There is much mystery surrounding proper language to provide protections to the Lessor for
post-production deductions by the Lessee against royalties due. I am aware of the Chesapeake vs. Hyder
ruling, which I believe presumes that an oil and gas company can use the "work back" method of accounting,
to deduct post-production costs, back to the "well head" even though contrary language is present in the lease
stipulating "no costs" shall be deducted. It seems the "magic words" need to be clearly referenced in the lease, or
attached exhibits, and those words are "free and clear" or "cost free" as specifically applying to all royalty proceeds paid, and that great care needs to be taken, to clearly identify, that royalties should be calculated "at the point of sale"
instead of being calculated "at the well head". Relating to this, I have a Chesapeake lease, where the language reads
that no post production charges, of any type, will be deducted from the Lessor's royalties, period. Though this language, (not verbatim) does not stipulate where, or, how the royalty was to be calculated; neither "at the well head" or "point
of sale" is even referenced. I can only say, that on my past royalty statements, "post production" costs have never appeared on my statements; and so am I to conclude that this "no costs" royalty provision is working, or, that Chesapeake had used the "work back" method of accounting, back to the "well head" and provided no notice of those expenses to the Lessor, as they have interpreted the law, allowing them to do so.
If anyone could put this in layman's terms, it would be greatly appreciated in the negotiating process of developing a good lease.