We have a lease from 1970 for section 21 township 2 north, range 66 that allows for “free use of oil, gas, coal, wood and water from said land except for water from lessor wells for all operations hereunder and the royalty on oil and gas shall be computed after deducting any so used.” That seems to indicate that the deductions for free use of oil and gas would be taken out off the top of gross production. In other words the amount of gross production shown on pay stubs would already reflect that deducted amount. Is this correct?
Another thing I've noticed is that the price paid for oil is generally about $5 under the price of oil on any given month. The lease doesn't specifically state that the royalty owner will be paid 1/8 of the market price but there's an indication that that is implicit when it allows the leasee to “purchase any royalty oil in its possession at the prevailing market price for the field where produced on on the date purchased.” Have other people noticed a difference in the amount being paid and the market price, is this typical?
What do you mean by $5 under the price of oil? The price of oil will vary depending on the quality of oil, but the starting point should be the same. I'm not sure whether Colorado has a required reporting format, but compare the State oil and gas reporting site and compare what the operator reports to the State to what they report on your check stubs. Your check stubs may actually show gross sales whereas the State may require gross production, uses of production, and sales.
When you refer to "market price," do you mean the price of WTI that for example CNBC reports? If so, fields/basins have what are referred to as differentials. For example, at one time, Bakken crude sold at up to a $30 discount to WTI. Differentials are the result of transportation costs, quality of oil, etc. Most fields often trade at a discount to WTI, in some measure. The exception being those along the gulf cost that are exceptionally close to refining or transport and thus traded closer to Brent (when Brent trades at a premium). Hope that helps.
I’m still pretty new to this but the price I was referring to was the WTI and I’m wondering if that is considered the prevailing market price referenced in the lease or if not how that price is determined. I can understand that oil or gas “at the well” might vary in terms of quality or post production costs might be incurred in refining, transporting and marketing. But to the extent that those factors are the differential then as Gary was suggesting in Colorado if a lease is silent on post production expenses then they are born by the leasee. I’m not sure whether the first marketable product doctrine requires that the product is marketed at the prevailing rate but it seems like the lessor should have access to information regarding the price unless I’m missing something and this is something similar to the difference between a wholesale and a retail price.
Gary,
Regarding post production deductions, Is that a matter to take up by going through the COGCC with a form 37 or should I first approach them informally?
You should be able to approach them directly. Some producers will be open others will be difficult. If you ever have the option to elect who you lease to try to figure out which one will be more cooperative. Typically, they will provide some guidance, but won't want to be pestered. Location differentials and quality will account for much of the difference.
Thanks for your response. Contacting them first was my inclination. Is your reference to location differentials and quality in response to my question as to the difference in the market price and the price on my check stub? Would that account for the amount nearly always being about $5 less?