By Paul R. Yagelski, Esquire
Rothman Gordon
Pittsburgh, Pennsylvania
Should “proceeds,” “gross proceeds,” “gross sales price,” “amount realized,” or similar language be used in conjunction with “at the wellhead” language in crafting a royalty clause where the intent is to create a gross royalty?
Use of the words “proceeds,” “gross proceeds,” “gross sales price,” “amount realized” or similar language in conjunction with “at the wellhead” language is problematic when the intent is to craft a gross royalty. If “at the wellhead” is used with any of the aforesaid language or similar language, the result may be quite different than what was intended. The use of “proceeds,” “gross proceeds,” “gross sales price,” “amount realized” or similar language in conjunction with “at the wellhead” could very well result in a royalty that is calculated using the “net-back method,” meaning that post-production costs would be deducted from the sale price before the lessor’s royalty is calculated, thereby not resulting in the intended gross royalty.
In Kilmer v. Elexco Land Servs., Inc., 990 A.2d 1147 (Pa. 2010), the Supreme Court of Pennsylvania held that Pennsylvania’s Guaranteed Minimum Royalty Act, 58 P.S. § 33, should be read to permit the calculation of a royalty at the wellhead, as provided by the net-back method. The goal of the net-back method is to determine the value of the gas when it leaves the ground by deducting from the sales price the cost of getting the natural gas from the wellhead to market.