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Understanding Your Oil and Gas Royalty Statement

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Oil & Gas Production Date or Month

Before receiving your royalty payments, you will be asked to sign a Division Order that sets out your interest in production. Your royalty checks will arrive 2-3 months after production begins, as there is a tremendous amount of accounting and production sales information that requires delayed payments. After you receive your first payment, you will then receive them monthly.

Oil & Gas Well Identification Information

Your royalty statement will identify the name of the well in addition to other information such as the API number. API stands for the American Petroleum Institute and is a unique, permanent number assigned to each oil and gas well drilled in the United States.

Production Type

So that you know exactly what product you are being paid for, this column will identify the type of production being sold. If the product is not spelled out, such as crude oil, natural gas, natural gas liquid, etc., then there will be a code that will be identified in the legend at the bottom of the last page.

Volume

The amount of production is generally measured in either barrels for liquids, or MCF for natural gas. MCF is an abbreviation derived from the Roman numeral M (for one thousand). Add it to CF (cubic feet) to get MCF.

Price

Each product is priced differently and product prices can fluctuate monthly. Some products are sold immediately at the wellhead. Other products may be sold weeks later to midstream companies at a metered location away from the well.

Deductions

Most of the royalty statement questions we get are related to deductions. Many oil and gas mineral owners wonder why their royalty checks is not as big as they expected. The four most common deductions are for:

Transportation, Compression, Gathering and Processing Unless you specifically negotiated otherwise, your royalty payment will be reduced as a result of costs incurred by the operator in marketing your production. These are necessary expenses associated with taking the production from the well, cleaning it up so it can be sold, and then transporting it to the buyer. The legend at the end of the statement will be helpful.

Taxes

Yes, that dreaded word. As a royalty owner, you will be subject to severance taxes as well as any other taxes created by the state where the well is located.

Owner Interest

This represents your ownership interest in the production. This should be the same number shown in the Division Order you signed and is expressed as a decimal interest and carried out to the eighth decimal place.

Net Value

Also known as the amount you are being paid. It is calculated as follows:

  • Volume X Price – Deductions – Taxes X Owner Interest = Your Royalty Payment. Whether you are a mineral owner receiving royalty checks or just want to know what your minerals are worth, LandGate knows what they are worth and can market your minerals to get you the most money. At LandGate, we want to make you an informed oil and gas mineral and royalty owner.


Oil and Gas Lease Provisions Definitions

  • Consideration – Sets out the consideration (also referred to as the lease bonus) paid to the mineral rights owner. Most states require that consideration must be paid to validate the contract. However, historically, the actual consideration paid to the lessor remains confidential, as the lease usually describes it as “$10 and other valuable consideration.” Consideration is also called the bonus payment.  A lease bonus payment is calculated on a $/acre basis and paid to the lessor at the time the lease is signed.  

  • Granting – Transfers rights in the leased lands from the lessor to the lessee and describes the rights and activities allowed, such as exploring, drilling, conducting geologic and geophysical surveys, laying pipelines, and building roads, just to name a few.

  • Description – Leased lands must be locatable and therefore properly described.  Depending on the history of the lands (Original 13 colonies established by Great Britain, the Louisiana Purchase from France, Mexican or Spanish Cession, etc.), they can be described using the English Units of Measure, Metes and Bounds or Section, Township, and Range and others. 

  • Mother Hubbard – In the event there was a mistake made in the description, this provision provides that the lease will also cover lands owned or claimed to be owned by the lessor if the lands are adjacent or contiguous to the described lands. 

  • Habendum – This provision sets out the primary term of the lease. Usually described in several years, the lessee must either establish production or begin drilling operations before the lease expires.

  • Royalty – A portion of the proceeds from the sale of production which is paid monthly to the lessor. The royalty payment is usually described as a fraction such as 1/8th or 1/6th.

  • Shut-in Royalty – A gas well can be shut-in for many reasons.  Shut-in commonly means the well is manually turned off due to reasons such as a pipeline needed to move the gas to market has not been completed or the price of gas has dropped to a point where it is temporarily uneconomic to produce.  The shut-in royalty clause allows for the lessee to make a shut-in payment to the lessor in lieu of making a royalty payment.

  • Pooling - Forced Pooling allows the lessee to combine 2 or more leases to meet the minimum number of acres required by the state regulatory authorities to drill and produce a well.  For example, if the state requires 640 acres to be allocated to the drilling of a gas well, but the lessor only owned and leased 320 acres, the lessee can lease an adjacent 320 acres and pool both leases together to make a 640-acre pooled unit.  Production from a well drilled anywhere within the 640 acres would be allocated equally to each of the 320-acre leases.

  • Delay Rental – Lessee has the option to either begin drilling operations during the first year of the primary term or pay a delay rental which would extend the lease into the following year.  Lessee has the continued option to pay an annual delay rental each year during the primary term in lieu of drilling a well. If the delay rental is not paid, the lease will expire.  The delay rental will not extend the lease beyond the end of the primary term. Lessee may also ask for the option to combine the delay rental with the initial lease bonus, which would effectively result in the lease being a paid-up lease.

  • Cessation of Production – If production from a well that has perpetuated the lease beyond the expiration of the primary should cease to produce, the lessee shall have (usually) 120 days to commence operations for the drilling of a substitute well. And suppose the substitute well is completed as a well capable of producing in paying quantities. In that case, the term of the lease shall be extended for as long as the substitute well continues to produce in paying quantities.

  • Pugh Clause and Continuous Development – Many leases cover large properties. At the end of the primary term, a Pugh Clause provides for the lease to terminate as to un-drilled and/or non-producing portions of the leased lands.  For example, suppose the lease covers 1,000 acres and the state regulations call for 640 acres to be allocated to a producing well. In that case, the lease should terminate as to the leased lands outside of the 640 acres allocated to the producing well.  The Continuous Development clause allows for the primary term to be perpetuated for as long as continuous drilling operations are being conducted anywhere on the leased lands.

    • From the example above, a Continuous Development clause would allow the primary term of the 1,000-acre lease to be perpetuated as long as there are continuous drilling operations anywhere on the leased lands.  Once drilling operations have ceased with more than 120 days elapsing between the completion of one well and the drilling of another well, the lease will terminate as to the leased lands that lie outside of a state-regulated drilling and spacing unit containing a producing well. This will allow the lessor to lease these lands again.

  • Proportionate Reduction – In the event it is later determined that the lessor owns less than 100% of the minerals or a smaller interest in the minerals than originally thought, a lessee may proportionately reduce rental and royalty payments paid to the lessor.  Although a warranty clause in the lease seems to guarantee a clear title, the lessee needs this provision to make payment adjustments.

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