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Understanding the Marketable-Product Rule [Oil & Gas]: Key Legal Principles
Definition & Meaning
The marketable product rule in oil and gas law refers to the principle that production is considered to occur when oil or gas is extracted, processed, and made ready for sale. This means that until a product is deemed marketable, the lessee, or the party leasing the land, is responsible for all costs associated with capturing and handling the oil and gas. Understanding this rule is crucial for determining how royalties are calculated in oil and gas leases.
Table of content
Legal Use & context
The marketable product rule is primarily used in the context of oil and gas leases. It plays a significant role in determining the timing and calculation of royalties owed to landowners. Legal professionals in the oil and gas sector often reference this rule when drafting contracts or resolving disputes related to royalty payments. Users can manage their legal needs by utilizing templates provided by US Legal Forms, which are drafted by qualified attorneys.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A gas company extracts natural gas from a well, but it must first process the gas to remove impurities before it can be sold. The company incurs costs for this processing, which it must cover until the gas is deemed marketable.
Example 2: An oil producer drills a well and pumps oil to the surface. The oil must be transported and refined before it can be sold. Until this process is complete, the producer is responsible for all related costs. (hypothetical example)
State-by-state differences
State
Marketable Product Rule Variations
Texas
Generally follows the marketable product rule but may have specific local regulations regarding costs.
Oklahoma
Similar to Texas, with additional considerations for transportation costs.
Pennsylvania
Has specific regulations regarding the definition of marketability in shale gas production.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Difference
Royalty
Payment made to a landowner based on production.
The marketable product rule specifically addresses when production is considered complete.
Gross Proceeds
Total income from the sale of oil and gas before deductions.
Gross proceeds do not account for the costs incurred before a product is marketable.
Common misunderstandings
What to do if this term applies to you
If you are involved in an oil and gas lease, it's important to understand the marketable product rule as it affects royalty payments. Consider reviewing your lease agreement to see how this rule applies. You can also explore US Legal Forms for templates that can help you draft or manage your lease agreements. If your situation is complex, seeking advice from a legal professional is recommended.
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