so....others did not even know of the gas/oil exploration boom nor the name Marcellus.

Jim ShoosPermalink Reply by Jim Shoos on April 16, 2012 at 11:10am

In my opinion you are mixing a lot of metaphors.  Trying to compare a man being on the planning commission who buys property based upon insider knowledge has little to do with private companies leasing land.  First off, one is a public official, presumably an elected official who is placed in a fiduciary position.  For such an official to trade on his knowledge of a highway being put in is a major ethical and fiduciary breach.  Same thing holds true of being a real estate agent... if you are representing a buyer and you have knowledge that would impact the value of a piece of property... you are in a fiduciary as well as contractual relationship with that buyer and you are obligated to disclose these facts to him/her.  Again, a landman acting on behalf of a private company... whom he is employed by, is obligated to act in the best interests of his employer...not you as a landowner.  If a landman were to offer you advice that were to be cause his employer to expend more money or obtain contact terms that were less favorable that landman would be open to liability.  Really... you expect the used car salesman to tell you that the car you're looking at was flooded at one point?  Like the commercial says... CHECK THE CARFAX... or in this case hire yourself an oil and gas attorney.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 16, 2012 at 11:48am

thanks again Jim....it's like we have nothing else to do.

There are disclosures in the sales of automobiles....I used to sell new cars.  Not all states have disclosures...in some states they consider the 'lemon law'.   Now those laws were developed because of deceitful practices to make gain off uninformed individuals.   this was also true for the real estate industry....laws were made because of the onset of people abusing the system that led to unfair business tactics and trade.

Now in the case of the oil company...,the same oil companies who go to Capital Hill and ask for handouts..they have some responsibility to the taxpayers of what they are doing with their money.   For them to negotiate unfair contracts to make gain and pay employees (land agents) to steer the terms of the agreement in their favor and especially with individuals with  such  ignorance of the oil industry procedures/policies/production....then more disclosure standards need enacted.   It is that I have seen in the contracts that I have seen so far...there is diversity of finding same named contract clauses with a standard form yet the language in the clause is diverse from another ( and this is like handing twenty contracts out at a meeting and each has its own version of that same standard clause...with all thinking that they are looking at the same contract)...,that is reason to conclude it is done to be confusing.  Other clauses like the 'market enhancement clause' for example (which you even say it is meant to be fancy)...is used to hook an individual into thinking they are getting a good deal only to find out they do not know what the enhancement cost could be (non-disclosed cost)..yet that could easily be considered in a court of law a "catch all' clause and in the state of Pa. there are statutes against the use of such.

Scroll down to where it states info about 'catch all' clauses:

http://www.wolfbaldwin.com/attorneys_lawyers/articles.asp?ArticleID=24

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.   

A dressed up '" fancy " clause hiding its unknown value in  a market enhancement clause is pretty deceptive.   Especially when the land agent wasn't telling the truth about it and other clauses and intentions as well, and knew quite well it was for taking that Gross contract and trying to make it NET for royalties..  this is why the state of Pa.. had to enact the min. 12.5percent royalty..which of course the oil companies go around that by adding deductions.


btw..Jim.   this isn't personal against you or your opinions...it is about a search to find some decency in the early parts of the leasing only to find that many were cheated of something that they could have really utilized in this time of our economy.   Some people Jim received only 25.00 per acre back in 2005...25dollars? and all of their land is subject to having surface and underground facilites?  and some couldn't renew because of the clauses....for what ?   25dollars per acre?  some at even 700dollars have been cheated.   I can see the landowners that are getting about 3k per acre and up...and then they find they just signed away all the surface property as well if they didn't limit what structures, etc., could be on site and how far away from buildings but at least they got a fairer per acre amount.

