Legal Definitions - marketable-product rule

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.