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Simple English definitions for legal terms
marketable-product rule
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A quick definition of marketable-product rule:
The marketable-product rule is a way to calculate royalties for oil and gas. It means that production happens when the oil or gas is pumped up, stored, and made ready to sell. The company that is drilling for the oil or gas has to pay for all the costs of getting it out of the ground until it becomes a product that can be sold. This is different from the capture-and-hold rule, which says that production happens as soon as the oil or gas is captured, even if it's not yet ready to sell.
A more thorough explanation:
The marketable-product rule is a doctrine used in the oil and gas industry to determine when production occurs for royalty-calculation purposes. It states that production happens when oil or gas is pumped up, stored, and made marketable through processing. Before a marketable product is produced, the lessee is responsible for all costs of capturing and handling oil and gas.
For example, if an oil company extracts crude oil from the ground, but it is not yet processed into a usable product, it is not considered production under the marketable-product rule. The lessee must bear the costs of capturing and handling the crude oil until it is processed into a marketable product, such as gasoline or diesel fuel.
Another example is if a natural gas company extracts gas from a well, but it is not yet processed and transported to customers, it is not considered production under the marketable-product rule. The lessee must bear the costs of capturing and handling the gas until it is processed and transported to customers.
The marketable-product rule ensures that the lessee is responsible for the costs of capturing and handling oil and gas until it is processed into a marketable product. This helps to ensure that the lessor receives fair compensation for the use of their resources.