Beware of all the gas companies!

I signed two lease's back in 2011 with Gulfport Energy on 80 acres that I own in Belmont County, Ohio. Let me start by saying don't believe anything that any of the land men tell you, the are working for the gas companies and their own benefit not yours period. While I was negotiating my lease with several companies at the time in 2011. I clearly explained to them that any lease I would sign would require a Pugh clause, and that I would not except any lease that required me to pay any of the cost associated with the production or marketing of the finished product from any wells drilled onto my property. I ultimately ended up signing with Gulfport Energy because of the higher bonus payment and higher royalty percent, and the land man assured me the Pugh clause and the deduction clause weren't a problem, that a lot of people were requesting it. Well the land man was lying through his teeth after receiving my first royalty check and statement there were $14,574.11 in total deductions. Beware of any lease that includes the language below.

 

"All oil, gas or other proceeds accruing to Lessor under this lease or by state law shall be without monetary deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other proceeds produced hereunder to transform the product into marketable form; however, any such cost 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 they are based on Lessee’s actual cost of such enhancements.  However, in no event shall Lessor receive a price that is less than, or more than, the price received by Lessee."

 

It was explained to me that this was exactly what I wanted and that the second part of this clause only meant if they did any advertising to enhance the selling price of the finished product I would have some associated cost from that. Well I have since found out that this is the language that the big oil companies have adopted to lead land owners to believe that they are getting a no expense deducted clause in their lease. If you find this language in your current lease be assured be ready to pay every single cost that is associated with bringing the product to market. Don't sign it! Ask clearly for a no production cost clause and have it reviewed by a gas royalty attorney.

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Permalink Reply by Joseph-Ohio on November 11, 2013 at 3:33am
Reads good.
Seems to cover the serious hoodwinking concerns we've been discussing here.
Good luck - kindly keep us informed.
Thank you.
J-O
Permalink Reply by george m. on November 10, 2013 at 6:29pm

I have reviewed a lease prepared by a landowner group with their attorneys supposedly protecting the interest of their members.  The Royalty Proceeds section goes like this:

 

Lessor's  royalty shall not be charged directly or indirectly with any expense required to make gas marketable, including but not limited to the following: expenses of production, gathering, dehydration, compression, treating, or marketing of gas, oil or any liquefiable hydrocarbons...except for the following which shall be charged proportionately to Lessor based upon the same cost or expense amounts paid by Lessee:

 

Note, you've got to watch what comes after the "however" (in Kevin's case) or the "except" in the scholarly prepared phrase above.

 

It goes on to explain 3 (three) paragraphs of exceptions/deductions, namely:  1) logistical (transportation charges), 2) processing of NGLs by "unaffiliated" plants, 3) processing of NGLs by "Affiliates".

 

There is a whole separate section describing what constitutes an Affiliate.  We all remember Enron, which had many "off balance sheet" "Affiliates".  The whole idea is to protect the landowner from hanky pan key associated with non arm's length transactions (which still often occur in the industry...see previous posts).

 

Important note, it does not stipulate a maximum percentage deduction, so the landowner assumes unspecified risk...and this is supposedly a very good lease.

 

The lease does have a clause defining the "minimum royalty"...which shall be based on the wellhead price in accordance with the index for the first day of the production month for the Dominion Transmission Inc./Appalachia Basis Index, published by Platts.

 

There is a whole section that deals with "Arbitration" (i.e. settlement of disputes), which is good (let's all try to stay out of court).

 

The lease is a mere 30 pages in length, which at $200/hour, should help some lawyers send their kids to college.

 

Hope you find this interesting/useful.

Permalink Reply by Joseph-Ohio on November 10, 2013 at 9:33pm
Causes us great concern - even more great concern.

Thank you.

J-O
Permalink Reply by bo boboski on November 10, 2013 at 10:44pm

THEN;  there's always the scenario where they create a new company to sell the wellhead products to at a lowball price. That co. then sells it for 100% profit to the midstream buyers!  Maybe the leases should address this with a clause that doesn't allow it. Landowner groups are charging big fees to get us good leases, but are they really?

Permalink Reply by Dan on November 14, 2013 at 12:59am
Last year I posted I had read Gulfport was sending their Utica condensates to their Grizzly Tar Sands counterpart in Canada to thin the bitumen to flow for transport, and asked the ? How will folks be paid royalties on the NGL's. Do they get paid after they are refined into oil in Texas? Or does the "enhancement" mean the landowner pays for the transport of NGL's to the tar sands and receives nothing back? Have never heard an explanation yet?
Permalink Reply by Joseph-Ohio on November 14, 2013 at 1:52am

I'm having real problems pertaining to how and why a lessor / landowner would have to pay for any "enhancements" at all.

If the lessor / landowner a) receives no return on production after "enhancements" are performed; b) said lessor / landowner has no knowledge of or control over what "enhancements" will be performed and c) said landowner / lessor has no control over what entities perform "enhancements" - why would the lessor / landowner have to pay for them ?

It's like your neighbor saying to you I'm going to fix my roof and now you pay for it.

Not making sense to me at all. 

We're back to if you want we lessor / landowners to pay enhancement costs or a percentage of their cost then we want another royalty return on the sale of "enhanced" production originating from our Gas and Oil (if Oil is also "enhanced").

Permalink Reply by Darlene Newton on November 14, 2013 at 3:09am

Yup

Permalink Reply by Greg K on November 15, 2013 at 3:41am

I agree Joe-Ohio....aren't we selling them a commodity? 

Permalink Reply by Joseph-Ohio on November 15, 2013 at 7:12am
Oil, natural gas, gold, and silver are traded on the market as commodities as I understand it.

But that really doesn't define my reasoning / what I'm trying to address.

If something - anything - is sold then it belongs to the buyer.

The way I see it, it doesn't follow to ask the 1st seller to pay for altering ( enhancing ) whatever was purchased by the 1st buyer, unless the 1st seller stands to gain a return on a subsequent sale made by the 1st buyer.
Permalink Reply by Joseph-Ohio on November 15, 2013 at 7:40am
What's in it for the landowner / lessor to pay for (any percentage of) 'post production' / 'market enhancements' once the landowner / lessor has 'sold' production for royalty payment ?

A higher royalty payment based on the 'net' return after enhancements ?

That would make sense but I'm thinking the bookkeeping would become a powerful headache.
Permalink Reply by Joseph-Ohio on November 15, 2013 at 8:05am
Also it seems to me to be fair that the final sale of the 'enhanced' production would have to be at arm's length ( not to a partner / subsidiary, etc.).

How does a landowner / lessor stay enlightened about that along with everything else ?

Hire a staff of auditor's, accountants, attorneys, etc. ?

Sounding pretty cumbersome / impractical to me.
Permalink Reply by Greg K on November 15, 2013 at 5:41pm

that was my point joe

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