What they are
Oil is usually sold near the well and trucked or piped away, so oil statements rarely have deductions. Gas is different. Raw gas from a well is wet, low in pressure and mixed with liquids. Before a pipeline will buy it, someone has to move it, squeeze it, dry it and sometimes strip the liquids out. Everything that happens after the gas leaves the well and before it is sold is called post-production.
The operator, or a pipeline company it hires, does that work and charges for it. The charge is then either paid entirely by the operator or shared with royalty owners by taking it out of the sale price before your share is figured. The second case is what shows up as a deduction.
GatheringPer mcf
Small pipelines collect gas from the wells and bring it to a plant or main line.
CompressionPer mcf
The pressure is raised so the gas can enter a pipeline.
TreatingOften small
Water, carbon dioxide or hydrogen sulfide come out so the gas meets pipeline standards.
ProcessingPaired with plant products
A plant strips out natural gas liquids such as ethane, propane and butane.
Transport and marketingGas and liquids lines
The gas and the liquids are moved to market and sold.
Each step can carry a charge. Whether a charge reaches you depends on the wording of your lease.
The usual charges
| Charge | What it pays for | Where you see it |
|---|---|---|
| Gathering | Small pipelines that collect gas from the wells and bring it to a plant or main line | Gas lines, per mcf |
| Compression | Raising the gas pressure so it can enter a pipeline | Gas lines, per mcf |
| Dehydration, treating | Removing water, carbon dioxide or hydrogen sulfide so the gas meets pipeline standards | Gas lines, often small |
| Processing | Stripping natural gas liquids (ethane, propane, butane) at a gas plant | Gas lines, and paired with plant-product lines |
| Transportation, marketing | Moving gas or liquids to market and selling them | Gas and liquids lines |
| Fuel and line loss | Gas used or lost on the way; taken as a share of volume rather than dollars | A percentage on the gas line |
Gas that went to a processing plant (code 3 in the disposition record) can carry processing fees. Gas sold straight to a transmission line (code 2) usually does not need processing, so a processing fee on code 2 gas is a question.
What your lease says
Whether the operator may take these costs out of your royalty comes from the words of your lease, not from a general rule. The wording matters most in the phrase that says where your royalty is valued.
| Lease wording | Usual effect |
|---|---|
| Royalty on the market value or price of gas at the well | The royalty is figured on the value at the well, before post-production costs, so those costs are shared. In Heritage Resources v. NationsBank (Tex. 1996) the leases also said there shall be no deductions for processing, dehydration, compression or transportation. The Court held those words only restated the rule and did not stop the deductions |
| Royalty on the amount realized, or the proceeds the operator receives | Depends on what the operator receives and whether the sale price is already net of costs |
| A clause that says no deductions for gathering, compression, treating, processing or transportation | Read it with the clause that says where the royalty is valued. In Heritage the two together did not bar the deductions. Where the lease values the royalty somewhere else, the same words can carry more weight, and a lease reader is worth paying |
| Silent on costs | The general rule in Texas is that royalty carries no costs of production but is usually subject to post-production costs such as taxes, treating and transportation, unless the lease says otherwise |
Two owners on the same lease can be treated differently if their leases were signed at different times. That is why the first question to an operator is not “is this legal” but “which clause of my lease allows it?”
A dollar of gas
The picture below shows what deductions do to a month of gas. The operator sells $1,000 worth of gas that belongs to you. Three charges come out and $720 is paid. Nothing about the sale changed; the deductions took 28 percent.
- Gas sold, your share$1,000
- Gathering−$80
- Compression−$60
- Processing−$140
- Royalty paid$720
Made-up figures. Here the three deductions take 28 percent of the sale. The audit asks a question when deductions pass 30 percent, or a new kind appears.
Two things change the answer over time: the gas price and the rate charged for each service. A deduction that is flat per mcf matters more when the gas price falls, because it takes a larger slice of a smaller sale.
What is worth a question
- A large share. The audit on this site flags a month when deductions pass 30 percent of the gross gas value. It is a prompt, not a rule.
- A new type. If compression appears for the first time in month 14, something changed, perhaps a new agreement with a gatherer.
- Processing without a plant. Fees for processing while the state shows the gas going to a transmission line, not a plant.
- Deductions on oil. Uncommon; ask which service the charge is for.
- A rate that rises with no change of service. Compare the per-mcf charge across several months. Steady is normal. A jump is a question.
- Charges to an affiliate. If the gatherer is a sister company of the operator, ask how the rate is set.
How to ask
Ask one specific thing and refer to the lease. If the answer is that the lease allows the deduction, ask for a copy of the service contract or a written statement of the rate and what it covers. That is a reasonable request from anyone whose money is being reduced.
If your stub does not explain a deduction, Texas gives you a formal way to ask. The payor must explain deductions and adjustments that the stub does not, by certified mail, within 60 days after it receives your request, and your request must go by certified mail too NRC §91.504. If it does not answer, you may bring a civil action, and the winner recovers court costs and attorney’s fees §91.507(d).
The question to ask
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.
Deductions are not always wrong. Ask which lease clause allows them.
You can see the shape of your deductions across all months on your audit, and the calculator on this site shows how much a given deduction takes from a given month: royalty calculator.