Royalty Deductions and CPL Services

Royalty Deductions - Brief Discussion

Core idea: Some types of costs from running an oil field should be paid jointly by Lessee (oil company) and Lessor (landowner), when the lease language and applicable law permit.

Why would lessors pay some costs?

Courts describe the core structure of oil and gas activities and how costs are allocated.

Courts break down oil producing activities into four chunks

Exploring
Producing
Treating
Marketing

General concept described in the materials

Costs from exploring and producing are typically borne by the operator.
Costs associated with treating and marketing may be shared when the lease includes certain language.

Lease language

The "in kind" test

A plain-English test described in the materials.

If the lease says the Lessor may take their royalty share "in kind" (e.g., bring a truck to the well and take their share), then the Lessor may be obligated to pay their share of costs for what the Lessee does downstream of the well to make production clean enough to sell - subject to the lease terms and applicable law.

Deductible categories

What costs may legally be shared?

Three sources of answers: (1) lease language, (2) court rulings, (3) field circumstances.

Common lease language examples

Property tax (royalty share)
Other taxes / governmental fees (royalty share)
Dehydration, oil treating, gas compression, gas treating, transportation (royalty share)
Alternate fuel / electricity in certain situations

Field circumstances (examples used in analysis)

Portion of time field workers spend on downstream operations
Water treating and disposal (not water injection for waterflood)
Diluent proportion used to facilitate downstream operations

Summary

So 3 kinds of costs should be shared (as summarized)

Costs downstream from the wellhead (and related costs)

Treating, compression, dehydration, transportation, and related downstream activities.

Property taxes and other governmental fees

Royalty share of property tax and other governmental fees where the lease allows.

Electricity in certain cases

Alternate fuel or electricity when lease gas cannot be used as fuel in certain situations.

How The Bugle Group helps

What we deliver

Tools and documentation built for defensibility and easy implementation.

A customized software matrix for each lease, based on: lease language, applicable court rulings, and field circumstances.
A single monthly number per lease that your team can enter into accounting software so the deduction is taken "off the top" before royalty is paid.
Complaint support: $1M bond, retained attorney support, and client indemnification (per engagement terms).
References available upon request.

Bugle Group provides operational and analytical support for informational purposes only and does not provide legal advice. Royalty treatment depends on lease language, unit/contract terms, and applicable law. Results vary by asset and scope. Operators should consult qualified legal and accounting professionals.

Potential savings

Savings depend on lease terms and asset conditions.

Stated experience indicates savings have often ranged from 10% to 20% of the total royalty bill, depending on lease terms and asset conditions.

$50,000/month in royalty -> potential savings of roughly $5,000-$10,000/month.

When lease language and applicable law permit, deductions can be applied lease-by-lease with documentation to support consistency and defensibility.

Case references

Selected case references (optional)

Examples listed for reference only; not exhaustive. Consult qualified counsel.

View case references

Western Gulf v. Title Insurance
Alamitos Land v. Shell Oil
Vedder Petroleum v. Lambert Lands (1942; 1946)
Axis Petroleum v. Taylor
Atlantic Richfield v. State of California
Whepley Oil v. Associated Oil
Walker v. Pacific Energy
Myers v. The Texas Co.
Crocker Bank v. McFarland Energy