Why is the oil and gas company allowed to deduct the costs of processing from royalties?
Like many federal, state, and private fee lease contracts, many Indian lease contracts allow companies to deduct reasonable and actual processing costs. Processing (manufacturing) costs are the costs of removing impurities and extracting liquid hydrocarbons, such as butane and propane, from natural gas. This deduction is allowed because these costs are normal, reasonable costs of producing these products. While the amount varies by well and lease, MMS generally allows deductions of up to two-thirds of the marketable product’s royalty value.
