Are my oil and gas royalty payments correct?
Leases and royalty payments can be complicated, but there are some things you can do to help make sure you’re getting paid correctly. Mistakes do happen so educating yourself and staying on top of each payment can potentially add up to much more money in your pocket.
Step 1: The first thing you should do is understand how much interest ownership you have in a well. With modern horizontal drilling, overall ownership percentage in wells can be smaller since the drilling units are larger in area. However, on the flip side, it’s common to be involved in multiple wells which can offset having smaller ownership interests.
Step 2: When you get paid by the oil and gas company they’ll send you a revenue statement with details regarding how your check total was calculated. These can be very confusing to read and they vary by the oil company. If you have a specific question about your royalty check, you'll likely need to reach out to your operator directly. You can use our Search Producers tool to find contact information for them, if you do not have it already.
Step 3: After you understand the basic components of your revenue check, learn a few quick tips for auditing your royalty payments.
Step 4: The last thing we recommend is tracking when new production is reported on your wells. Tracking your production is a service from MineralAnswers and will help make sure you understand changes in production for your wells from month to month. Barring drastic changes in oil and gas prices, understanding production changes will help you understand if your revenue checks are reasonable.
How to calculate your royalty interest in a well
Calculating your royalty interest is easy once you know a few key details. Here are the three things you need to know:
The size of the production unit for that well. This is the area allocated to a well by a state regulatory authority that is to be included in the drilling and production of the well. Basically this is the size of the overall pie.
The number of net mineral acres you own within the production unit. The net mineral acres is the net amount you own. For example, if you share ownership of 160 acres with three other siblings, your net mineral acres would be 40 acres. This is your piece of the pie.
The royalty percentage based on your lease term. This commonly ranges from 12.5% to 25% and is stated in your lease. This is the percentage of production value you receive from the producer.
Once you have these three inputs, the formula is as follows:
There are circumstances when this can get more complicated. An example would be with a horizontal well that covers two or more sections. For horizontal wells, it’s common to create perforations which are explosive charges used to create a communication tunnel from the tight rock reservoir into the wellbore. The proportional distance of perforated wellbore in each section can be used to allocate a percentage of production to each section. If you think about it, this is logical considering the relative depletion that should be occurring in each section and to make sure mineral owners are properly compensated for the production extracted from their property.
Four simple audit tips for your oil and gas royalty payments
Make sure none of your wells drop off of your royalty statements. Sometimes when you have a lot of wells producing, this can be more difficult, but just doing a basic inventory count can help make sure you’re being paid on all of your wells. Remember you can track reported production to your wells through our platform. If a well is missing from a royalty payment, match up the month of reported production to see if the well is shut-in or down for maintenance. It’s not uncommon for wells to get shut-in for a period of time before new wells are drilled adjacent to them and then brought back to production with the new well.
Check your total revenue and your total deduction amounts. Usually, these are listed at the end of your royalty statement. If you notice a big increase in overall deductions versus overall revenue month to month, this could be an audit flag.
Double-check your interest percentage on the revenue check. If a payment seems low, check your interest percentage in the well and compare it to prior months or your division order. Even small decimal changes can create a big change to your revenue check.
Post-production charges. If you know your lease restricts the operator from taking post-production charges and you notice some deductions that don’t look like taxes, researching those charges is a good idea. This can be an honest mistake from your oil company that you can catch with your first few payments.
There are other things to look out for such as prices received for oil, gas, or processing plant products. BTU (British thermal units) content can also affect the prices received. Overall just looking for significant changes can help you understand if you should do a more in-depth audit.
Remember that an audit can go both ways. Although it’s not as common that the oil company has overpaid versus underpaid, it is possible. At the end of the day, making sure you receive a fair amount due is the goal.
Finally, it’s possible that you’re not getting paid because the producer doesn’t have your current address or needs additional documents showing that you own the mineral rights. If you suspect this is the case, contact your oil company to find out what information they need from you.