lease offer

whats 17% net  on all prducts produced off well minus production cost is this something new or is this a good lease option?

Views: 2309

▶ Reply to This

Replies to This Discussion

Permalink Reply by Jack Straw on August 20, 2012 at 9:13am

There has been a lot of discussion here on net versus gross.

Opinions vary, but most people would oppose net royalties.

When "net on all products produced off well minus production cost" is specified in a lease, some Operators have been quite "original and creative" in how they calculate net - throwing in everything but the Kitchen Sink (actually if you audited, you might find that the Kitchen Sink was snuck in). Chesapeake seem to be the worst at manipulating numbers.

Even when a lease specifies "Gross", they often subsequently slip in a clause that negates the calculation of royalties as Gross.

I would suggest that you take advantage of the search window in the upper right hand corner of the web page - and, insert appropriate search words to locate past discussions - a lot of useful information is available in these past discussions.

There appear to be valid arguments for net royalties on Natural Gas Liquids (NGLs), where there can be significant post production costs for these NGLs.

For Natural Gas, I personally see NO REASON for net.

If you are in a dry gas area - I would opposed the insertion of Net in a lease.

If I were in a wet gas area, I would only consider net for that portion that was NGLs.

Personally, I would prefer 15% Gross over 17% net (of course 17% Gross would be better).

In any case, please have an Attorney experienced in O&G Law review any lease BEFORE you sign; several hundred dollars for a review could save you a lifetime of regret.

 

All in my personal opinion,

JS

Permalink Reply by ROBERT H.DIXON JR. on August 23, 2012 at 2:46pm

yes this is true the companys exspenses but their getting 87% already times that by 100s of wells  as of which the land owner only has whats in his production unit ?

3uq96odaochmjPermalink Reply by 3uq96odaochmj on August 21, 2012 at 12:43am

probably close to 12.5% straight w/o deductions

Permalink Reply by Armstrong Land on August 22, 2012 at 4:12pm

Jasper,

What is your basis in this calculation?  

3uq96odaochmjPermalink Reply by 3uq96odaochmj on August 23, 2012 at 12:24am

experience in the industry.

Permalink Reply by Armstrong Land on August 22, 2012 at 4:12pm

Mr. Dixon,

I think 17% net is a great deal - these company's incur a ton of expenses producing and enhancing your gas - the effect of the net down is tied directly to commodity price.  Jasper's assumptions about equating it to 12.5% is simply wrong, the equation does not follow.  The percentage is fixed (17%), the gathering/processing fee is fixed (likely 50 cents/mcf), thus the equation follows that say gas is $5/mcf - $.50 = $4.50 net realized value.  You of course make 17% of that 4.50 (the net post production commodity price).  If gas is 6 bucks, all the better, if its 4 bucks, that 50 cents drives your net down further.  By signing that deal you allow the company to economically develop and enhance the products and enhance your royalty.  In this market, its a steal, I wouldn't let bad information deter you from realizing a potentially valuable royalty stream.  If your acreage can make high btu or wet gas, I think you will find these types of net leases are necessary for company's to cost justify the construction of their costly infrastructure/processing plants.

Permalink Reply by Jack Straw on August 22, 2012 at 5:34pm

RE: "these company's incur a ton of expenses producing and enhancing your gas"

WRT: "these company's incur a ton of expenses producing"

True - that is why these companies get the majority of the value of the resource (80-87.5%), while the landowner (who pre-lease owned 100% of the Natural Gas) can expect to receive a small proportion of the gross value.

The profitability risk and the significant investment earns the companies the majority of the value of the resource.

WRT: "these company's incur a ton of expenses enhancing"

There are very small costs associated with "enhancing" dry gas (as there is little requirement for enhancement). I do not look upon things such as nominal transportation (pipeline) tariff as an enhancement.

In situations in which the gas is "wet", the NGL portion will require enhancements; an enhancement charge is (IMHO) justified on that portion consisting of NGLs - and there should be protections that the enhancements are fully justified and reasonable. 

When payment is specified as "net", creative accountants can play games with the numbers.

RE: "net leases are necessary for company's to cost justify the construction of their costly infrastructure/processing plants"

The infrastructure/processing plants are typically investments made by midstream companies, not associated with the E&P companies.

 

If you keep it Gross, you keep it simple, you keep it clean - you do not have to worry about what those strange deductions are on your royalty statement.

The companies take the risks, and for that they should and do get the biggest piece of the pie; but, the companies are in the business of taking risks.

Since the companies get (by far) the biggest piece of the pie, all the risks should be on them - and they should not attempt to transfer risk back upon the landowner by the use of net (rather than gross).

 

All IMHO,

                    JS

 

 

 

 

Permalink Reply by Jim Litwinowicz on August 23, 2012 at 2:59am

One of the arguments that companies use to justify cost deductions in royalties is that these are legitimate business expenses. But the landowners are not true business partners even though some of us call them partners. If we were partners, we would have input into business decisions like selling price, contracts with midstreams, the degree of processing and costs of enhancement before selling.

Few of us would have the expertise or time to be involved in such decision making even if companies allowed it. So we have no input to all these decisions. No control over company costs. So if we have no input or control over these things why we help should foot the bill?

If a company wants to treat me as a partner by incurring costs on my royalty stream then I should be involved in controlling those costs.

Permalink Reply by Jack Straw on August 23, 2012 at 3:40pm

I would like to add a point to my previous post:

The larger O&G Companies (such as Chesapeake) and the Integrated Oil and Gas Companies (Chevron=Atlas, EXXON=XTO, etc.) have Midstream subsidiaries.

These companies have the potential to play some complex accounting "games"; shifting income/profits from the Upstream to the Midstream (or visa-versa).

When a lease specifies Net (rather than Gross) - or they slip in a net back clause buried somewhere towards the back of the lease - this opens up a wide door for "creative accounting". Bouncing charges/expenses back and forth from the Upstream to the Midstream could confuse all but the best forensic accountant.

 

All IMHO,

                 JS

 

Permalink Reply by ROBERT H.DIXON JR. on August 23, 2012 at 2:33pm

next if they offer the 17 % on the marcellus and make the by products what about the utica that is  leased it is supposedly a dry gas also  would in fact this 17% still apply  and what about past the utica cause the lease goes to center of earth

Permalink Reply by Jack Straw on August 24, 2012 at 3:55am

To interject, unless a lease explicitly specifies a depth limit (either in feet subsurface or by naming a formation), then there is no depth limit associate with the leased - as ridiculous as it might sound, the lease does extend to the "center of the earth".

As most leases do not specify depth limits, the implication is that most leases extend to the "center of the earth".

 

JS

Permalink Reply by Jack Straw on August 24, 2012 at 4:18am

I should have qualified that as "most older leases".

The old leases tend to be "one page wonders".

It was (and is) to the advantage of the leasee to have as few limitations as possible written into a lease. Since the O&G Companies wrote the leases for their primary benefit, they wanted to leave as many "doors open" as possible.

 

With the rejuvenation of interest associated with the Marcellus & Utica - the old leases HBP by old shallow wells have been a gold mine for all but the landowner.

The lack of restrictions in the old leases have hobbled many landowners with leases more appropriate for the situations existing inthe 19th and early 20th centuries.

 

All IMHO,

                     JS

RSS

© 2024   Created by Keith Mauck (Site Publisher).   Powered by

Badges  |  Report an Issue  |  Terms of Service