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Which is better? Royalties based on wellhead price or point of sale price?

  • 06/01/2012 6:14 PM
    Quote
    Message # 940444
    Anonymous
    I thought I knew the answer to this question but something I just read made me think I've gotten it backwards. I've negotiated a no-post-production-cost-deduction rider, but I am now unsure about whether it's better to base royalties on the price at the wellhead or on the price at the point of sale.
  • 08/10/2012 1:15 PM
    Quote
    Reply # 1043709 on 940444
    Anonymous
    I think it is better to stipulate royalties based on "point of sale price".  See the oil and gas lawyer blog below and read what they have to say on this issue (at least based in TX).  

    http://www.oilandgaslawyerblog.com/postproduction-costs/

    It is good to also stipulate that if royalties are sold to an affiliate of the company, then the sale price must be based on a common gas market index.  Otherwise, they can "sell" it to themselves at a low price and sell it onward to a third party for the market price and stiff you.

    This is something I am dealing with currently with a lease.

 
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