Unlike oil, which is liquid, gas is physically processed from its natural gaseous state, compressed, and liquefied for transport. Gas is not always used in the region where it is produced and therefore a network of pipelines became the means of transport. There are no local refineries as there are with crude oil. It is transported from the well by transmission through a natural gas pipeline. The capital investment to move gas along the pipeline is substantial compared to transporting oil to local and regional refineries. There are over 280,000 miles of pipelines in the United States. The price received for natural gas at the well is determined by the gas sales contract. The market for gas is determined by the season and the need for natural gas and liquefied natural gas. As a result, there is a significant difference between oil and gas leases.
Natural gas produced and consumed in the same state is called intrastate gas. Natural gas produced in one state and transported to another state is interstate gas and this gas is federally regulated because it is transported across state lines. Gas prices were regulated until 1989 by the federal government. Before deregulation, gas contracts were long term and somewhat inflexible for the life of the contract, which could last from ten to twenty years. Since deregulation, gas contracts became much shorter in duration. The spot market actively deals in gas contracts. Oil has not had the same regulations as gas.
Since gas is in a vapor stage until compressed and liquefied for transport, gas is more difficult to offer a royalty in kind or at the well, as in oil lease royalty. Most landowners take cash and credit for their royalty. The extreme volatility of gas makes a cash royalty the better of the options available.
Oil royalties may be paid in oil. The landowner may elect to receive oil from the oil company and then market the oil. Most landowners choose to receive the royalty in cash at the posted price of the oil. A landowner deciding to receive the oil as the royalty payment can market the oil royalty back to the Lessee for marketing and receive cash through that arrangement.
On the other hand, gas royalties usually are paid in cash. Gas price is difficult to value given the fluctuating and volatile markets lately. Gas royalty clauses usually state a royalty in market value, or in kind. Few landowners opt for an in kind royalty because of the necessity for compression for transport across the network of pipelines.
Landowners can specify separate royalties for oil and gas production. Landowners in negotiating the lease can place a due date for receipt of royalty payments and if timely payments are not made, there can be an interest charge for late payment placed in the lease.
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