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Post Production Costs Explained

In many cases, natural gas well leases hold that the landowner is entitled to a definite proportion of the well’s total natural gas production at market value, but costs are incurred by the natural gas companies between the point of production and the point of sale.

In Pennsylvania, phrases like ‘market value’ and ‘net proceeds’ within natural gas leases are taken to mean that post production costs can be deducted from the sale price of the natural gas. But, what are post production costs?

Post production costs include:

  • Gathering: Gathering encompasses the act of gathering natural gas at the well site. These costs mostly cover pipeline infrastructure as pipes are needed to take the natural gas to where it can be further processed or compressed.

  • Compressing: Most of the time, natural gas needs to be compressed so that it can travel across pipelines.

  • Processing: Processing involves preparing the natural gas for market. Many things can happen at this point, as this is the stage where it is made into commodities. It may be depressurized, cleaned of water particles, or separated to make ethane or propane, or processed in some other way as it is prepared for sale.

  • Marketing: Marketing is the act of finding a buyer and selling the natural gas.

  • Transportation: Transportation costs can be incurred when the natural gas is leaving the well site on its way to be processed or when the natural gas is sold and sent to the purchaser.

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