let's tell the truth....if a man leases his entire acreage of let's say 100 acres and leases for 25dollars an acre with a 12.5 royalty with deductions and finds that they want to put storage and ponds and compressor stations, even equipment for processsing and roads and truck parking.,..etc. etc,   and they are stuck with the contract without even monies for compensation of installing feeder pipelines with the company...for what?  less than peanuts.   Then they find that their neighbor two fields away is getting 7k per acre but knew what the production was all about...cause they heard about it after the initial signing was done.  These contracts that were bought cheap, had clauses to extend that were not explained, some done without representation , and clearly the land agent had the upper hand of the whole situation....they should renew these contracts with another bonus outlay...,especially in those cases where they are using one vertical well in the entire 1000 acre unit to hold many leases without production anywhere figured in the future.   this kind of business dealings with the public is completely OUTRAGEOUS and the public should let the elected officials know...

Permalink Reply by CL on April 16, 2012 at 2:42pm

The problem with all of these lease issues is the direction of the offer. In almost every other area of leasing it is the lessor who tells the lessee what the terms will be (autos, homes, apartments etc.) In the oil and gas industry this relationship is reversed.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 16, 2012 at 3:25pm

finally...well said and simply put.   this is why most people were taken by surprise with the land agents and their interpretation of the lease contract and those with pipeline contracts.  It is not the normal....well said CL.

This is why the gas and oil industry have to be more transparent in their offers and more realistic in explaining what their offer really entails...the days of the carpetbaggers were many years ago and that is why specific trading rules and regulations have been enacted by the various states thru the years:

http://en.wikipedia.org/wiki/Carpetbagger

....and the normal is not what they have done and they so far have gotten away with the Nabal attitude, if you know how the story goes on...Nabal's love for greed and money finally got the best of him while enjoying his own prosperity and ignoring what he was doing to others. (1 Samuel 25)

Jim ShoosPermalink Reply by Jim Shoos on April 17, 2012 at 3:17am

Again, you guys are mixing metaphors... Lessors of, let's say an apartment complex are in "business"...and that business is renting apartments... lessors of automobiles are...in that business.  Both are educated in the business they are in.  Landowners are NOT in the oil and gas business, but they want to be accorded all the benefits without taking the time to educate themselves in the business they wish to be compensated for.  You can't even remotely be serious about comparing these drastically different situations.  Nobody...I repeat... NOBODY was cheated simply because they got paid $25.00 per acre for an oil and gas lease.  Had it been worth more at that point in time there would have been a sea of landmen from other competing companies offering higher amounts.  Nor can you state that simply because a friend who lives 3 miles away received ten times more per acre constitutes being "cheated"... in the world of oil and gas 3 miles might as well be three million miles.  The geology can be drastically different.  Many a dry hole sits across the road from a well that produces like a hen on steroids.  Your statement "we was cheated" reminds me of the line from one of my favorite all time movies... Heaven Can Wait (Warren Beatty).  A rich former NFL  team owner is sitting in his luxury box looking out over the field and he is whining to his assistant that the new owner "stole his team".  The assistant says...gee boss, how they do that?  The team owner says... I said $300 Million.... and they said OK. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 17, 2012 at 4:16am

"Landowners are NOT in the oil and gas business, but they want to be accorded all the benefits without taking the time to educate themselves in the business they wish to be compensated for"


Jim Shoos, you weren't there when the land agent told an old man of his eighties that he didn't need to know the business,...just sign and have five years to figure all this out cause he could renew the lease with the oil company in five years.   Most people who lived in areas where even the lawyers had not much knowledge of all these 'fancy' clauses...didn't know what to do...and expected that such reputable firms like Chief, Chesapeake, Range Resources would be sending people that would explain the contract more clearly...WRONG...they were hoping that the land agent wouldn't explain it well.,.,so the people would sign it as it is.   AND many did.

