Each month, royalty owners across the country receive oil and gas royalty statements. These statements often include terms like severance tax, BTU factor, decimal interest, and API number—specific to the oil and gas industry, and sometimes confusing for those unfamiliar with them. In this article, we’ll help you navigate your royalty statement, so you feel confident in understanding the details.

Royalty Statement Basics:

Royalty statements are the monthly accounting documents sent to royalty rights holders. For many mineral owners, these statements are their primary connection to the oil company (also referred to as the Operator or Producer). In some cases, these payments come directly from the First Purchaser. When the royalty amount is small, oil and gas operators are only required to send payments once the balance reaches a minimum threshold, as dictated by state laws.

While there isn’t a standardized format for royalty statements, most reputable operators follow good accounting practices and state regulations. Typically, gross values appear on the left side of the statement, while net values are on the right. Below, we’ll break down the key elements of your statement.

Key Elements of a Royalty Statement:

Producing Property Identification: Each producing property is identified using a combination of lease names, well names, tract numbers, county, and state. These details help you pinpoint which property the statement refers to. If you have interests in multiple properties, each should be listed clearly on your statement.

Product Code: This section indicates the type of product you’re being paid for, such as crude oil, natural gas, or plant products (e.g., NGLs, sulfur, CO₂). Since these products are priced differently, each will appear as a separate line item. The product may be named outright or represented by a code, with a legend provided on the statement.

Production Month: This column shows when the product was extracted. Payments for oil are often made two months in arrears, while payments for gas and other products are typically made three months in arrears. State laws often set a minimum threshold for payments (usually $25 or $100), meaning smaller balances may only be paid annually.

Oil and Gas Price: This is the price per unit (e.g., $/bbl for oil, $/Mcf for natural gas, or $/Gal for NGLs) upon which your payment is calculated. Over the last 15 years, pricing has shifted from long-term fixed contracts to market-based 30-day pricing, driven by natural gas deregulation and the rise of futures markets.

Royalty Interest Type: Royalty statements typically reference two types of interests: Royalty Interest (RI), derived from mineral ownership, and Overriding Royalty Interest (ORRI), created from the oil and gas lease itself. Regardless of the type, both are treated similarly on royalty statements.

Quantity: This represents the volume of the product extracted during the production month. Units vary (e.g., barrels for oil or Mcf for gas) and often decline over time as wells naturally deplete.

Gross Value: The gross value is calculated by multiplying the product’s price by the quantity produced for the given month.

API Well Number: The API number is a unique identifier assigned to every oil and gas well. It includes the state code (2 digits), county code (3 digits), and a unique well identifier (5 digits). The number may also include sidetrack or operation-specific codes. This isn't always included on the royalty statements.

Decimal Interest: This is your ownership interest, expressed as a decimal (e.g., 0.00012345). Your decimal interest is calculated based on factors like tract size, mineral interest percentage, lease royalty fraction, and unit size. It determines your share of production.

Taxes: Oil and gas production is taxed in various ways, including severance tax, conservation tax, and oil field cleanup tax. While tax rates vary by state, the total burden typically ranges from 5–8% of gross revenue. States may offer tax breaks for certain wells, such as low-production (stripper) or enhanced recovery wells.

Royalty Statement Deductions: One of the most common questions royalty owners ask is: “Why are there deductions on my royalty statement?” These deductions reflect the costs of making the product marketable. Crude oil and natural gas often require processing and transportation before they can be sold. Common deductions include: Compression (costs to compress gas for transportation through pipelines), Dehydration (removing water vapor from natural gas), Gathering (transporting the product to a central sales point), Processing (refining high-BTU natural gas), and Treating (removing impurities like CO₂, nitrogen, or hydrogen sulfide). These deductions are necessary to deliver marketable products and vary depending on the product and operator.