Market Enhancment Clause and the MWCD/ Antero Lease

I have followed many of the discussions on this site about the market enhancement clause that the oil & gas companies want to include in their leases.

I have also read this same clause in the MWCD /Antero lease on the Seneca Lake land.  The MWCD did accept a market enhancement clause in their lease.   A copy of that lease is attached.

http://http://www.mwcd.org/upload/documents/conservation/Seneca_Lak...

My questions are:  if the market enhancement clause is so bad why do you suppose the MWCD, with over 6,700 acres of land at Seneca, would have accepted this clause if they thought it would reduce their royalties in any way?   Does this clause in the MWCD lease appear superior to others market enhancement clauses? 

I would think the MWCD would have hired a multitude of attorneys to review the Antero lease and they would have made sure they got the market enhancement clause wording correct.  With the size of the MWCD lease (hundreds of millions of dollars of royalties at stake), would they have not got this right?

Curious to others comments as I am unsigned and still leery about these market enhancement clauses.  Appreciate your comments!!

http://www.mwcd.org/flood-control-and-conservation-stewardship/cons...

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Permalink Reply by Joseph-Ohio on December 18, 2013 at 3:38pm
Maybe more royalty % will also mean more nonsense deduction clauses ? ?
Permalink Reply by Joseph-Ohio on December 18, 2013 at 4:17pm

Doesn't all the controversy promote delay ? ?
As you both (Scott T. and Philip Brutz) have written / inquired / remarked about results of; how can the top level teams of lawyers allow such contradictions to exist in leasehold agreements of such magnitude ? ?
Is it intentional ? ?
Perhaps to enable moving forward and arguing about it all later ? ?
That would be the most forgiving guess of an interpretation I can muster; any other would come off conspiratorial wouldn't it ? ?

Permalink Reply by Scott T. on December 18, 2013 at 5:05pm

Maybe if we just duplicate what the MWCD did on the market enhancement clause we can at least piggyback off their attorney team if something goes sideways?  Sure beats having to hire our own attorney team!!

Permalink Reply by Joseph-Ohio on December 18, 2013 at 9:55pm
Seems like it could be a good idea although it also seems condoning of the double talk and / or what appears to be an assault doesn't it ? ?
Wouldn't it be better to seek more specific prohibitive language in these clauses prior to commiting to them by signature ? ?
I think it would be best to drop the 'however' and any words that follow afterward - don't you ? ?
Permalink Reply by Scott T. on December 19, 2013 at 5:18am

You would think the MWCD would have been able to drop the words after 'however' if they wanted.  They had to have about as much leverage as anyone could have with 7000 acres.  It is almost like they believed this was good wording.....would love to hear their side on this issue.

Permalink Reply by Joseph-Ohio on December 19, 2013 at 5:32am
Hard to imagine their team of legalists shooting themselves in the foot on this isn't it ? ?
I would also like to understand their rationale.
Permalink Reply by Scott T. on December 19, 2013 at 7:33am

In your example it would appear technically that the costs would exceed the value of the enhancement al least it would for the lessor.  This is where it becomes a word game.

Permalink Reply by Joseph-Ohio on December 19, 2013 at 7:44am

Pretty much a word game from the get go Scot T.

But in the example :

The Cost of Enhancement was $1.00 (less than the Value)

The Value of Enhancement was $2.00 (more than the Cost)

It's just that the lessor paid the whole Cost and as a result earns less royalty than if no Enhancement was performed.

Also key is if it is not an 'arms length transaction' the lessee pays nothing for the Enhancement but just gets to sell it for more - of course at the lessor's expense.

Permalink Reply by Joseph-Ohio on December 19, 2013 at 7:58am

James,

'Doubt more than $0.20 of that $1 enhancement cost would or could be deducted from the MCWD's royalty.'

Don't know James can't tell from clause language.

'But the MCWD should have inserted language to clearly limit the deductions to the landowner's pro-rata share of the cost (20% of cost).'

Oh yeah - I of course agree.

'If MCWD wants to know what is really bring deducted and if it complied with lease, it can assert it's right to audit books that is also contained in the lease.'

I guess so but that means hiring an Accountant (at least).  Also much easier for MCWD to entertain that.  Can you imagine landowners having to do it ?  Pretty daunting / onerous wouldn't you agree ?

'Using $0.20 as MWCD's correct share, the net would be $2.20 with enhancement and $2.00 without it'

Have to deduct the Cost of Enhancement.  Key is if MWCD pays 100% of Enhancement and if there is no Enhancement would pay nothing.  That's what I was trying to say - weighing selling Un-Enhanced production at $10.00 vs. selling Enhanced production for $12.00 but also with MWCD paying 100% of the cost for Enhancement.  20% x $12.00 - $1.00 = $2.40 - $1.00 = $1.40 to lessor.  Whereas 20% x $10.00 = $2.00 return for lessor if no Enhancement occurred and product sold.

Say to digress from the math MCWD = Muskingum Conservancy Water District - right ? ?

Permalink Reply by Scott T. on December 19, 2013 at 10:12am

Yes, MWCD is Muskingum Watershed Conservancy District

Permalink Reply by Joseph-Ohio on December 19, 2013 at 11:03am

Who are you asking James ?
I certainly don't have a copy of the official MWCD lease just so you know.
I only read what was posted and noticed that there were no instructions on the % of the Market Enhancement that the lessor was responsible to pay - just that there may be deductions. The clause is not specific in that regard as you also noticed and only addressed the lessor's payment. I believe it a rational interpretation that the lessor is responsible to pay the whole nut. It would be more of an assumption to interpret that the lessor was only responsible to pay a % of the cost of the same magnitude as the lessor's royalty %.
Of course this is only my interpretation / opinion of the meaning of the clause posted.
Also of course the numbers used are totally hypothetical and used just to help illustrate a line of thought.
Regarding requiring Market Enhancement of an already marketable product being mentioned; my interpretation was that was presented as an option available to the lessee to be employed at the lessee's discretion. Once again only my interpretation / opinion of the meaning. Maybe I'm right maybe I'm wrong.  We're only talking here trying to figure a few things out so we can make as an intelligent decision as we can should opportunity present itself.

Permalink Reply by Joseph-Ohio on December 19, 2013 at 12:21pm
BTW James, I think my high school math skills are rather easily seen to be intact in my little intellectual exercise.

Also it's rather interesting how kernels of additional information and addendum clauses seem to materialize as discussion progresses and how they are then portrayed as something that all participants are / should be privy to.

Makes a fellow conversationalist who is trying to pay attention / stay on topic and understand what's being discussed also question the motivation - doesn't it ? ? Does me - how about you ? ?

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