You are here:

Oil/Gas/Arkansas and "Marketable Product - Minority Rule"

Advertisement


Question
Ms. Breazeal,

I apologize for this additional question, as I know I sent you a follow up yesterday...however, I have done some research and have more information specific to that inquiry.

Upon looking more closely at my father's lease, I read a provision that allowed XTO to deduct "all costs incurred by Lessee in delivering, processing, or compressing" all gas produced.

Now, Upon researching legal precedent for "lawful deductions", the case most often, and recently, cited was Hanna Oil& Gas Co. v. Taylor,759 S.W.2d563 (Ark. 1988). This Supreme Court ruling established that while Arkansas has yet to explicitly state that the Lessee is required to bear all costs incurred in obtaining a "marketable product", it did rule that the compression costs, which were in question, are not deductible.

The 2011 Annual AAPL Meeting in Boston also established the following:

“Marketable Product” Rule

Minority Rule.

Colorado, Oklahoma, Arkansas, Kansas.

Lessee bears all of the costs associated with production
and transforming into a marketable product.

Only after gas has reached “marketable condition” can
post-production costs be deducted.

View that leases are silent as to allocation of post-
production costs and “at the well” is ambiguous

When lease refers to “gross proceeds” or “proceeds” at the well, sharing of post-production costs is not permitted.

Once gas reaches a “marketable
condition,” additional costs to improve or
transport the product may be shared.

Now, after scouring every Arkansas law, regulation, and statute I could find, it seems that the defining of allowable deductions is assumed to be dictated by the framework set aside in each individual two-party lease. And, after studying both the petition that One-Tec put to the commission, as well as the resulting order, there is no provision whatsoever as to royalty deductions of any kind.

So, my question to you would be: In my case, where no provisions concerning royalty deductions have been provided for, can ANY deduction, other than taxes, be defined as unlawful based on a "lack of clarity"? And, if additional deductions are taken, is that an issue that can be argued before the AOGC, or is that something that would have to be taken up with private litigation?

Burden on lessee to demonstrate “marketable
condition.”

Answer
"So, my question to you would be: In my case, where no provisions concerning royalty deductions have been provided for, can ANY deduction, other than taxes, be defined as unlawful based on a 'lack of clarity'?" This is definitely a question that you should ask an Arkansas attorney, one board certified in oil and gas.  From the standpoint of a division order analyst, we set up the computer database to issue revenue payments based on the terms of the oil and gas lease.  If the oil and gas lease contains a "cost-free provision" then the owner's revenue account is coded that way.  If not coded that way, the account will automatically bear its share of post-production costs each month.

"And, if additional deductions are taken, is that an issue that can be argued before the AOGC, or is that something that would have to be taken up with private litigation?"  No, it would not be argued before the AOGC (because of jurisdiction limits) it would be argued in an Arkansas District Court.

There is one more thing I would like to add at this point, to make this issue a little easier to understand. Before oil and gas is produced out of the ground, it is considered a part of the ground.  So in place, in the ground, it is treated like a real property right, as part of real estate property.  A royalty owner can never be charged any share of any costs incurred to go into the ground and bring the oil and gas up to the wellhead.

But once the oil or gas is produced out of the ground, or "severed" from the ground, it immediately becomes personal property.  And your integration order states what fraction of the personal property at the wellhead belongs to YOU.  But it is YOUR personal property.  You own it.  You are responsible for it.  This is one of the big reasons why division orders are issued and royalty owners are asked to sign them: to give permission to sell your personal property.  And the standard lease form (and integration order based on it) states that the Lessor (in this case, you) is responsible for the costs to make your personal property marketable and any costs to get it to market.  The information you gave indicates that the Arkansas courts have ruled that compressor charges cannot be passed on to the royalty owners, that it cannot be treated as a post-production cost to be passed on.  So no royalty owner's revenue checks should ever bear the cost of compressor fees, according to that court ruling.

Does it help a little bit, understanding the difference between royalty ownership before the wellhead, and after it?  Let me know if you have any other questions. I was off from work today, which is why it took me so long to answer your post from yesterday.  I didn't see your question from yesterday you submitted around noon until today, even though I checked my email inbox before I left the office at 4 p.m. central time yesterday.  There must be some kind of time-delay between when you submit a question and when it appears in my email inbox.

Marsha

Oil/Gas

All Answers


Answers by Expert:


Ask Experts

Volunteer


Marsha Breazeale, M.Ed., CDOA, CPLTA

Expertise

All questions regarding division orders; ownership decimal calculations; title ownership and payer record changes (testate/intestate inheritance; deed; assignment; court order); oil and gas lease analysis for record-keeping and purposes of payment by operator or payer; pooling, horizontal wells, horizontal well allocation units; unclaimed property reporting; royalty owner relations questions. All questions concerning administration of surface land contracts and payment questions, such as for Surface Right-of-Way, Sub-Surface Right-of-Way, Easement, Surface Use Agreement. All questions regarding industry-standard and company-specific policies that affect land owners.

Experience

Sr. Staff Division Order Analyst. Certified Division Order Analyst (CDOA, National Association of Division Order Analysts) and Certified Lease Analyst (CPLTA, National Association of Professional Lease and Title Analysts) with 35 years of experience as a combination division order analyst and lease analyst in exploration and production in the oil and gas industry.

Organizations
National Assoc. of Division Order Analysts (NADOA), National Association of Division Order Analysts (NALTA), American Association of Professional Landmen (AAPL), American Society of Trainers and Developers (ASTD)

Publications
"How an Oil & Gas Exploration & Production Company Operates" and "Principles of Oil & Gas Lease Analysis: Standard Clauses", Oil Patch Press; Articles in NADOA Magazine; LandFocus EDU Professional Training Manuals

Education/Credentials
B.A.in Management from Our Lady of the Lake University in San Antonio; M.Ed. in Instructional Design from WGU Texas.

Past/Present Clients
Past 15 years: GeoSouthern Energy Corporation; Contango Oil Co./Crimson Exploration & Operating Inc.; Apache Corporation; BP America; Marathon Oil; Newfield Exploration

©2016 About.com. All rights reserved.