Gas Produced and Sold

Blogs
1

The typical royalty provision for gas begins: "On gas produced and sold, the equal ... What about the other gas that they do not tell you about?

The Operator will use the gas to run equipment - separators, compressors, etc. This natural gas is not SOLD, it is USED on the lease. On pooled land, it is used off the lease. To us, it makes no difference. Once the asset (natural gas) is captured, it becomes personal property and as such the royalty owner should be due his fair share of his asset. How much does this cost you? Depends. In my experience in se Texas, it takes about 1500 mcf per month to run the equipment PER WELL. Take 1500 mcf at $4.00 per mcf and 1/4 royalty and you only give up $1500 per month, PER WELL.

Even if you have a "Typical" no-deductions clause, it will not protect you, since it all goes back to the royalty on gas produced and sold language. My form for royalty goes into explicit detail, but it all starts out, "On gas produced and saved, the royalty shall be...."

This is not legal advice, but sound business advice.

If you are 100% confident in your ability to construct a very good royalty provision by all means do so. Otherwise contact a qualified professional experienced in this type of provision.

2

I wonder how this effects turbine generators, which I’m sure provide power for the wellsite, but excess power also can be connected to the power grid and the electric power utility must buy it. I hear this is done in N.D. to prevent waste, if there is a market for the electricity. Since the gas is used onsite, I would suppose the leaseholders probably aren’t being paid royalty for the gas and of course they don’t have an electricity lease.

3

Is the oil produced from a well sold, BEFORE or AFTER the impurities in the oil are removed?

Thanks! :->

4

Dear Mr. Evans,

Oil is typically marketed with impurities in. The most common impurity is sulphur, which when mixed with hydrogen(2), becomes extremely toxic (H2S, hydrogen sulphide). Other impurities include Nitrogen and various trace elements. Typically the impurities are removed during the refining process. SemCrude has tables of adjustments to the price of oil, based on heating quality, purity, gravity, etc.

Throw in the paraffin and the naphtha and you begin ending up with a crude that has an API gravity of less than 20. Makes it tough to refine.

Other oil is so naturally refined, you can run a tractor with it. We call that natural gasoline.

Chemical wizards have worked on biochemical technology to remove the impurities in the reservoir itself. I think up to now, there has not been any successful application.

5

Of course paraffin and naptha do have value, so it isn’t all bad.

6

Bob,

Paraffin and naptha do have value. Only the mineral owner is due no royalty. My wife needs paraffin now to put up some preserves.

7

You commented on impurities...thanks. But said nothing about 'water'. Is oil sold before the water is extracted? I am in Texas.

Bob, 8-)

8

Dear Bob,

Yes, water is separated at what is called the "seperator" before it is put in tanks or pipelines. Water is not considered an impurity, but a by-product of production. It has to be hauled off and put in a commercial Salt Water Disposal Well, or the operator can use a dry hole as a SWD well.

9

Can anyone tell me what dewatering on a lease means? Also is there anything in this part of the lease that should be of concern as a mineral owner? Here is how the lease reads.

If, at the expiration of the primary term or at any time or times thereafter there is any well on the leased premises either capable of producing oil or gas or subject to dewatering operations, then this lease shall not terminate so long as such well is shut in or such dewatering operations continue.

For each such well, Lessee shall pay or tender to Lessor or Lessor's successor or assigns One Dollar per year per net mineral acre retained hereunder, such payment or tender to be made on or before the anniversary date of this lease next ensuing after the expiration of 90 days from the date such well is shut in or dewatering commences and thereafter on or before the anniversary date of this lease during the period such well is shut in or is in a dewatering phase. Lessee's failure to pay or tender, or properly pay or tender, any such sum shall render Lessee liable for the mount due but it shall not operate to terminate the lease.

Thanks for helping, I have not seen this wording, in any previous leases I've held in the past 2 decades.

10

Dear Snues,

I have never heard of that in a lease form, but I have heard of dewatering as it applies to pipelines. This is a case of get your own form that you know what it means.

11

Snues, I wonder if that would be the same as using your well for salt water disposal in the future ?

12

Hi Buddy and Robert,

I just quickly googled dewatering and found disturbing information that leads me to believe they want to lease my land to use as a dumping location. A big red flag, that it was added to the lease without first asking us if we'd be in agreement with such thing.

Can I just draw lines thru that in the current lease offer and let the leasing company know or not.

Buddy when you said "get your own form that you know what it means." Do you mean have a lawyer draw up a lease I'm willing to sign, or just where would I get such form that would not include that part of the lease?

Thanks so much, I was just guessing that dewatering had to do with separating the water from the oil before selling (in the case a well is the end result).

13

Do you think they tried to pull this because we're not the surface owners? No wonder surface owners are angry, beyond the other reasons.

I also noticed extra wording in the opening portion of my lease (in comparison to prior leases) and this is highly likely another Red Flag. I'd love your input.

