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Oil/Gas/Post Production Cost - Lease Language


Mr. Williams

In a lease with an oil company we had proposed the following language to prevent the deduction of post production costs from our royalty:

Notwithstanding anything herein to the contrary, Lessee shall pay royalty on the fair market value received at the point of sale, with an arms length transaction, without any post-production expenses or costs being prorated back to Lessor.  Such post-production expenses/costs are to include, but are not limited to, the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, manufacturing, transporting, and marketing the oil and/or gas produced hereunder whether the point of sale is at or off the leased premises.  Such royalty is to include all oil, gas, including all its constituents and any other by-products produced and saved from the leased premises.  The only allowable deductions are those for the lessor򳠰roportionate share of taxes.

In their counteroffer they added the following language to the language above:

.; provided however, in the event Lessee runs the gas through a gas processing plant where natural gas liquids are extracted for sale, Lessee shall (i) not pay royalty on gas used as plant fuel or plant shrinkage consumed during the extraction process or (ii) on any gas which becomes the property of the plant owner as compensation or other plant fees pursuant to an arms-length agreement to make the gas merchantable or to improve the quality or value thereof.

If we agree to the language above, are we giving them back the ability to deduct many of the post production costs?  If so, which ones? I believe the company has its own gas processing plants.

Thank You


Their additional language only allows one deviation from your paragraph - the right to not pay you royalty for gas that is used to make your gas more valuable.  The sentence in paragraph (ii) that is important is "to make the gas merchantable or to improve the quality or value thereof."

I would suggest the paragraph sentence (ii) be changed to not allow them to run this through their own processing plant as you mention by adding the phrase "third party" like this:

"...on any gas which becomes the property of the third party plant owner as compensation or other plant fees pursuant to a third party arms-length agreement..."

I think that if they make the gas worth more then it is ok to allow them to not pay royalty on the gas that they use to improve the value but that is your call to make.

Hope this assists some.



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Cliff Williams


I will try to answer any question you have. Even if I reject a question, I still will give a shot at what I would do in your position. The only questions I will not take a shot at would be a highly technical engineering or geological question. I am beginning to see quite a few questions from land men and other oil companies and that doesn't matter to me either. I will attempt to help.


I am an oil and gas attorney that has been in the business for more than 20 years. I have held a series 22 and 63 securities license, been in oil and gas operations, land man, division order analyst all prior to obtaining my law degree. Today, I typically write title opinions verifying ownership of oil and gas minerals, assist landowners in negotiations on oil, gas and mineral leases, easements and conveyances. I also assist oil and gas companies with the sale of working interest ownership as well as common business law issues.

State Bar of Texas, Member of the Tarrant County Bar and the Dallas County Bar Associations.

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