Gross Proceeds at Wellhead; Terms, wording, good or bad ?

I am asking for feedback, opinions, recommendations and good or bad experiences with leases or negotiations with involving calculations and compensation based on proceeds at the wellhead.  I have found very little to no information in previous post regarding this type of lease so this would be a very beneficial topic for educating a lot of other members on this topic.

We received a Gross Proceeds Clause in a lease contract as follows:

"Gross Proceeds at Wellhead. It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, royalties payable on gas and gaseous substances, including casing head gas, shall be based upon the MMBTu value of unprocessed gas at the wellhead, free of all costs, charges or deductions of producing, treating, compressing, transporting and marketing said gas to such purchaser, which royalty, however, shall be subject to such production taxes and severance taxes as are properly allocable thereto."

Questions:

1) How is "Wellhead" gas valued or assigned a value ?

2) How would oil or other liquid substances be valued at the Wellhead ?

3) Is a "Gross Proceeds at Wellhead" an oxymoron being used as there will be no expense for treating, compressing, transporting and marketing.  Also should the production and severance taxes not be allowed on a gross proceeds lease?

Thank you for your replies !

Views: 4872

▶ Reply to This

Replies to This Discussion

Permalink Reply by Bill Bergseid on December 8, 2015 at 4:05am

Most gas is not sold by the producer at the wellhead.  So the well head price would normally be the price paid at the delivery point, less any costs between the well head and the point of sale.  If gas is sold at the well head these costs would normally be figured in by the buyer and seller in arriving at their price.  So there are two elements a mineral owner wants to cover in the royalty clause of his/her lease:  the point of valuation and the costs which can and cannot be deducted prior to calculation of the royalty.  Unfortunately, many of those mineral owners who tried to protect themselves by getting help from a local attorney, probably didn't find someone with the expertise needed in this area.  Ohio hasn't been a big gas producing state until lately.  So while a local attorney may have had experience helping clients with leases, the production was never of large quantities of gas, impregnated with liquids, sent to different plants for processing and liquid extraction. 

I would think that people on this board should work to organize a big enough political group to get a sympathetic legislator to help protect mineral owners.  Many of these terms could be defined statutorily to avoid some of the deductions from royalty.  Take a look at Wyoming's statutes on royalty payment.  You may not be able to get all of these adopted in Ohio.  But I think some of the provisions would be easy to get passed:  specifying time periods when royalties must be paid, both following initial production and then on an ongoing basis; if not paid in such a time period interest accrues; if one has to sue to collect the royalties and interest, attorney's fees and costs are included in the judgment; and a statute requiring information that has to be provided with each check showing volumes and deductions.  More difficult, but worth pursuing, are the definitions of royalties and costs of production, which cannot be deducting before calculation royalty.  These costs of production include: deyhdrating, gathering to the point of sale, compressing, and treating gas.  You also might want to check to see if a local chapter of NARO would be of help.  Good luck.

Permalink Reply by james mcmeechan on December 8, 2015 at 6:59am

  I'm not sure I would count on much effective relief from the state. The Public Utilities Commission is a fine example of the state's ability to regulate something. I do believe your right with NARO. They must be well aware of the schemes, and able to help with avoiding them.

Permalink Reply by DustyRoads on December 9, 2015 at 4:20am

Thank you to all who have responded to this post and provided valuable input.  I think we have all learned something from this post and I personally have learned a great deal for myself and will share with others.

The proposed Gross Proceeds as Wellhead seems to be full of gaps and loop holes and pretty much gives the lessee the ability to deduct and valuate the gas and other liquids at whatever gross or net value they can calculate or justify on their end.  The wording can be very misleading and misinterpreted by the lessor as the term "gross" can mean very little in today's leasing bags of tricks.

So what is the ideal leasing terms language and terminology to use in a lease or amendment regarding the sale and valuation of gas, oil and other liquids which a well can produce?   

Permalink Reply by Joseph-Ohio on December 9, 2015 at 5:16am

Great question.

Inclined to keep it as simple as possible.

Seems to me, the less words the less angles can be taken.

The more words the more askew things have a chance to go.

Find that 'Good and Experienced Attorney'.

Christian  E. Turak (who contributed / replied above) noted on his profile page that he's an Attorney.  I for one have already found much value in those replies of his. 

Good luck DustyRoads and wish me and mine luck as well - I think we need it.

Permalink Reply by Leo S on December 11, 2015 at 7:48am

I would put an absolute mininum clause into the agreement.  For example, state that the value of your gas (then do for liquids and oil) can not be any lower than $2.50.  That way, if your royalty is 20%, you can be assured you will get a minumum of 50 cents.  The oil and gas companies all have hedges in place that bring them much higher revenues than any market value for your minerals.  The oil and gas companies will continue to produce even if gas goes to zero because of their hedge strategies.  In my opinion it is definitely a necessity to include an absolute minimum value you are willing to receive.  You could say, 50 cents per MCF produced.  Otherwise, you are subject to having your minerals produced and receive only 10 cents.

Permalink Reply by james mcmeechan on December 11, 2015 at 8:11am

  When I received gas from a clinton well, anything over what you were allowed was billed at what the local utilities were charging. You could tie it to a % of what local utilities are paying. You would only need a lesser to sign up for it.

Permalink Reply by cecily cox on December 11, 2015 at 9:24am

You can have a lease written by "The Almighty" Himself, but getting the O/G companies to comply is another story. I think you can't underestimate the importance of having your royalty check assessed by a reputable G/O accountant or lawyer, every month. The G/O companies may sign a landowner-friendly lease, then take out any deductions they want, hoping the landowner will be happy with the amount and be too dumb to scrutinize every figure on the check stub. They count on it, knowing most people won't go to court.

As for writing lease language, a good G/O lawyer is a must. Greg Brunton 614 228 1311 is an excellent lawyer. He's with Reminger Co. out of Columbus

Permalink Reply by Jeff Kerr on December 11, 2015 at 9:26am

Just got a royalty check from Rice for Aug. and Sept   lol they pd. us 74 cents for Aug and71 cents for Sept  what a joke 

Permalink Reply by DustyRoads on May 5, 2016 at 11:04am

This has come up again.......... any current input or opinions?

RSS

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

Badges  |  Report an Issue  |  Terms of Service