Ownership of oil and gas interest are a bit more complicated than other types of real property, as there are different types, with different obligations to the owner of the interest.
Four common types of interest ownership in a well
- Royalty Interest (RI): A percentage of production value that the mineral owner receives from oil & gas production as stated in the lease agreement. The royalty is paid by the lessee (producer) to the lessor (property owner) once the well is producing. Generally, the royalty interest owner is not required to pay costs to drill or operate the well. However, depending on the lease terms there may be post-production charges applied to the royalty interest for the royalty owner’s share of getting the hydrocarbons from the wellhead to a buyer. These post-production charges are applied as deductions (negative values) in the royalty statement details and you can often see the aggregated amount of deductions at the bottom of the royalty statement.
- Overriding Royalty Interest (ORRI): A royalty in excess of the royalty provided to the mineral owners in an oil and gas lease. These do not affect the mineral owners. An example could be a geologist or a landman given a 1% ORRI by the operator in exchange for subsurface analysis or title work. Sometimes even a small ORRI can payout substantially.
- Working Interest (WI): A type of ownership where both costs and revenue are shared based on the percentage of ownership. Costs include drilling, prepping the well for production (completion), and ongoing operating expenses. Often the percentage of shared costs is higher than the percentage of shared revenue for WI owners. This is because of the need to pay royalty interests that don’t also bear the drilling and operating costs.
- Non-Participating Royalty Interest (NPRI): This interest type is similar to a normal royalty interest in that these interest types do not bear costs to drill or operate a well. However, the interest owner does not have executive rights to make decisions such as leasing and they typically do not receive lease bonuses. NPRI’s are often created when a mineral owner wants maintain the ability to make decisions regarding their mineral rights and royalty interests while monetizing part of their royalties or leveraging a portion of the interest in negotiations.
Royalty payments: are a percentage of production value that the mineral owner receives from oil and gas production or other natural resources as stated in the lease agreement with the oil and gas company.
Why haven’t I been paid my oil and gas royalties?
There are a few common scenarios regarding the timing of royalty payments to consider depending on if you are still waiting on your first royalty payment or if there has been a gap or a delay in oil and gas payments
I haven’t been paid royalties by my oil company at all yet
Once production is flowing from a well, it can still take several months for a royalty owner to receive their first payment. Oil companies want to make sure they have an economically viable producing well before they take the time to figure out the exact ownership percentages to payout. The good news is that states enforce interest payments if these payments aren’t made within a certain timeline.
Questions about a timeline for a specific state? Contact us for help.
I haven’t been paid royalties in a while by my oil company
Changes in the production output of an oil and gas well will affect the payment you receive. Oil & Gas wells usually decline in production over time as oil and gas is extracted and the pressure decreases. Unless new wells are drilled, you should generally expect payments to decrease through time. Oil and gas commodities and their trading value will also affect the price you receive. After the well has been producing for a while, normal maintenance is to be expected which can create short term decreases or gaps in payments.
If there’s been a gap in payments with your oil and gas company, there are few things you can do.
- Track your assets to understand if your well is still producing or if the well has been shut-in for any reason. MineralAnswers offers a free service to track your wells and to be notified when new production is reported. Production gets reported ahead of revenue checks so getting notified on production can help you stay aware of future revenue changes or even gaps in payments.
- Understand your state’s aggregate pay laws. These laws allow oil companies to withhold royalty payments until certain dollar thresholds are met.
Aggregate pay laws allow oil companies to withhold royalty payments until certain dollar thresholds are met. These vary by state, usually ranging from $25 to $100. These are in place to cut down on administrative costs for minimal payment amounts. The next section outlines aggregate pay laws for some key states.
Aggregate pay laws by state
Texas: Payments less than $100 may be accrued before disbursement. However, payment is required at least yearly when proceeds equal $10 or more. On the written request of the owner, the oil company will be required to pay the owner if the payment due is more than $25.
Oklahoma: Payments less than $100 may be accrued before disbursement. However, payment is required at least yearly when proceeds equal $10 or more. On the written request of the owner, the oil company will be required to pay the owner if the payment due is more than $25. Also before the oil company withholds payments greater than $25, they must notify the owner of the ability to request payments above $25.
North Dakota: The operator can aggregate payments up to 6 months if they are less than $50
Questions about a different state? Contact us and we’ll try and dig it up.
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 can ask an expert here.
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 free 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.
If during this process you need help then ask a MineralAnswers expert.
4 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 for free 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 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.
I need to update my information with the oil and gas company
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.