BY: DAVID SMITH
Business Development Officer, Argent Mineral Management
It’s crucial to analyze your mineral royalty check so you know it is accurate and that you are not losing any money.
I am currently wrapping up my 14th year in the oil and gas industry, beginning my training as a landman back in October of 2007. I got both my introduction to land work and my love for Boston Red Sox baseball from my father. Sadly, we lost him in March of 2020. However, he spent 41 years as a land professional, and I’m proud to have this in common with my dad. In fact, as I’m writing this article, there’s a lot to be excited about — the WTI crude oil price is approximately $80 per barrel; the Henry Hub natural gas price is around $5 per mcf; and the Red Sox beat the Yankees this past season to advance to the American League Division Series. Dad is most certainly smiling down!
This industry is an interesting one — I’ve seen it create a lot of wealth for a lot of people; however, I’ve also worked with folks who only experience frustrations. This range of outcomes is dependent on several factors, but ultimately comes down to how well the individual understands the mineral interests they own.
Interestingly, the United States is one of only very few countries in the world where landowners can own the minerals under their land. In fact, the National Organization of Royalty Owners estimates that approximately 12 million landowners across the United States currently receive royalty payments for mineral resources tied to their property. These mineral royalty checks are payments for their respective share of the oil and gas production from one or more wells located in a production unit that includes the landowner’s minerals.
Oil and gas companies need your land to drill. To accomplish this, they will send a landman to lease your minerals. In exchange for doing so, the landman typically offers a combination of a bonus payment (an upfront payment at the time the lease is signed, which is usually a mutually agreed upon price per acre of minerals owned), coupled with a royalty percentage that applies to future payments that begin once wells are drilled and producing. These terms can vary greatly between parishes/counties and states.
Since the onset of the shale boom in the early to mid 2000’s, there has been a gradual shift regarding how lease language is interpreted and, subsequently, how royalties are paid. This can vary from one operator to the next, but what is important is that things have changed significantly, emphasizing the need for mineral owners to stay in the know.
To further complicate matters, no two operators have identical check detail – data provided by the oil and gas company – enclosed with your mineral royalty check that explains the amount of payment you are receiving. For many individuals, these checks are very difficult to understand, leaving mineral owners to simply hope that their payments are correct. Many times, they are accurate; however, mistakes do happen and can be quite large, so it is important to be able to monitor your payments for accuracy.
Things to look for on your mineral royalty check:
Prices: It’s best practice to look at the price of the respective commodity. This will change from one month to the next, perhaps significantly depending on certain factors. However, some operators will report no deductions, but instead pay on a significantly lower price, essentially trying to “hide” deductions. Additionally, if you are paid by more than one operator, you should compare prices from one check to the other(s).
Volumes: This is the amount of product produced. Every month, operators report their volumes of production to the state. This should, but doesn’t always, correlate to the amount of volume reported on your royalty check.
Severance Tax: This is a state-imposed tax on the extraction of natural resources, and the tax varies by product and from state to state. It is levied to compensate states for the loss (severance) of the product being produced. Due to the variance, it is important to make sure that these taxes are being assessed accurately.
Deductions: Also referred to as “post-production costs,” deductions are the expenses tied to getting a product from the wellhead to the market and can reduce your royalty payments by 25% or more each month. This typically includes some or all of the following:
• Transportation – a charge assessed for getting the product from the well to a point of sale or a processing facility.
• Gathering – a charge assessed for pipeline gathering of a product to its next destination.
• Compression – a charge assessed for compression of the product to a certain pressure to get it into a transportation pipeline.
• Processing – a charge assessed for refinement of the product.
• Marketing – a charge assessed to help market the product to a willing buyer.
Royalty decimal: This represents your ownership within a production unit and is based on the size of your tract of land/minerals, your lease royalty percentage, and the size of the production unit. This number is what your mineral royalty check payment is based on, so it is very important to be sure that this is correct.
To truly maximize the value of your mineral interests, it is important to better understand the assets that you purchased or have inherited. If you find yourself in a situation where you are still uncertain about your mineral royalty checks, don’t have time to review them, or you’re simply overwhelmed with the information, we welcome the opportunity to assist. Our team of oil & gas management professionals enjoys working through these matters with our clients.
If you have questions or concerns about your royalty checks, Heritage’s mineral management team is here to assist you. Give us a call at (877) 887-8899 to learn more.