Not long ago, Samson Contour Energy offered my family in Sabine Parish a lease for 0-->4000ft, Fredericksburg formation I believe. The bonus was $250 and for the royalty I have two options:  A) 22% with deductions, or B) 20% with no deductions. 

Deductions include:

1. Ad Valorem

2. Production & Excise taxes

3. Treating, Processing

4. Delivering and otherwise Marketing

 

If drilled, it will be a hydraulically fractured horizontal well for liquids. If I choose the 22% royalty, I have to believe those deducted costs, now, and for the life of well, will not exceed the 2 percentage points. 

Has anyone else had enough data to model this decision successfully in this area? My gut is telling me that there is enough uncertainty in future tax obligations alone to warrant going for the No-Cost option.   

Any insights are much appreciated.

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Ben, from prior experience, I would go with the no cost option.  There are too many variables in the "expenses" and not much accountability.  Processing and transportation expenses can encompass many costs, which you have absolutely no control over.  I have both types of leases and the no cost is definitely better, even at a slightly lower percentage.  Good luck!

i suppose as long as you aren't tying yourself to chesapeake, they apparently sometimes like to negotiate in bad faith and find ways around the "no cost" language after it's been set in the lease.  keep your ear to the ground, CHK.  sorry for the OT i couldn't resist the jab.

 

that said i would probably choose no cost, like sweetniece says you might be surprised how expensive "expenses" can be.

I'm not going to recommend which way to go.  But I will recommend that if you choose the cost-free royalties at 20%, that you get iron-clad language in your lease.  We have seen some companies wiggle out of a cost-free clause.  I've seen one company that has given language to lessors for cost-free royalties, and then proceeded not to honor it.  So, make sure your language is iron clad -- get an attorney to provide the language.  You will need the words to address two things:

 

1.  How will the price for your gas be determined?  Make sure it is the downstream price where the gas is sold into the market.  Depending on the location of sale, you may be paying for the deductions without realizing it.  Make sure there are provisions that cover what happens if the gas is sold to an affiliate.

2.  What if any deductions are allowed?  NONE (well, maybe severance tax?).  And make sure that there are no exceptions for things that "enhance" the price of your gas.  Do not allow for any exceptions.

 

These two items are related, and you will need to get both of them right.  I recommend you get an experienced O&G attorney to help you.

Thank you Sweetniece, essay, and Henry for your thoughtful replies.
I would take the higher royalty myself. I would also counter with a free lease (no bonus) and a 1/4 royalty.
Thanks Baron...I like how you think

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