Gross vs Net considerations

Our attorney pointed out something interesting today. We were offered a gross, no deduction lease for some property in a couple counties. It was gross "at the wellhead". One county is dry gas only (Doddridge) and one county could be either wet or dry (Tyler). The interesting part is that we might want the price at the wellhead, not at the point of sale if it is dry, since the point of sale price might be lower.  If it is a wet gas well, the price would probably be higher at the point of sale after processing. However, if we want that price, they want to take out processing charges. The thing to remember is that just because they offer you a gross, no deduction lease, THAT might not be the best way to go if you had to pick one or the other. Obviously, we all want a no deduction either way, but if you had to choose AND you are in a wet gas area, the choice is not as easy as it looks since you might be better off with the processing fees taken out and getting your money at the point of sale. You need to find out how the company determines wellhead pricing. Also, we have one well in Wetzel which is producing wet gas and another well just a couple hills away which is only dry. Makes the choice that much harder. Any thoughts about this?

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Permalink Reply by Joseph-Ohio on April 14, 2015 at 6:36am
To me, those clauses discuss sales to affiliated entities as being an option that may occur.

I don't read that sales to any affiliated entity is prohibited / dis-allowed.

I read those clauses as permissive and interpret on that basis that sales to affiliated entities could be expected.
Permalink Reply by Tony Yurina on April 15, 2015 at 9:54am

 Due to the inevitable compression costs to gather, compress and process the gas to make it marketable or usable a just and fair royalty with this added land owner burden must be considered at the time the lease is negotiated.

It is crystal clear why the Western States royalty owners are getting 25% royalty given the reality of market enhancement deductions.  

IMO a 22%-25% royalty with deductions are in not out of reason for the prolific areas.  If shared risk is a problem, structure a tiered royalty tied to WTI or NYMEX.  

Most companies refuse to do this, however for really good wells, they win and royalty lose a piece of the pie. 

Permalink Reply by Kyle Nuttall on April 15, 2015 at 11:14am

If we here in West Virginia could negotiate up to a 25% royalty I'd be a little more willing to allow my clients to agree to deductions.  The highest I've seen is 20%, though.

There is still the issue of auditing.  There's no way for most of my clients to audit the company to make sure that the numbers they're seeing on their checks are accurate, or even real.

Permalink Reply by Kyle Nuttall on April 9, 2015 at 4:34pm

Nice point about them being able to calculate the value at the wellhead.  From my discussions with landmen and others in the industry, they know with a pretty high level of accuracy just how much of each type of gas is coming out of the wellhead.

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