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Post-production Costs And Probate

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Post-production Costs And Probate

Postby Fearchar » Mon Dec 15, 2014 7:02 pm

I recently received a 3-yr. oil and gas lease offer from Lowry Land Co., on behalf of Midwest Resources, L.L.C., on 5 acres, Section 5-17N-21W, Roger Mills Co. in NW OK, which my grandfather left to my mother years ago, both of whom have passed on. I tried to look up Lowry Land Co. and Midwest Resources on OK City BBB, but neither were listed, nor were they listed in any Internet search of OK City oil and gas leasing services. Should that be a concern?  Lowry's website stated they organized around 1982. In reading through your Q&A's, I saw another question regarding Lowry in AR. They also had a 3 yr. lease and wondered how to find out what was going on. I printed out your answer suggesting the OK Corp. Commission's website for permits, poolings and production info for any area in OK, which may be very helpful in the future. Thank you for that!   Also,I live in N. TX and was told by Lowry that OK does not recognize other States' wills, such as CA where my mother passed on. And even though my brother died in before my mother, and her will stated that anything not specified in her Trust, would go to me, his 5 children will receive a divided interest in another 5 acres that was also my mother's(her last lease was signed in 1962), so I'm sure she had forgotten about it). I have no problem with this, but it seems strange not to recognize other States' wills. I would like to know if this is accurate and if other States have similar laws? I doubt that this is common knowledge.  Another question you answered re the lessor being asked to pay post production costs(which is in the contract I have), was also very helpful(you thought, in general, no). We were offered $600/acre for leasing and 3/16 royalty which seems fair, but I have no idea what paying post production costs would do towards what we actually receive, and is this often included in contracts?    Thank you for your expert help!
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Post-production Costs And Probate

Postby Tyfiell » Tue Dec 16, 2014 5:44 am

Lowry Land Company, Inc. is located in Oklahoma City, OK on Broadway. Their phone number is 405-843-2760. They've been in business for years. Midwest Resources, Inc. is located in Elm Grove, Wisconsin and their phone number is 262-786-6338. Not every company(reputable or not) is listed with the BBB. Many lessees will lease without a probate in the state where the minerals are located, but not all will. It's up to the company. When I worked as a landman we sometimes had to tell people they'd need to have an "ancillary probate" done in Oklahoma(where the minerals were) before we could lease their minerals, because the person they inherited them from died out-of-state. The reasoning was that title to a property is not actually "marketable" unless it is also transferred in the state where the minerals are located. Some lessees therefore extend this to include oil and gas leases. They are basically just covering their butts to ensure the leases they buy are truly "marketable." Post production costs are usually associated with natural gas wells and can be defined as those costs that are incurred by the lessee after the gas has made it past the wellhead. Production costs on the other hand are those costs which are incurred in bringing the gas up TO the wellhead(i.e. to the top of the hole.) Post production costs can include such things as compression(if compression is needed to "push" gas into a purchaser's pipeline, for instance); dehydration(if the gas it too "wet" to be placed into a purchaser's pipeline) as well as gathering(gathering the gas TO a purchaser's pipeline) and processing(processing the gas into its separate components.)

In Oklahoma and certain other states, post-production costs can not be deducted from royalty unless the lease allows for it, which yours apparently does. You can either "strike" the offending language from your lease, or you can add an "addendum" to your lease covering such costs. One common "no deductions" clause that is acceptable to most lessees in Oklahoma is the following: DEDUCTIONS: It is agreed between the Lessor and Lessee that, notwithstanding any language herein to the contrary, all oil, gas or other proceeds accruing to the Lessor under this lease or by state law shall be without deduction, directly or indirectly, for the cost of producing, gathering, storing, separating, treating, dehydrating, compressing, processing, transporting, and marketing the oil, gas and other products produced hereunder to transform the product into marketable form; however, any such costs which result in enhancing the value of the marketable oil, gas or other products to receive higher net proceeds may be deducted from Lessor’s share of production so long as they are based on Lessee’s actual cost of such enhancements. The reason that last phrase is in there is because sometimes a lessee can find a better price(thus "enhancing" the gas,) by transporting the gas downstream to a buyer other than the one available at the wellhead. It costs money to do this however and so the lessee will ask that the lessor(mineral owner) pay his or her proportionate share of the costs to get the gas downstream, since both parties will be better off(even after deducting these costs) then they would have been with the wellhead purchaser. I have no problem with this since I will "net" more money even after these deductions. I have written several articles on post production costs for industry publications, and trying to determine whether the deductions are legit or not can get fairly complicated at times because for one thing you usually have no idea whether this downstream purchaser is an affiliate of the lessee or not, or whether the lessee is "really" obtaining a higher net price by charging these costs. This is the stuff of class-action suits actually, and there are several landmark cases in Oklahoma dealing with this very subject. Still, it's better to have this clause in your lease than not to have it at all.

To answer your question, post production costs that are deducted from royalty can sometimes lower your royalty payment by as much as 35%, though this is not that common. More common would be five-to-fifteen percent. In the case of those downstream sales I mentioned(assuming they are legit) those reductions would be offset by the higher price and so wouldn't be a problem. The way your lease reads now however, it leaves the door open to ANY post production costs the lessee feels is necessary in order to make the gas "marketable." This could include costs NOT associated with transporting the gas to a better purchaser downstream. For this reason, I'd suggest either striking the language from the lease, or adding a clause in an addendum(which would take precedence.) Hope this helps you out.

Frederick M. "Mick" Scott CMM RPL

The Mineral Hubhttp://www.mineralhub.com  
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