Post-production costs: what can come out of your royalty
After oil or gas leaves the well, the company often pays to gather, compress, treat, process and move it to a buyer. Whether part of those charges comes out of your royalty depends mostly on the words in your lease.
What it does
Royalty is free of drilling and production costs by its nature. The question is the costs after the well. A clause that pays royalty "at the well" or on "net proceeds" can let the company subtract a share of them. A clause that pays on gross proceeds at the point of sale, free of those costs, usually leaves more of the price in your royalty.
States read these words differently. In some, courts have held that a "no deductions" sentence does little when the same clause sets the value at the well. So the wording of the whole clause matters, not one phrase.
On a check stub, deductions may show on their own line or may be netted out of the price before it reaches you. Either way, the lease decides whether they are allowed.
What we mark on a review sheet
Normal
- Some owners agree to share certain costs in trade for a higher fraction. That can be a fair trade when it is a choice made on purpose.
Missing
- Any sentence at all on post-production costs. Then the default rule where the land sits decides.
- Anything about charges from a company affiliated with the operator.
Ask about
- Royalty valued "at the well" or on "net proceeds".
- A "no deductions" sentence sitting next to an at-the-well valuation point.
Questions to ask the company
- Will you pay royalty on gross proceeds received at the point of sale, without deducting gathering, compression, dehydration, treating, processing, transportation or marketing costs?
- If you sell to an affiliated company, will royalty be based on what an unaffiliated buyer would pay?
- Will that language apply to oil, gas and gas liquids alike?
Common questions
Can an oil company deduct costs from my royalty?
Sometimes. It depends on the lease wording and the state. Clauses that pay at the well often allow a share of post-production costs. Clauses that pay on gross proceeds at the point of sale, free of those costs, usually do not.
What are post-production costs?
Charges after the oil or gas leaves the well: gathering, compression, dehydration, treating, processing, transportation and marketing. Drilling and operating costs are separate and do not come out of royalty.
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Email hello@landman.review with what you got and your question, or call (307) 263-8515.