To say the market wasn't there...some got $700 dollar offers per acre in Jan. 2008 and then in Feb. it was over $1500 and climbing....every time the land agent would say, 'we must go on to another area, better lease now, top dollar we are paying right now.'   Had they spent some time explaining the clauses sufficiently then most people would have said 'go on to the other area then'...and they knew that...but the people were too trusting.   That's right ...a lot of folk in these Marcellus shale areas are very polite and trusting people...why?  cause they and their forefathers worked hard to give them and their children a good inheritance and they learned to enjoy taking care of their wonderful environment....now they are learning just what oil/gas production is all about.  

when you don't know the questions to ask and don't know anyone else who really does...it is best not to do the signing of the lease until you have a good handle on what is being signed.   In some cases people couldn't wait...and i understand that not all had their parents dying when the parents were signing....in my case my dad was about to die and he wanted to do that lease for the family as it was all his to do....it was sorta a man thing....at his age.   but he met Goliath and he wasn't David.   ...and of course I inherited that rag of a contract....without the bonus so I am not happy with what was in the clauses as I also had believed the land agent was telling the truth and was a responsible person...but I advise everyone use a recorder and have the land agent sign that it is ok to record them or have that on the recording and document your contract that you have your business discussion on tape and scratch out that clause that says you cannot hold them verbally liable, but of course they will most likely tell you 'we won't do the deal your way'...and then they will tell the state or  capital hill...'the people are unreasonable and won't work with us'...as they seek ways to 'force' their unreasonable contract clauses on people...such as applying for utility status because people won't sign pipeline contracts at $100down 2year option with a granting clause that could install even a cracker plant if it  be possible...oh, and sign it today.

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 17, 2012 at 4:38am

Yet today landowners are now getting more of a fair share (not as partners) but a fair share with the lease royalties at almost 20percent compared to 12.5percent and bonus outlays are more in line to accept if the five year primary term gets extended....more understand the contract clauses, the lessor is more informed.   In China the landowners are not allowed to receive royalties for the leasing of their natural resources (so I heard here from a man who is from china)..the money goes to the government of China...so maybe the oil companies who lease around the globe are not always wanting to accept that in America the landowners get paid...perhaps that is why some feel like the landowner isn't really part of the process and they are not even willing to present a decent offer with a reputable standardized (all clauses typed same with same wording) contract to begin with.   But I have to say that things are looking better, more landowners are wiser and the oil companies realize this isn't China.

Yet in my opinion the oil companies beat themselves down....if they had come into the Marcellus area with more fair pricing, more reputable landpeople that would explain the contracts to the unknowing ignorant folk, and didn't look to 'hook' them into contracts that appear like they are for only five years......then the pricing for the bonus and royalty amounts would have been in better control..,.not fluctuating from 700 per acre to 7k per acre in about 3 years time....sure some have really scored as landowners getting higher bonus and a very decent 20percent gross royalty...but they wouldn't have seen those offers if others had not found how deceptive their contracts were...those that were cheated of a professional contract association with the oil company told the others to BEWARE of the land agent and his/her tactics....and that is what led to the higher prices which continue to go up as the price of natural gas goes up.   thereby as more people realized that they couldn't trust to sign those contracts without proper representation (even at an expense)...land groups were formed as a way to fight Goliath or is it Nabal?   so I don't feel the least sorry for the mismanagement of the oil companies leasing arm...they stink, they don't care and they made the money back and then some when they flipped the leases (some even a month after signing with the landowner).   But I am encouraged that as the environmentalists ride and chase their tale and the for frackers and the not for frackers keep them so busy that they cannot manage as well as if they weren't in these soap operas....that maybe just maybe they may hire someone to look at their leasing policies and better manage them...maybe even get some input from landowners that were not given a fair share...on how to do better business for the future ...then we can hear them say on their commercial..."we are an honest company seeking your best for your future'...without thinking 'boy, they paid that actor to lie'.

