After Payout Royalty Escalation

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After-Payout Royalty Escalation

 

In the very rare circumstance where you or your client is negotiating a lease  on lands offsetting a very productive well, you may be able to get the lessee to agree to an after-payout royalty escalation.  (Some of the lessors in the Big Escambia Creek Field negotiated these types of clauses.)  An example of this type of clause is:

After Payout Royalty Escalation.

 

Definitions.  For the purposes of this Paragraph:

 

(1)  “Net Proceeds” means the proceeds from the sale or other disposal of all Minerals produced from any well on the Leased Premises or Lands Unitized therewith (including products extracted therefrom) which are attributable to the Leased Premises (“Leased Minerals”), and such Net Proceeds shall be calculated as follows:

 

(i)        Either (a) the price of such Leased Minerals if sold under a bona fide contract to Third Persons or (b) if not so sold, the fair and reasonable value thereof at the place sold or used (or in the case of Leased Minerals processed or treated in a Service Facility, the fair and reasonable value thereof at the outlet of the last Service Facility involved);

 

(ii)        Less the aggregate of (a) all royalties payable on such Leased Minerals which in the aggregate do not exceed twenty-five percent (25%) of such Leased Minerals and (b) all severance and/or production taxes applicable to such Leased Minerals.

 

In the case of Leased Minerals which are treated or processed in a Service Facility, the price or fair and reasonable value thereof (whichever is applicable under Paragraph  1(i), above) may be reduced on a current basis by that proportionate share of the current direct costs and overhead of such Service Facility, which is attributable to the processing or treatment of such Minerals. The charge for the operating costs of such Service Facility shall be a proportionate share of the current direct costs for such month of labor (including employee benefits but not to exceed twenty-five percent (25%) of total labor costs), supplies, utilities, taxes, repairs and similar items, plus overhead; provided, however, that overhead in no case may exceed ten percent (10%) of such current direct costs. Such price or value, as the case may be, shall not be reduced by any share of the capital costs of such Service Facility.

 

(2)  “DC&E Costs” means all of the costs which are attributable to the Leased Premises of drilling, completing and equipping a well on the Leased Premises or Lands Unitized therewith, excluding however any part of the capital costs and operating expenses of any Service Facility attributable to or serving such well.

 

(3)  “Payout” means the date on which the Net Proceeds from any well on the Leased Premises or Lands Unitized therewith shall equal (i) the DC&E Costs for such well, plus (ii) 100% of the costs of operating such well which are attributable to the Leased Premises during the period when the DC&E Costs are being recovered (“Payout Period”).

 

Monthly Statements.  Prior to Payout with respect to such well, Lessee shall furnish to Lessor a monthly statement showing (i) current direct costs of operating  the well, (ii) Net Proceeds for the month and to date from production and the calculations used in determining such Net Proceeds, and (iii) a statement of the unrecovered balance to date of DC&E Costs. Accounting for all related costs and expenditures with respect to such well shall be made in accordance with customary accounting procedures.

 

Royalty Escalation at Payout.   When Payout occurs with respect to any well on the Leased Premises or Lands Unitized therewith (which well after Payout shall be termed “Payout Well”), Lessee shall notify (“Notice of Payout”) Lessor of such fact by certified mail within no more than ten (10) days after Payout, and the Base Royalty provided for in Paragraph 4.1 on production from such well (which after Payout well shall be named “Payout Well”) shall escalate from twenty-five percent (25%) to thirty percent (30%). Such escalation shall become effective as of 7:00 A.M. on the first day of the month next following Payout.

Copyright 2011 by Edward G, Hawkins. All rights reserved.