Replies to This Discussion

Permalink Reply by sweetniece on August 27, 2011 at 5:20

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!

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Permalink Reply by essay on August 27, 2011 at 17:34

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.

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Permalink Reply by Henry on August 28, 2011 at 1:26

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.

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Permalink Reply by Benjamin Hall on August 29, 2011 at 4:49

Thank you Sweetniece, essay, and Henry for your thoughtful replies.

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Permalink Reply by The_Baron on August 31, 2011 at 3:48

I would take the higher royalty myself. I would also counter with a free lease (no bonus) and a 1/4 royalty.

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Permalink Reply by Benjamin Hall on September 1, 2011 at 3:51

Thanks Baron...I like how you think

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