Jim ShoosPermalink Reply by Jim Shoos on April 17, 2012 at 4:54am

You can call it "trusting" if you prefer, but if ANYONE came banging on my door presenting me with a multi-page legal document and used the words "trust me, you don't need a lawyer to look at this", my door would get slammed in their face pretty fast.  Common sense is common sense, I don't care how old or how "uneducated" you are.  If I had a nickle for every time I heard a landowner say that they got the best of the landman who was willing to pay him money for a lease when there was "no way on earth" that there was anything of value that would ever be extracted from their property... I would have a decent 401K by now. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on April 17, 2012 at 5:47am

That's why Jim you are where you are today.. cause you would have the sense to 'shut the door' and especially cause you work for those people that make 'fancy clauses'...then you have the knowledge...and you know the business and you know it is first and formost for gain.

But these people in these rural areas (and most were rural) were busy on the farm and many had financial problems and couldn't even afford a lawyer to retain upfront.   Pls read the story about this man in Pa. the case is still pending:    these are the folks and those like them that 'trusted' and had a great need,.  the woman in the article had a daughter in the hospital to attend to...they were caught in the ignorance of the shale play that the oil companies knew about well ahead of time.   The oil companies didn't just one day go 'hey, let's see how the leasing market is in pa. and see if 25dollars or even 2 would be tasty to someone in need"...they planned it.

http://www.thecourierexpress.com/tricountysundaytrilocal/927030-349...

I guess some in the oil companies say, "i just didn't know these people could be that dumb'...and I am sure that they say that....but that isn't a good excuse to send contracts like they did to people ignorant of the oil/gas business.    if the oil company CEO wouldn't even dare to take in a landagent with such an offer...why send one for someone else to sign?  even  to someone he wants to say he is a new neighbor in the community to?  what a new neighbor!  someone to have to take to court cause they cheat in using unscrupulous tactics...parking a bulldozer on the last few minutes of the last day of a five year primary term to extend the lease and unit with a vertical well not even on their property?  and then have to spend the money that they could have offered the couple for renewal on lawyers and litigation?   for GOD's decency sake....why not just offer the couple the money ...ooh..because in that area people are getting like 6k per acre or more...that's why...instead of 25 per acre.  Of course spread out over 20 years or more...doesn't seem like that much for the oil company who already made some money in flipping those leases.

Jim ShoosPermalink Reply by Jim Shoos on April 17, 2012 at 9:43am

No, that is not why I would shut the door.  There are plenty of things that I know absolutely nothing about.  It's not a matter of knowing things, its a matter of knowing that you don't know things... and when you don't know things you certainly don't sign contracts about which you know nothing about... and you certainly don't do so when the guy who's shoving it under your nose is telling you that you don't need to have an attorney look at it.  Again... its common sense... not a matter of "having knowledge".  Knowledge is either street smarts, or book smarts and has nothing whatsoever to do with possessing common sense. 

You are using the same arguments (excuses in my opinion) that all those people used when they took out adjustable rate mortgages on houses they couldn't afford to begin with and then "assumed" that interest rates would never go up and the payments wouldn't become unaffordable.  It's a ridiculous premise, but their excuse was "I just didn't understand what I was getting into.  That mortgage broker didn't explain everything to me.  Come on... when did we become such a lame culture that we cannot utilize the common sense that God gave us???   Really, somebody has to explain to you that home values don't always rise, that home prices aren't cyclical and that they are always subject to fluctuations, that interest rates can possibly go up???  Or in this case that a landman might not be putting the most lessor friendly version of a lease under your nose, or that he might possibly be willing to pay more per acre than he is offering you... all the while telling you not to have an attorney look at it.

I fully understand that not everyone in this country has a college degree, that some chose to work on the farm.  I know farmers personally... I have never found them, as a whole, to be devoid of common sense.  Although perhaps not knowledgeable with regard to oil and gas terminology they certainly know better than to sign a legal document they don't understand.

I often wondered how it was that the American culture got to the point that we can hold a fast food restaurant liable for you spilling hot coffee on your crotch under the premise that it was unreasonable for you to have known it was hot.  Or why the box that a clothes iron is packaged in has the instruction on it... to not iron while wearing your clothes.  It's all becoming apparent to me now... it's always the other guys fault. 

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