Jim is right about the actual amount of post-production costs. I've heard all sorts of different things. That the deductions equate to 1% out of the 12.5% or whatever the agreed royalty amount is (so that the landowner gets 11.5%, etc.), and also what was discussed, more like 2% to 3% (which would be between 10% to 20% of the royalty). I've asked landmen to get me documentation on this, or some actual estimate, but mum's always the word.I do agree with MM, that trying to go for watertight language is the best approach, but even if you think you have watertight language you may either a) get screwed by creative interpretation by the operator down the road, or b) not be able to find an operator who will sign on.I've heard about a few companies that will accept a "market enhancement" type clause - no deductions except for any costs that make the gas more valuable (but NOT the big dogs down here - Range, Chesapeake, CNX). But who knows how they'll interpret "market enhancement" in a few years?Which brings me to the idea of having an HA for lease groups. Not a bad idea at all. It is incredible - all of that money for gas and really we all just have to take the operator's word that the deductions are proper. Allthough, if I were the operator I'd be scared to death of a class action suit if I tried any funny business. I think that's why they push the standard lease so much though - because they know exactly what they will deduct based on their standard lease. They are creatures of habit. I'd have less of a problem with the standard lease if they'd just say... your post-production deduction costs will not exceed $___ per Mcf of gas.Its pretty funny, that case in Texas was brought by Bank of AMerica, who somehow ended up as the owner of a bunch of royalties. Leave it to a big bank to go after the gas company!I think that this whole process of leasing and drilling is just so based on antique industry practices (from other states!) and is so populated with shady characters and corporations that its a huge leap of faith to do anything. But with all of that money flying around, a lot of people are willing to jump, and should be. The real question is, when do you jump? It seems like a lot of members on this forum will be holding out for a long time, bacause I don't know that there will ever be such a thing as a perfect lease, the right amount of bonus money or a completely ethical gas operator!
There's no question that this highly technical subject of how royalties are calculated are going to be a major preoccupation for anyone with a producing Marcellus well in years to come. And I agree completely with the idea expressed by some that it is extremely important to retain a landowner association structure of some kind to keep the whole process of collecting royalties honest, or else the royalty owners are likely to be taken left and right over a long period of time. Some people on this thread have mentioned examples in Texas, Oklahoma, etc. But there's a case very much closer right in the Marcellus Shale region in West Virginia. In Roane County, West Virginia, a little while back a jury awarded in a class action suit some 400 million dollars (134 in actual and the rest in punitive damages) to around 10,000 landowners who had been systematically short changed over the years when it came to calculating post production expenses. Two companies, NiSource and Columbia, had been socking it to landowners by loading on all kinds of expense thus reducing the net proceeds considerably. Chesapeake walked into the mess by buying up Columbia, continued the practice and ended up being nailed for the jury award for the entire period that landowners had been shorted. What it appears the court found was that if the state requires a minimum royalty of 12.5%, then any deductions that the gas industry can come up with should not cut into that minimum.