Market Enhancement Clause

I posted this on the General Discussions but I guess no one has an answer.  We all know that any "Market Enhancement Clause"is not a good thing, although it may be too late for a lot of us. I am not leased with Chesapeake but I wonder if my market enhancement clause is NOT THAT BAD.  The language reads "17.5% of the gross proceeds received by Lessee for the sale of oil, gas and related products produced and sold from the leased premises and accruing to Lessor under this Lease, such royalty to be calculated without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting and marketing the oil, gas and other products produced from the Leasehold; provided, 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 so long as such costs are based on Lessee's actual cost of such enhancements, and further provided that in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee. Lessor's royalty shall bear its proportionate share of applicable production, severance and other similar taxes attributable to Lessor's royalty interest."  I thought perhaps the section that reads that I cannot receive a price that is less than the price they receive saves me a bit, although I know it also means that they can still deduct from my royalties.  What are your thoughts?  Thank you in advance

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Replies to This Discussion

Permalink Reply by Tony Yurina on October 21, 2013 at 4:05am

The royalty market enhancement in bold print above and resultant cost to the royalty owner seems fair on its face.  

However it is problematic, in that the lessor is not provided the documentation to review and ascertain the validity of the market enhancement actions and the cost vs. benefit ratio as a result of "market enhancement".

The lack of market enhancement documentation and forthright transparency of such an arrangement will be fodder for some law firms.  

I doubt the production company will provide the two sets of figures to justify any cost deductions associated with supposed market enhancement actions.

The first set of figures would obviously be the gross sales receipts and royalty without any market enhancement actions.

The second set of figures would show the gross sales receipt, the types of market enhancement action(s) and cost of each action, the royalty percentage deduction, and the resultant royalty payment.

One could easily compare the two number sets and determine if the production company is following the spirit of the two fold meaning of the no post cost deductions -non market enhancement / market enhancement having a better price with deductions. 

The problem I see is they want you to accept the terms without your ability to ever know (likely without litigation and associated costs) the actual cost to enhance numbers vs. non enhancement numbers.

Permalink Reply by Dott on October 21, 2013 at 5:52am

Thank you so much for responding

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