Replies to This Discussion

Permalink Reply by Checkmateking on March 6, 2009 at 4:37

Costs-are the costs of production, there is no set percentage of the royalty, costs are costs,lol. Production, compression, scrubbing, etc. never sign a lease without a no-cost royaltry clause-if possible of course.

• ▶ Reply

Permalink Reply by WayneandAnna on March 6, 2009 at 4:46

Checkmateking, that's a good list of costs. Cost can also include transportation and marketing costs. But how much do people get charged? Do they lose 10% or 30% of their royalty? Which cost is the biggest, etc.?

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on March 6, 2009 at 7:47

I believe when you speak of "costs clauses" in leases, particularly as it relates to royalty owners, these costs are generally centered around transportation costs of the gas. As a royalty owner, you are not charged for operating costs of the well...the cost to get the gas to the surface. Some fields require that the gas be processed to get it ready to meet pipeline specifications...scrubbing, etc. These costs can be deducted from the royalty owner but most royalty owners have deleted these from the leases. Then there is generally a cost to get the gas to what is called a "liquid sales point". This means a point where there is a market and a price set for the gas. In some areas, that could be a long long ways, so the pipeline companies usually charge you a fee to get it there. Basically, the operating company isn't going to want to pay you $5.00 per mmBTU if they can't sell it for more than $3.50 due to the distance the gas has to travel to get to a contract point. These fees are generally contentious, particularly if the transporter of the gas is also owned by the production company. My way of handling this is to sell my gas "at the well head" and I have the pipeline company come and get the gas. Now, if gas in the market is selling for $5.00, the gas company isn't going to come to the well head and pay $5.00 for it; they are going to pay something less and I will be able to show a sales receipt for the gas. When I say "I" I mean as an operating company, not a royalty owner.

Now, lots of fun things have happened over the years in lease negotiations. Some landowners have inserted clauses such that they get paid based on a certain price marker, others want the highest price based on several markers, etc. There are arrangements that have been demanded that make the lease impossible to be complied with. For instance, landowner demands payment within 2 months and wants the highest price of 2 markers that he names. However, one of those markers is not published until the 3rd month. So right away, the company is in violation of the lease...which also includes a clause that says if you don't abide by ALL terms, the lease is null and void! So, as a company, how do you deal with that?? I walk away and tell the landowner "good luck". And anyone that agrees to his lease is basically a short term lease flipper who won't be around when the lawyers come calling!

So, your very straightforward question is not so esily answered!! My suggestion: be reasonable and get some 3rd party advice...not only from a lawyer but someone who is in the gas transport/pipeline business. Don't accept any lease operating costs but be willing to accept transportation costs within some very well-defined boundaries. And spell it all out very specifically in writing!!

• ▶ Reply

Permalink Reply by Jay Murrell on March 6, 2009 at 11:07

KB:

Unless otherwise provided in the lease, costs can be deducted as Mark has stated.

But even if you negotiate a "free" lease it is very difficult do define "wellhead" cost. Some attorneys will tell you that there is no such thing. Therefore, you are at the mercy of the operator. Short of a court order, it can be very problematic to get them to reveal what they sold the gas for. Kinda sucks.

JM

• ▶ Reply

Permalink Reply by Grillin' - MmmMmm on March 7, 2009 at 9:14

You hit it KB. The price paid at the wellhead is the price adjusted by the buyer to account for the fees/costs he will have to incur. I have a couple of areas where I negotiated a wellhead contract. The buyer pays me the marker price for that area (WAHA for this area) minus a per mmBtu fee. that fee is what is used by the buyer to take care of his costs. And I pay my royalty owner the same price I get paid. That's usually at a substantial discount to the Henry Hub or NYMEX price you see on the news. But the royalty owner and I are on the same ticket. I could have sold the gas further downstream to the gas company and made a bit more but the lease wouldn't allow me to deduct those extra charges so I just went with a well head contract. Both the royalty owner and I lost a few cents per mmBtu but its not worth the hassle.

• ▶ Reply

Permalink Reply by Jay Murrell on March 6, 2009 at 11:03

Mmmmmarkkkkk said:

" Don't accept any lease operating costs but be willing to accept transportation costs within some very well-defined boundaries. And spell it all out very specifically in writing!!"

I agree 100% with you sir. But you need to understand that if you are doing business with some companies ( a certain spin-off of Enron comes to mind) you might have to spend big bucks to make them abide by the terms of your lease as to transportation and marketing costs, or any other semi-exotic special clause.

Otherwise, all you can do is what Mark has suggested. It would be wise to hire a savvy O&G attorney to draw and review any contract.

• ▶ Reply