It reads as such:

Witnesseth, That the Lessor, for and in consideration of Ten Dollars and more ($10.00+) cash in hand paid, the receipt of which is hereby acknowledged, and the convenants and agreements hereinafter contained, has granted, demised, leased and let, and by these presents does grant, demise, lease and let exclusively unto the said Lessee, the land hereinafter described, with the exclusive right for the purpose of mining, exploring by geophysical and other methods, and operating for and producing therefrom oil and all gas to include coalbed methane gas, of whatsoever nature of kind, together with the right to construct and maintain pipelines, telephone and electric lines, tanks ponds, roadways, plants, equipment, and structures thereon to produce, save and take care of said oil and gas (which right shall include specifically a right-of-way and easement for ingress to and egress from said lands by Lessee, or its assignees, agents or permittees, necessary to or associated with the construction and maintenance of such pipelines, telephone and electric lines, tanks, ponds, roadways, plants, equipment, and structures on said lands to produce, save and take care of the oil and gas), and the exclusive right to inject air, gas, water, brine and other fluids from any source into the subsurface strata, and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of said land, alone or conjointly with neighboring land, for the production, saving and taking care of oil and gas (including dewatering of coalbed gas wells), and the injection of air, gas, water, brine, and other fluids into the subsurface strata, said lands being situated in the lease description.

14

Dear Snues,

That language is a bit out of bounds, in my opinion. As a mineral owner, the most you can grant of the surface is whatever rights of ingress and egress that you possess as a mineral owner.

I am so disappointed in what I have seen up in North Dakota. The companies are preying on landowners where they really do not have to. It is something that the industry needs to police on its own before their reputation is damaged beyond repair.

In particular, you do not want to grant geophysical rights (that is a mineral owners call). You need - for your own protection - a separate agreement for that manner of exploration. With a separate agreement comes additional compensation.

15

I don’t know if you own the surface or not. The pore space belongs to the surface owner. Until your well stops production your brine will likely go down someone elses well. They are trying to procure the right to pump someone elses brine down your well when your well ceases production. It’s something to consider, if you negotiate for damages, it could be a considerable sum, but for a dollar per acre per year? They should take you out for a dinner and a movie, first. Whoever you are dealing with must be a gem. The pad and road should be under surface damages I think, the pipeline easement should be a seperate negotiation and the pore space would be yet another seperate issue. I hope you have other offers.

16

My last post was addressed to snues. I apologize Buddy for cluttering up your blog but what the oil co's and lease agents do in ND raises my ire.

17

RW,

I addressed you as Robert, by mistake as my oldest brother has those initials and thats his name.

We only own the minerals and I don't think this offer with slipping in the verbiage of dewatering, without first telling us that it was there and what it'd mean to us as mineral owners only, is really a shady way of doing business. We do have another lease offer that expires soon, but this one I'm currently writing about just came a week ago. The terms of the other lease aren't as favorable, but have no such verbiage that draws a red flag.

We have to contact this lessee to see what can be done before we choose. Thanks for the input you've written here.

18

Mr Cotten,

In Texas, does the Operator have the "freedom" to deduct for gas used at well site from a Non-Participating Royalty Owner just as the Operator does from Mineral Owner/Lessor? My first thought is the Operator would not have that "freedom" because there is not a lease contract and/or negotiation between the Operator and NPRI Owner prior to exploration. Shouldn't an NPRI percentage be paid based on gross production of the well less well tax and no other deductions?

19

Dear Mr. JMH,

The short answer is probably so. I would really want to see the underlying lease to see if it was on gas produced, sold, used, or what.

One of my favorite clauses to use is when my client does not own all of the royalty. It basically says that "any person or persons who own an interest in the royalty under the leased premises, at their election, shall be paid on the same terms and conditions as provided in this lease." The problem is that the lease is not recorded, it is so onerous.

My suspicion is that you are being paid on the same basis as the holder of the minerals. I am not aware of anything that would provide different.

20

Thank you for responding Mr. Cotten,

I have a copy of the filed/recorded lease signed by the majority mineral owners (mineral rights are very diluted on this property). It is a "Producers 88-Paid Up with 640 acres Pooling Provision" form with no addendum attachment. Paragraph 10 clearly says "free of cost" The Mineral Owner obviously just signed the contract offered with no regard to its content.

So even though i am not a party to the lease i am still subject to it when it's in favor of the Operator? I assume this is part of Executive rights obligations/duties. Alternatively I doubt i would receive shut-in royalty even though the mineral owners would per terms of the lease. Is that correct?

Is there a book/reference source/ case law you can recommend that describes the "rights of/obligations to" a Non-Participating Royalty Owner in Texas? It feels like i am subject to the will of the Operator and Mineral Lessor and have no rights. I understand I do not have a voice in lease negotiation. I do feel like i should be paid on gross well production without deductions for fuel used on well site just like i am not to be charged for cleaning and transportation.

I suppose this is where common sense and oil/gas law collide....

Thank you very much for your quick response last night and any additional information/guidance you may provide.

John