How important is it that the royalties have a “No Cost" provision in an O&G ? Is a lower royalty % with “no cost” better than a little higher royalty?
Very important-Depending upon the state you are in, getting a no post production costs (PPC) clause can be challenging due to how the courts have interpreted the laws and wording of the lease. Gas is particularly subject to the PPC charges for dewatering, compression, transportation, marketing and many other charges. Oil may also have charges.
The optimal situation is no PPC at all and a high royalty. PPC charges are not a set percentage as they vary due to what needs to be done to get the product to market. If you have a 3% charge, then that is manageable, but if you have a 50% charge then you cannot offset that with a change in royalty from 18.75% (3/16ths) to a 25% (1/4th) royalty.
It is wise to get a good oil and gas attorney to review and edit any draft lease for more favorable terms. The royalty will also depend upon the competitive market conditions for your area.
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Thank you so much for your reply.
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