Capping Post-Production Costs - Is it wise to allow adjustment annually, based on the Consumer Price Index?

West Virginia Mineral Rights Wetzel County, WV
1

Based on previous advice herein, I was able to get the company I am dealing with to agree to an 18% royalty for Wetzel County, which is now also proposing to have post-production costs not exceed $0.80/MMBtu, for both oil and gas. But what is confusing me now is that they want to adjust this annually, based on the Consumer Price Index (CPI). First of all, I will counter with some figure lower than $0.80, but the CPI adjustment has me suspicious, or is this standard operating procedure for all leasing contracts? What could that ultimately leave you with five years down the road?

2

This is not advisable as it is way too complex. Per internet, mmbtu equivalent per bbl of oil = 5.5514. This means that you will be charged $0.80 X 5.5514 = $4.44 per bbl. Assuming that gas is dry at 1 mmbtu, charge will be $0.80 per mcf. These charges will increase with federal inflation numbers. Remember when inflation was over 10%? If inflation is 5% for 3 years, the charge will go up 5% every year. Is it 5% from the original $0.80 or 5% of the prior year charge? Are you being guaranteed the market value based on sale to third parties and NOT sale to affiliate or below-market sales price? Are you being guaranteed absolutely no other costs? You need to consult a lawyer who is experienced in W.V. oil and gas law to review your provision. The interpretation of the wording of the lease will depend on state law, not on your expectation.

3

Where will that leave you five years down the road???

Wishing you had not fallen for their ploy!!!

4

Thanks for this helpful reply. Once they realized I wasn't going to accept the original lease, they came up with this "Addendum," which like you said, is way too complex, and actually contains a lot of the same language text contained in the lease that it's supposed to replace. I wanted to strike out a lot of the lease, and Addendum, text, but like you said, it's probably better now to just let a WV oil and gas lawyer review it. For example, you see duplicated text in both the draft lease and Addendum, some of which I don't agree with anyway. However, I would have to be more versed in WV state law to know whether or not certain text was required.

5

Alan,

I am NOT an attorney. However, I have attorneys that review every lease / pooling modification that is offered.

If you need a recommendation of quality attorneys, I will happily share.

Good Luck

6

WV Mineral Owner,

I am in way over my head w/a couple of contracts I've been presented with and desperately am seeking an atty who will not rip me off and who knows what the heck he's doing.... Please get back to me, here or private message is fine.... I would REALLY appreciate it. Thank you. (My pieces of land are in Wetzel Co).

7

WV Mineral Owner,

Thanks for your input. Yes, I would like a recommendation of quality attorneys that are familiar with Wetzel County, or WV oil and gas attorneys that you have utilized in the past.