Video · 4 minutes · captions on
Post-production deductions, explained
Transcript
Introduction
Many royalty owners first meet post-production costs as a line on the gas statement called a deduction. Whether the operator may charge them to you depends on the words of your lease.
Oil is simple. Gas is not.
Oil is usually sold near the well, so oil lines rarely carry deductions. Gas is different. Raw gas is wet, low in pressure, and mixed with liquids. A pipeline will not buy it like that.
From the wellhead to the sale
First, small pipelines gather it from the wells. Compressors raise its pressure, so it can enter a pipeline. Treating takes out water, and gases the pipeline will not accept. A plant may strip out liquids like ethane, propane and butane. Only then is it sold. Everything between the well and the sale is post-production. The operator does that work, or hires a pipeline company to, and charges for it.
What a deduction does
If the charge is shared with you, it comes out of the sale before your share is paid. Say your share of a month's gas sold for a thousand dollars. Gathering takes eighty dollars. Compression, sixty. Processing, a hundred and forty. Seven hundred and twenty dollars reaches you. Nothing about the sale changed, and the deductions took twenty-eight percent. A charge that is flat per thousand cubic feet takes a bigger slice when gas prices fall.
Your lease decides
Whether these costs reach you comes from the words of your lease. The words that matter most say where your royalty is valued. In a 1996 case, the leases valued the royalty at the well, and also said there shall be no deductions for processing, dehydration, compression or transportation. The Texas Supreme Court held that those words merely restated existing law. Valued at the well, the royalty still shared the costs.
Read where your royalty is valued
So read the royalty clause for where it values your royalty. Wording like cost-free, or free and clear of all post-production costs, can keep them off your royalty. Wording like market value at the well, or the amount realized at the well, usually shares them. So does a lease that says nothing about costs. Two owners on the same lease can be treated differently, if their leases were signed at different times.
What is worth a question
Deductions are not always wrong. These are worth a question. A large share: our audit flags any month when deductions pass thirty percent of the gross gas value. A new kind of charge, like compression showing up for the first time. Processing fees, when the state's record shows the gas going to a transmission line, not a plant. A rate per thousand cubic feet that jumps, with no change of service. And charges paid to a company related to the operator.
Ask which clause allows it
Ask one specific thing, and point to the lease. Which clause of my lease allows the gathering, compression and processing deductions on my statements since November 2024? Please send the rates you are charging, the service each covers, and whether the provider is an affiliate of the operator. Send it by certified mail. If the stub does not explain a deduction, the payor must explain it by certified mail within sixty days of getting your request. If it does not, you may bring a civil action to enforce that, and the winner recovers reasonable court costs and attorney's fees. See what each charge takes from a month in our free gas royalty calculator. The sources for this video are on screen.