Treating and Gathering Deductions not in the Lease, but being deducted from royalty checks
If treating and gathering are not mentioned in the lease, what tells me that they can deduct it from your royalty checks? Section 4b of the lease states the following.
The royalties to be paid by Lessee are: (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 there from, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the wells the royalty shall be one-eighth of the amount realized from such sale; such gas, casinghead 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-eighth, either in kind or value at the well or mine, at Lessee's election, except that on sulphur the royalty shall be one dollar ($1.00) per long ton.
I was mislead about the deductions and was not told upfront about these deductions.
As a landowner, it appears that they silently wrote it hidden and misunderstood. Even though there is nothing that states the lessor cost or expenses.
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Replies to This Discussion
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Permalink Reply by Ben Elmore on -
If you are asking how a UMO in a unit is charged post-production costs, in Texas, assuming they are a drillsite tract owner in the unit, they are charged their proportionate share of post-production costs just like a non-operating working interest owner, or a leased royalty owner who does not have a cost-free royalty clause. However, they do not begin to share in the proceeds from production until the well pays out. If they are a non-drillsite tract owner in the unit, they do not share in production at all and are thus, not charged any post-production costs.
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Permalink Reply by Ray on
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In Texas, our landman has promised us a cost-free royalty, and we’ve hired an O&G attorney to finalize our lease ... and to make sure we actually get it. Our lawyer has given us the first draft of our lease; it hasn’t been presented to the landman yet.
The long, detailed royalty clause has 10 paragraphs with many sub-paragraphs. Most seem excellent, but I’m concerned about some of the sub-paragraphs. (I’ve asked the attorney but didn’t really understand his answer.) I’m hoping someone can reassure me this is a good royalty clause ... giving us the cost-free royalty we were promised. Do you think the following will give us a check stub with no deductions except taxes? Thanks for any insight.
___________________________________
As royalty, Lessee covenants and agrees ... to pay Lessor on gas and casinghead gas produced from the premises
(a) when sold by Lessee in an arms-length sale to an unaffiliated third party, one-fourth of the Gross Proceeds received by Lessee from the sale of such gas and casinghead gas, or
(b) when sold to an Affiliate of Lessee, one-fourth of the Gross Proceeds, computed at the wellhead, from the sale of such gas by such Affiliate of Lessee;
Question
- Re (b) above, if the gross proceeds are “computed at the wellhead,” doesn’t this allow for the deduction of post-production costs per the Heritage case?
___________________________________
For purposes of this lease, “Gross Proceeds” means the total consideration paid for oil and gas produced from the premises, with the following exceptions: ...
(b) If gas produced from the premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is not owned by Lessee ... Lessor's royalty shall be calculated based upon the consideration received by Lessee ... from sale ... less Lessee's proportionate part of severance taxes thereon.
(c) If gas produced from the premises is processed for the recovery of liquefiable hydrocarbon products prior to sale, and if such processing plant is owned by Lessee ... Lessor's royalty shall be calculated based on ... the total consideration received by Lessee ... from the sale ... less Lessee's proportionate part of severance taxes thereon.
(d) No royalty shall be payable on gas used on the leased premises for production operations or compression or dehydration of gas produced from the leased premises.
Questions
- In a cost-free royalty, why should there be any exceptions ... other than Lessor’s severance taxes?
- Re (b) and (c) above, why should Lessor’s royalty be calculated on the gross proceeds ... less Lessee’s severance taxes?
- Re (d) above, why shouldn’t Lessor be paid royalty on gas used on the premises? ___________________________________
Lessee shall place oil and gas produced from the premises in marketable condition and shall market same for Lessor, at no cost to Lessor (except as provided above). Except as expressly provided above, Lessor's royalty shall not be charged directly or indirectly with any of the following: expenses of production, gathering, dehydration, compression, manufacturing, processing, treating or marketing of gas, oil, or any liquefiable hydrocarbons extracted therefrom.
Questions
- Shouldn’t transportation be listed as one of the expenses that are not deductible?
- Wouldn’t it be a good idea to include the phrase, “including but not limited to”?
- Would it also help to add a sentence like “Lessee shall directly reimburse Lessor for any such charges or expenses made or charged to Lessor and withheld by a purchaser, by Lessee, or by others.”?
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