Deduction Clause

I have a lease with the following clause.  There are no exhibits addressing deductions other than this clause.  Should I expect to pay expenses?  Any comments are welcomed.

4.  The royalties to be paid by Lessee are: (a) on oil, and other hydrocarbons which are produced at the well in liquid form by ordinary production methods, one-fifth of that produced and saved from said land, same to be delivered at the wells or to the credit of the Lessor in the pipeline to which the wells may be connected; Lessor's interest interest in either case to bear it's proportion of the expenses for treating the oil to make it marketable as crude; Lessee may from time to time purchase any royalty oil or other liquid hydrocarbons in it's possession, paying the market price therefor prevailing for the field where produced on the date of purchase; (b)  on gas, including casinghead gas, or other gaseous substance produced from said land and sold or used off the premises or for the extraction of gasoline or other products therefrom, the market value at the well of one-fifth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-fifth of the amount realized from such sale; such gas, residue gas, or gas of any other nature or description whatsoever, as may be disposed of for no consideration to Lessee, either through unavoidable waste or leakage, or in order to recover oil or other liquid hydrocarbons, or returned to the ground, shall not be deemed to have been sold or used either on or off the premises within the meaning of this paragraph 4 hereof; (c) on all other minerals mined and marketed, one-fifth, either in kind or value at the well or mine, at Lessor's election, except that on sulphur the royalty shall be one dollar ($1.00) per long ton.  

 

Thanks.

 

 

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Replies to This Discussion

Permalink Reply by lee on March 31, 2011 at 7:16
Add this to lease exhibit:    Notwithstanding anything contained in this lease, the royalties due to Lessor hereunder shall never bear, either directly or indirectly, any part of the costs and expenses of overhead charges or related operating costs, expenses of production, compression, gathering, dehydration, treating, transportation and marketing of minerals from the leased premises, except Lessor’s royalty shall bear its proportionate part of severance taxes, it being the intent of this provision that Lessors shall not bear, directly or indirectly, any costs whatsoever except Lessors’ proportionate obligation under the law for severance taxes.
Permalink Reply by RONNY on March 31, 2011 at 7:35
I wish it was possible but this lease is held by production and paying royalties.  I'm wondering if since my clause does not specifically refer to expenses related to gas production, only oil, if I can object to any deductions for marketing gas.  Also curious about the line which states "paying the market price therefor prevailing for the field" If my operator is paying less than other operators in the same field do I have a legitimate complaint?  Or, am I just pissin' in the wind?  Thanks.
Permalink Reply by Henry on March 31, 2011 at 8:06
The "paying the market price therefor prevailing for the field" was under the oil, and not the gas section.  What ever it means, it won't apply to your gas.  Sorry.
Permalink Reply by Henry on March 31, 2011 at 8:02
This looks like the standard Chesapeake lease.  You will pay expenses.  Sorry.
Permalink Reply by RONNY on March 31, 2011 at 8:30

Under section (b) "the royalty shall be one-fifth of the amount realized from such sale"

 

Is this the line which gives them the legal right to deduct expenses?

Permalink Reply by Henry on March 31, 2011 at 12:02

Ronny,

I am no lawyer, and I cannot tell you where in those words CHK gets the legal right to deduct expenses.  All I can tell you is that they do.   But if I had to offer an interpretation, knowing what I know about how CHK sells its gas, it would be this:

 

Your royalty is 1/5 of the amount "realized from such sale.."  From what such sale?  From "gas sold at the wells.."  So when gas leaves the well in your section, CHK immediately sells it to its subsidiary, CEMI.  The price for which it is sold depends on the price CEMI later sells it for.  So let's say CEMI sells it for $4.50 into the so-called market.  The price you will receive at the well will be $4.50, minus all the costs CEMI incurred in getting your gas from your well to the market.  These prices can include transportation, dehydration, marketing, compression, etc.

 

One can debate about whether or not CEMI's costs are excessive or not.  Based on my survey and feedback I receive from survey respondents, these costs appear to be higher than what we see  charged by other operators.

Permalink Reply by RONNY on March 31, 2011 at 14:25
Thanks Henry.  I believe I'll ask for an explanation as to exactly how they derive their price at the Royalty Owner's meeting in April.
Permalink Reply by Ben Elmore on April 1, 2011 at 9:14
In Texas and LA, the lessee has a right, whether expressed in the lease or not, to deduct a proportionate share of reasonable post-production costs.  The only way to prevent it is to provide so expressly in the lease by adding the cost-free clause mentioned above.
Permalink Reply by Henry on April 1, 2011 at 12:19
Good idea.
Permalink Reply by w.r. frank on March 31, 2011 at 14:56

Sorry Henry,

 

The price CEMI pays has nothing to do with its "cost." It is not an arm's length transaction. CEMI is a profit making entity controlled by CHK.

 

For landowners with a "cost free" royalty clause (not the primary lease quoted above), CHK is illegally trying to do do indirectly what it is prohibited from doing directly (i.e. charging for gathering, transportation, marketing (soon compression) and profit to CEMI) by sales to an affiliate.

 

CHK is about to be hit with the biggest multiple landowner suits you can imagine (from which contributions to the Jaycees will not shield it) and also class actions. The landowner suits will be in every parish in which CHK uses this illegal action and in multiple suits with every lease clause you can imagine. The class action, if certified, will be consolidated in a Federal District Court.

 

CHK is rotten company from top to bottom!

Permalink Reply by Henry on April 1, 2011 at 2:21

wrf,

You know more than I. 

 

I was parroting the CHK explanation of how they sell their gas and give you their price.  I don't condone it.  I just repeated it.  I hope I didn't convey that I thought it was right of fair.  But that's how they explain it to their lessors.

 

From personal experiences, I agree with your last statement 100%.  I have had to deal with different people from CHK on various issues.  I do not doubt they are good, decent people at heart.  But I sometimes think they have been so immersed in their culture of deceit and bullying, that they have come to believe that theirs is the normal way of doing business.    

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