If you’re considering leasing your oil and gas rights, it is critical to inform yourself about the issue of post-production costs. Actual production costs are those expenses that are assumed by the operator to extract oil and gas from the ground. In contrast, post-production costs include the expenses incurred after gas has reached the surface, or “wellhead.”
Traditionally, producers were responsible for bearing all costs involved in extracting and selling natural gas. However, changes within the industry prompted these companies to negotiate lease terms that imposed production costs upon the property owner. The theory is that by assuming these post-production costs, operators enhance the value of the property owner’s royalty by processing and transporting the gas to obtain the optimal sales price. Oil and gas producers often categorize these costs as follows:
- Gathering: entails transportation and storage of natural gas prior to compression/processing
- Compression: compressing the natural gas sufficient to permit effective transport
- Processing: changing or separating the physical properties of the gas
- Marketing: costs associated with locating purchasers
- Transportation: moving the gas from well pads or processing facilities to the ultimate point of sale
Some of you may have seen these post-production cost terms coded within your royalty statements. I have seen statements where operators have deducted as high as 70% of the property owner’s 1/8th royalty interest, yet these statements rarely give any detail as to how such costs were utilized by the producer.
Unscrupulous oil and gas producers have seen fit to capitalize on this industry trend by imposing undue costs without adding any value to the property owner’s royalty. If there is no specific mention of post-production costs in your lease, the producer may be withholding more than they bargained for at your expense. Please consult an experienced mineral rights attorney if you have concerns about excessive costs in your royalty statements.