Lessor’s Royalty. (a) As consideration of the premises, Lessor hereby reserves, and Lessee hereby covenants and agrees to pay Lessor, a royalty of fifteen percent (15%) on, and payable solely out of, gross proceeds from the sale of Covered Hydrocarbons as measured at the sales meter from all xxxxx and shall be free and clear of all operating costs and expenses, provided no royalty shall be due during the first eighteen (18) months from the Lease Date unless and until the royalty which otherwise would have been due during such period would have been Two Hundred Seventy-five Thousand Dollars ($275,000.00). With respect to Covered Hydrocarbons used as allowed under this Lease under Section 22 or by Lessee in its operations, the royalty shall be based on the wellhead price at the time of production for the Covered Hydrocarbons so used.
Lessor’s Royalty. Lease royalty amounts vary greatly as well. In the early days of oil, gas and mineral exploration, the typical lease royalty amount was a one-eighth (1/8th). Today, it is rare to see a royalty as small as a 1/8th. More often than not, the lessor’s royalty will range from somewhere between a three-sixteenth 3/16th and a one-fourth 1/4th. The lessor’s royalty amount, like the bonus, often depends on the geographical location and the going rate in that area. Calculating the amount of royalty due has been the subject of numerous cases. While the calculation is relatively straight forward for oil xxxxx (measurement of the oil produced is easily ascertainable), the case law regarding gas xxxxx when the lease uses the following or similar language is more involved: : on gas, including casing head gas or other gaseous substance, produced from said land and sold or used off the premises or for the extraction of gasoline or other product therefrom, the market value at the well of one-eighth of the gas so sold or used, provided that on gas sold at the xxxxx the royalty shall be one-eighth of the amount realized from such sale... Thus, depending on the point of sale, gas royalty is calculated either on “market value” or “the amount realized from such sale.” This interpretation gives the lessee the ability to pay on a percentage of market value if the amount realized by the lessee is more. To temper this result, lessors would be wise to insert a clause such as the following:“[n]otwithstanding Paragraph (Royalty Provision) of this lease, in no event shall Lessor receive a price that is less than the price received by Lessee.” One area where savvy landowners are increasing their net royalty is in disallowing post-production royalty deductions. “Although it is not subject to the costs of production, royalty is usually subject to post-production costs, including taxes, treatment costs to render it marketable, and transportation costs.”6 This general law can be modified by party agreements.7 As such, it is becoming more common to see a provision inserted into the lease by the landowner, which prevents the lessee from deducting post-production costs from the lessor’s royalty. The following is an example of how to draft around current case law: Lessee shall handle and market Lessor’s royalty oil, gas, and hydrocarbons, and products extracted, separated or saved from the gas or residue gas from the Leased Premises, free of costs to Lessor. Lessor’s royalty shall never bear, ei...
