Of Nets and Grosses
A question that we often get from clients considering an oil and gas lease is “What is the difference between a net and a gross lease?”
The question deals with the landowner’s royalty interest in production from an oil and gas lease. Historically, this interest was 1/8 (12.5%) of the net production from a well or wells leased by the landowner. Note that the royalty is a net amount. This allows the producer to subtract production costs from the gross or total production before dividing the proceeds with the landowner. Until recently, this was not much of a problem as large royalty checks were secondary in value to the landowner to the free gas provided from the well.
However, for many of our clients, especially those with land east of I-77 in Southeastern Ohio, the difference between gross and net landowners royalties is a real issue.
1.) Due the large investments, production costs and production values from many shale wells, and 2.) Because shale wells generally do not produce natural gas for home or farm use.
We recommend that a landowner considering a shale lease pay att-ention not only to the up-front bonus money, but to where most of the money is to be made: the landowner’s royalty. 20% of gross production is fairly standard in much of Southeastern Ohio.
Gross production means that the landowner’s royalty (larger than the traditional 12.5%) is calculated on the gross production of the well, not the net after expenses are deducted.
If you are considering or have questions about an oil and gas lease, contact us. We represent landowners only and will strive to get the best lease for you.
Thomas D. White, Esq.