Royalty Price Provisions, New Effective Burdens and the Impact on Your Overall Well Economics

1.00 CEU

Previously Presented at the 2022 Annual Meeting

Marketing oil, gas, and NGL‚Äôs is more complicated and complex than most in the industry realize. The rapid increase in oil, gas, and NGL exports adds even more complexity. The ultimate value of the commodities depends on many factors including the regional location, the point of sale (whether at the wellhead or somewhere further downstream), the quality or condition of the commodity, and numerous other factors. Determining the price at a particular point of sale depends on the contracting and sales strategy of the producer. Royalty price provisions in lease agreements can likewise be confusing. In many cases, the Lessee remits payment to the Lessor based on what he actually receives, net to the wellhead. Certain lease agreements attempt to disallow certain deductions that may be required to make the oil, gas or NGL marketable. In many cases, the language in these leases does not make sense from a marketing perspective, leading to confusion on how royalty payments are made often resulting in legal challenges. Several court cases have attempted to resolve these disputes with cases having differing outcomes based on the specifics of the case.

This talk attempts to assist negotiators in how to avoid introducing conflicting statements in lease agreements and arrive at the language that describes the situation they are attempting to receive. Another issue faced in the royalty provisions are the economic results of disallowed deductions. In many situations, organizational silos between land, engineering, management, and accounting result in no clear understanding of the actual economic results of disallowed deductions. A company that thinks it signed a lease with a 20% burden may experience an actual burden much higher as a result