Understanding Your Oil and Gas Royalty Statement

Understanding Your Oil and Gas Royalty Statement

LandGate is a marketplace for mineral, solar, wind and other property rights. And as such, we spend a lot of time assisting property owners. Last week we worked with a mineral owner who just started receiving royalty checks from her property in West Virginia. She was not interested in selling her mineral rights, she just wanted to talk to someone about “all the details” on the royalty statement. No doubt that this information can be confusing, so we will try to answer the most common questions about royalty statements.

The majority of monthly royalty statements are mailed to mineral owners whose interest in a well is derived from a royalty reserved in an oil and gas lease. As a mineral owner, you will receive the monthly royalty statement either directly from the operator of a producing well or possibly a company who has taken possession of or purchased the production from the operator. There is a good chance your royalty payment is being directly deposited into your bank instead of being sent with the statement.

Not all royalty statements are the same, but most will contain the same information. So, let’s review the important and most common details.

Production Date or Month

Prior to receiving you royalty payments, you will be asked to sign a Division Order which 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 require delayed payments. After you receive your first payment, you will then receive them monthly.

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 which 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 check 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. Basically, 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 wanting 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. And even if you just need someone to answer your questions, give us a call. We look forward to hearing from you.

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