20% cost free or 25%?

General Mineral Rights Discussion
1

Just in general is it better to get 20% cost free royalty or 25% without cost free clause?

I know it varies a great deal among different companies. Thanks

2

Be warned that even though a lease appears to read as if it is cost free, it might actually function differently than what you believe. Get expert assistance before signing an oil lease.

Post-Production Costs after Hyder

3

Thanks. Assuming the cost free clause was going to be honored and didn’t have any loopholes, which would you choose?

4

You're welcome. I would have to do intensive research before making that decision. Is it conventional production or some sort of exotic project with who knows how many deductions? I believe I read another forum member once opining a few years ago that a 25% royalty with deductions might end up being like a cost free 18.75% royalty. Please do not act on that, however. How about splitting the difference with a 22.5% cost free royalty? If your property is in a hot area of the Permian Basin, you might insist on and receive a full 25% cost free royalty. Do you have an attorney who has verified the lease language as truly cost free?

5

I agree with AJ comment completely. Many of the cost free language clauses are voided by a 1996 Texas Supreme Court case that says that language is "surplusage" because it conflicts with the common law understanding of the computation of the royalty clause. Even when the State GLO amended its lease form to state, that it is NOT surplusage, the Supreme Court refuses to accept that language., Many will also hide behind their interpretation that the operator is not the one adding the costs, it is the oil transporter or gas refiner, and you get stuck that way, too. The landman may also give you language that looks cost free but it allows costs that "enhance the value of the product" which in my case, means all the post production costs.

My experience is that the 5% reduction in royalty is less than the costs they add, but as AJ says, make sure some attorney looks at the language because, that 20% royalty can be eaten up by lots of things. I found in the GLO contract that disallows all costs, the operator adds the cost to the severance tax numbers, which you can easily catch for oil, but not as obvious for gas and products. It would be easier if all operators would abide by the clear intent of the royalty owner and landman, but even if the first operator does, subsequent operators might not.