Minimum Suspense in Oil and Gas
Minimum suspense refers to the practice of withholding (suspending) royalty payments until the accumulated amount reaches a state-mandated or contractually specified minimum threshold. This ensures that operators and revenue distributors avoid issuing payments that are too small to justify the administrative costs of processing and mailing checks.
Why Does Minimum Suspense Exist?
1. Administrative Efficiency – Cutting checks for very small amounts (e.g., a few cents or dollars) is inefficient and costly for operators.
2. State Regulations – Many states have minimum payment laws, usually set at $25 or $100, requiring that royalties below this amount be held in suspense until the threshold is met.
3. Contractual Terms – Some oil and gas leases include specific terms for minimum payment amounts before distributions are made.
How Minimum Suspense Works
• If a royalty owner’s share of revenue for a given month is below the minimum threshold, the operator holds the funds in suspense.
• Once the total amount owed reaches or exceeds the threshold, the accumulated royalties are paid out.
• If the balance never reaches the threshold (e.g., due to declining production or fractional ownership), many states require at least one payment per year regardless of the balance.
Example of Minimum Suspense in Action
• A royalty owner is entitled to $10 per month in royalties.
• The operator has a $25 minimum suspense threshold.
• The operator holds the payments in suspense for three months.
• In month 3, the accumulated balance reaches $30, and the operator issues a payment.
State-Specific Rules
Each state has different minimum suspense laws. For example:
• Texas – $100 minimum suspense, or at least annual payment if the balance is lower.
• Oklahoma – $25 minimum unless otherwise specified in the lease.
• New Mexico – $100 threshold before payments are made.
Key Takeaways
• Minimum suspense ensures cost-effective royalty distribution.
• The threshold is set by state law or lease agreements.
• Suspended funds are released once the total reaches the required minimum.
• Some states mandate an annual payment regardless of the balance.