If our lease clearly states that we shall be paid at our negotiated rate for royalties “free of cost” for our share of any oil or liquid hydrocarbons produced, is there any reason why the producer should be able to deduct from these royalties for line items as follows: Facility, Gathering, Haul Gain/Loss, Hauling, and Transportation?
If the lease allows for deductions from gas and gas condensate for Compression, Transportation, and Gathering, is it permissible for the operator to deduct more than the value of the royalty share? In other words, the sale of the gas or component results in a negative value on that component - we pay them to take our gas!
It depends on state law where minerals are located and all of the language in your lease, not just a single phrase, among other things. You should post the question in the appropriate state and county. If you search, you will find a lot of previous discussions of this question.
If your minerals are in Texas and the royalty is valued “at the wellhead” and “at the well,” the 'free of cost" language may be surplusage and without power. See page 3 of this link.
This is not in Texas, but is in a state that does not see much activity on this forum, so for that reason I chose to post in the General area. Thanks for your response.
The issue of cost free royalties is actually very complicated and what seems like a “cost free” royalty clause in a lease to a lay person, is often not worth the paper it is written on in a court of law. The operators know this and are often happy to agree to “cost free” lease provisions that they know don’t actually mean anything and allow them to deduct costs.
It depends on the language of the lease - the whole royalty provision, not just a few words - and the state where the minerals are located. Consider contacting an attorney to review your lease and royalty stubs. Many active on this site may be willing to provide a free initial consultation.
My wells are located in Oklahoma. Some time ago the current operator suddenly began showing figures for gathering, compression, transportation, etc., on the royalty check stubs, which had not previously been done, either by the current or previous operator. After I went into extreme-concern-mode for a while, it was determined by simple mathematical calculation that my royalty was still being payed by applying the percentage rate to the total production value. Those figures were not actually being deducted from what I was due.
Unfortunately it was the oil/gas attorney I engaged and paid, who did the mathematical calculation and pointed this out. So, first do the math, and only then hire an attorney if necessary.