Oil/Gas/Value of lease
QUESTION: My wife owns mineral rights in Washington County, Colorado; she recently received a request to lease her mineral rights to an oil company. The lease is offering a paid up amount of $375.00 and a 12.5% royalty should a well produce, but included is a statement saying the royalties would be reduced by 12.5% for operation costs should there be a producing well.
My questions are:
1. Where can I find out if there are any producing wells in the area of my wife’s mineral rights?
2. Is the 12.5% royalty fair?
3. Is the 12.5% royalty reduction normal?
Thank you in advance.
ANSWER: Sorry for the delay...I've been out of town.
You can call the Colorado Oil and Gas Commission and speak with the permitting representative to determine whether there are producing wells in the area. If you are handy with the computer you can download maps from the COGCC website at http://cogcc.state.co.us/
Some areas of Washington County have not been very productive. If you are south of Township 1S and on the western side of the county there isn't much production and 12.5% is normal.
I'm not aware of a 12.5% reduction clause and I would strike that before signing a lease with them. It doesn't make any sense. If you'd like, copy that back here word for word and I'll let you know what I think.
Again, sorry for the delay.
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QUESTION: Thank you for the information, here is the specific wording on the reduction clause; "Royalty Payment. For all Oil and Gas Substances that are physically produced from the leased premises, or lands pooled, unitized or communitized therewith, and sold, lessor shall receive as its royalty one-eighth (1/8) of the sales proceeds actually received by lessee or, if applicable, its affiliate, as a result of the first sale of the affected production to an unaffiliated party, less this same percentage share of all post production costs and this same percentage share of all production, severance and ad valorem taxes. As used in this provision, Post Production Costs shall mean all cost actually incurred by lessee or its affiliate and all losses of produced volumes whether by use as fuel, line loss, flaring, venting or otherwise from and after the wellhead to the point of sale. These costs include without limitation, all costs for gathering, marketing, compression, dehydration, transportation, removal of liquid or gaseous substances or impurities from the affected production, and any other treatment or processing required by the first unaffiliated party who purchases the affected production. For royalty calculations purposes, lessee shall never be required to adjust the sales proceeds to account for the purchaser's costs or charges downstream of the point of sale."
If it matters Omimex Petroleum Inc. is the lessee of record.
First, I have done work for the company involved and will do work for them in the future, but notwithstanding that full disclosure, this information can be verified from other sources.
The part of the paragraph that lead you to believe that you would be reduced by the same percentage is as follows "less this same percentage share of all post production costs and this same percentage share of all production, severance and ad valorem taxes."
That statement isn't actually referring to reducing your royalty by 12.5% but rather a statement to indicate how much of the tax and post-production cost your royalty would bear. It is saying that your royalty will only be reduced by 12.5% of the "post production costs and this same percentage share of all production, severance and ad valorem taxes" rather than your royalty being reduced by all of the costs.
It would be clearer to have a blank in the paragraph so the landman could put in the exact number. In other words the paragraph would be more clear if it read "as its royalty one-eighth (1/8) of the sales proceeds actually received by lessee or, if applicable, its affiliate, as a result of the first sale of the affected production to an unaffiliated party, less this 12.5% share of all post production costs and this same percentage share of all production, severance and ad valorem taxes."
The statement is just making you aware of how much tax and post-production costs (if any) you'll pay on the royalty.