?????? 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 !

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Jim ShoosPermalink Reply by Jim Shoos on May 22, 2012 at 4:40am

I mean, if one lessor has a market enhancement clause and the 30 other lessors in the unit do not....how does that one Lessor absorb that cost even if it is proportionate?


USA... the scenario you created borders on the ridiculous.  Even without proportionate reduction language pertaining to payment of enhancement charges there is absolutely no contractual basis in ANY lease that would support charging lessor "A" for the costs associated with enhancing the gas belonging to lessor "B"... which is what you suggested.  Even if you were the only lessor that had acreage in a producing unit which had a lease that had an enhancement clause you cannot be charged for anything more than the enhancement that increases the value of the gas attributable to your acreage.  For example, if you owned 64 acres out of a unit containing 640 acres you would be allocated 10% of the total production from the well/unit.  If enhancement charges totaled $100.00, you would be charged/see a deduction for $10.00, which is 10% of the total enhancement charge.  You CANNOT be assessed for fees that are spent enhancing the production that is allocated to the other lessors in the well/unit.  It simply doesn't work that way. 

Jim ShoosPermalink Reply by Jim Shoos on May 22, 2012 at 5:04am

But clearly an example of what would be an enhancement and what that could be in a situation in the percentage of the expense to enhance.   Such as if a mcf is at 3.00mcf and a 1.00 could go to enhancing to make 6.00mcf ...then at least we could have some idea....but if enhancement does not usually cost that much such as in the example it may only be a 25cents expense per mcf then that would help understand.   But if enhancement is really all charges of production and transportation from the well site after the well head....then it really is a 'net' contract.


USA... I honestly don't even know what you were trying to say with your statement above.  An enhancement is not a function of the underlying commodity price, so it matters not whether you are dealing with $3.00 gas or $6.00 gas.  Obviously nobody in their right mind is going to spend $4.00/MMbtu to treat/enhance gas in order to sell it for $3.00/MMbtu.  Would you spend $5,000 of your own money to fix up a car that is only going to sell for $2,000... I don't think so. 

Assuming a scenario where a royalty owner has a royalty percentage of 20%, then that would mean that out of every dollar of treatment/enhancement charges, the lessee/producer is going to pay for $0.80 worth of the expense.  You have to have some degree of trust to know that producers aren't idiots when they bear the lions share of any expense... we aren't in this to lose money. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 10:13am

This was a good example you used.   I see what you mean.   Yet if the enhancement cost for that Lessor is so expensive that their percentage on their royalty that leaves the Lessor with no money from the royalty....would the producer do such?

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 10:18am

Is that based on if the enhancement for just those acres was for $100. just for those 64 acres in the example?   I mean if the enhancement charges for the entrire 640 acres was let's say $1,000.... would the one Lessor then be responsible for 10percent of the $1,000 for the entire unit?   Or would the percentile for the $1,000 first be dealt with covering those 64 acres and then a 10percent assessed?

Not a foolish question for someone with a market enhancement clause...that is why we are discussing it.   I think they would do better in this world not to put questionable clauses that are like 'catch all' for making them profit...they would be better off determining the royalty amount with no deductions at all and get away with all this 'crap' of itemizing the unknowns and do business justly.

Permalink Reply by time will tell on May 23, 2012 at 11:13am

Thanks USA , nothing foolish about answering  a asked question .

This is how we vent out  a questions and discuss them  .

Thanks for your input and valuable info Jim .

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 9:58am

Great answers Jim....so thank you!

that's why your contribution here is appreciated...you work in that field of expertise.  You stated above:

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.

therefore when the oil companies signed these 'gross royalty' contracts with no deductions to be assessed to the Lessor to make the NG 'marketable' then when any processing from wet gas to market should not be considered 'enhancement'.

so with this statement inluded in the 'Market Enhancement Clause" most people would not know when they receive their royalty checks (unless they audit) if the enhancement was done to 'MARKET" the gas or to "ENHANCE" for more value.

"However, 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

 

You see in their Market Enhancement Clause they even state that there will be no deductions but with a 'however' if they enhance they will deduct....yet clearly if they are enhancing to even make it marketable as it is worthless without the enhancement (as you stated above about the wet gas needing to be processed to even make it marketable for the interstate line)...then this is a clause meant to make it a Net royalty contract and not a Gross royalty.    

People with this clause...don't miss this!

Jim ShoosPermalink Reply by Jim Shoos on May 23, 2012 at 10:02am

You're very welcome... yes, that is what I stated... did you have a question related to my statement?

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 10:05am

this was the answer that I have been searching for...to determine when they may try to consider an 'enhancement'....sorry for the delay in my above answer....I had already replied and then when I keyed to post half of my answer was removed.   Is this happening to anyone else here?   I have to copy and paste my postings before clicking on the 'add reply' button or I might lose some of my reply.

 

So the question I still have Jim....is processing the 'wet gas' to make it marketable a process referred to as 'enhancement"....cause the contract clause states they are only trying to make 'marketable gas' more profitable.

Jim ShoosPermalink Reply by Jim Shoos on May 23, 2012 at 10:15am

In the wonderful world of contract law we refer to this as the "now you see it, now you don't"... or the yo-yo clause.  You are given certain contractual rights, but then they disappear or are yo-yo'd back with the "provided, however".  These types of provisions are not limited to the oil and gas world. 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 10:23am

I meant to put this in my post above....that says "people with this clause dont miss this!"

 

Jim, that picture wasn't meant for you...just a reminder of what I think of that clause and so do some others here.

that was because the oil company tries to put these market enhancement clauses where they don't belong...on a 'gross royalty contract'.   And I feel sorry for those who signed 'net contracts' cause they really are giving them a tough situation to make any profit off their own land resources.

Actually since their own employees and those in the oil and gas industry say often' STAY AWAY FROM SUCH A CLAUSE'  then you have to wonder what bullshit they are trying to pull off on an innocent landowner when their own employees know better than to sign such.

and of course there is the familiar statement by the land agent...'oh, the oil company won't do business with you unless you agree to this clause'....again, 'bullshit' cause many land groups and those with oil/gas attorneys have contracts done without such a clause.

 

0l1a6laz7smpfPermalink Reply by 0l1a6laz7smpf on May 23, 2012 at 10:40am

maybe when negotiating with that land agent you should give him a copy of this photo first and then talk.  Perhaps a forum mascot could be useful here.

Permalink Reply by time will tell on May 23, 2012 at 11:17am

LOL on the negotiating comment USA . I think I must have fired you up with this post !

I like seeing you in action , keep up the fight !!!

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