Austin Oil and Gas Attorney Stresses Importance of Lease Clause Prohibiting Cost Deductions
Austin, TX (Law Firm Newswire) June 28, 2013 – When landowners enter into a lease with an oil and gas company, they should include a clause that the company cannot deduct costs from their royalties.
“To protect your royalties, a lease should clearly provide that the driller cannot make deductions based on the costs of processing, transporting or marketing the oil or natural gas,” said Gregory Jordan, an Austin oil and gas attorney. “There are numerous examples of provisions that were intended to accomplish this result that have been held in case law to not quite cut it,” notes Jordan. “It is important to have a knowledgeable oil and gas attorney assist you with a lease so that you can make sure such a clause will be effective under the law.”
The importance of a “no deductions” clause has been made clear by several recent lawsuits. In August 2011, Chesapeake Energy sent letters to royalty owners in Texas and other states saying that the company would start deducting “post-production costs” from the sales price for natural gas used to calculate payments of royalties.
At that time, Chesapeake said that if a royalty owner’s lease prohibited such deductions, then there would be no change in payments to that owner. However, the company has been accused of making such deductions, even from payments to owners whose leases did contain such a clause, according to recent lawsuits.
“Language in your lease prohibiting deductions puts you on much stronger footing should a company attempt to make such deductions,” said Jordan. “It does not mean that a dispute is impossible, but it provides strong evidence for your side.”
According to a Bloomberg News report, Chesapeake is facing at least eight lawsuits in five different states claiming underpayments of natural gas royalties. A lawsuit by landowners in Johnson County, Texas, seeks class action status. For its part, Chesapeake claims that it had always been permitted to make the deductions for post-production costs, but had chosen not to do so until 2011. Such costs, which can vary greatly, can constitute a large percentage of the royalty.
In the class action lawsuit, Chesapeake has asked the court for a dismissal, claiming that the “no deductions” clause should be regarded as “mere surplusage” that should be ignored. This illustrates one reason why it is important to have a knowledgeable oil and gas attorney involved in the leasing process. In Arlington, Texas, a neighborhood group achieved results without legal action, convincing Chesapeake to reinstate higher royalty payments based on the “no deductions” clause in their lease.
To learn more visit, http://www.theaustintriallawyer.com.
Law Offices of Gregory D. Jordan
5608 Parkcrest Drive, Suite 310
Austin, Texas 78731
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