On the revenue statement that accompanies my monthly royalty check from oil companies, at times I see “adjustments” to the volume and corresponding revenue for a particular production date for an individual well. When I asked an oil company what this “negative and then a positive entry” (my term) is, the royalty relations department said it reflects a correction to the previous month’s revenue statement. When I asked what brought about a need for a “correction” I was referred to the oil company’s production department, who has yet to return my call.
I’ve seen this occur on revenue statements from several different oil companies. What creates a situation that requires an “adjustment”? Are volumes of production from the well sometimes just estimates with corrections then made once an actual reading is made at the well head?
Can anybody explain what creates the need for “adjustments”?
Most adjustments are the result of quality of product adjustments made by the purchaser under a purchase agreement with the operator. The quality of the product requires some testing. For example, if the price paid for natural gas is based on the the energy value (BTU) in the contract and the test shows more or less energy value was delivered, the price paid is adjusted up or down after testing is done. The same is true of oil and may include the percentage of contaminants such as sulfur or insolubles. Sour gas or oil gets a lower price because of the sulfur that must be dealt with vs. "sweet" crude which has lower sulfur contaminants.
Some operator accounting departments choose to adjust by deducting the previous month's revenue in total then putting the revised payment in as a positive amount.
Thanks for your reply, Gary. I appreciate your taking the time to respond.
If I may explore this a bit further ………
While I certainly prefer receiving my royalty check sooner rather than later, I don’t understand why an oil company would cut royalty check based on pricing information that would likely need to be adjusted. Isn’t it more work and expense for an oil company to have to make an adjustment to negate what was shown on the previous month’s revenue and then plug in the more accurate pricing when received? Why not wait until all of the final pricing info (production testing, etc.) is received and then cut the royalty checks? Is there some accounting advantage to the oil companies to get production on their books just as soon as possible, even if it’s preliminary information, and then adjust it later to reflect the final sales figures?
jdub
Gary L. Hutchinson said:
Most adjustments are the result of quality of product adjustments made by the purchaser under a purchase agreement with the operator. The quality of the product requires some testing. For example, if the price paid for natural gas is based on the the energy value (BTU) in the contract and the test shows more or less energy value was delivered, the price paid is adjusted up or down after testing is done. The same is true of oil and may include the percentage of contaminants such as sulfur or insolubles. Sour gas or oil gets a lower price because of the sulfur that must be dealt with vs. "sweet" crude which has lower sulfur contaminants.
Some operator accounting departments choose to adjust by deducting the previous month's revenue in total then putting the revised payment in as a positive amount.
the operator may be complying with the terms of the Division Order you signed or with lease provisions. Be happy you are getting paid on time. If you wake up a sleeping dog just for the fun of it, it may bite you. GLH
jdub said:
Thanks for your reply, Gary. I appreciate your taking the time to respond.
If I may explore this a bit further ………
While I certainly prefer receiving my royalty check sooner rather than later, I don’t understand why an oil company would cut royalty check based on pricing information that would likely need to be adjusted. Isn’t it more work and expense for an oil company to have to make an adjustment to negate what was shown on the previous month’s revenue and then plug in the more accurate pricing when received? Why not wait until all of the final pricing info (production testing, etc.) is received and then cut the royalty checks? Is there some accounting advantage to the oil companies to get production on their books just as soon as possible, even if it’s preliminary information, and then adjust it later to reflect the final sales figures?
jdub
Gary L. Hutchinson said:
Most adjustments are the result of quality of product adjustments made by the purchaser under a purchase agreement with the operator. The quality of the product requires some testing. For example, if the price paid for natural gas is based on the the energy value (BTU) in the contract and the test shows more or less energy value was delivered, the price paid is adjusted up or down after testing is done. The same is true of oil and may include the percentage of contaminants such as sulfur or insolubles. Sour gas or oil gets a lower price because of the sulfur that must be dealt with vs. "sweet" crude which has lower sulfur contaminants.
Some operator accounting departments choose to adjust by deducting the previous month's revenue in total then putting the revised payment in as a positive amount.
Nope, not trying to wake a sleeping dog ...... and especially not just for the fun of it. Just trying to educate myself. Thanks again for replying.
Gary L. Hutchinson said:
the operator may be complying with the terms of the Division Order you signed or with lease provisions. Be happy you are getting paid on time. If you wake up a sleeping dog just for the fun of it, it may bite you. GLH
jdub said:
Thanks for your reply, Gary. I appreciate your taking the time to respond.
If I may explore this a bit further ………
While I certainly prefer receiving my royalty check sooner rather than later, I don’t understand why an oil company would cut royalty check based on pricing information that would likely need to be adjusted. Isn’t it more work and expense for an oil company to have to make an adjustment to negate what was shown on the previous month’s revenue and then plug in the more accurate pricing when received? Why not wait until all of the final pricing info (production testing, etc.) is received and then cut the royalty checks? Is there some accounting advantage to the oil companies to get production on their books just as soon as possible, even if it’s preliminary information, and then adjust it later to reflect the final sales figures?
jdub
Gary L. Hutchinson said:
Most adjustments are the result of quality of product adjustments made by the purchaser under a purchase agreement with the operator. The quality of the product requires some testing. For example, if the price paid for natural gas is based on the the energy value (BTU) in the contract and the test shows more or less energy value was delivered, the price paid is adjusted up or down after testing is done. The same is true of oil and may include the percentage of contaminants such as sulfur or insolubles. Sour gas or oil gets a lower price because of the sulfur that must be dealt with vs. "sweet" crude which has lower sulfur contaminants.
Some operator accounting departments choose to adjust by deducting the previous month's revenue in total then putting the revised payment in as a positive amount.
Several years back I had a well with a high BTU gas factor1.65, yet was being paid less than dry gas. One call and all back pay arrived. I owned the surface, so a 55 gallon barrel of high grade equal length aliphatic liquid was left at the sight. No smell and no ping in my old mowing tractor. I was much better than iso-octane. Probably would have powered a AA Fuel Dragster
I know of a few farmers who ran their equipment from the condensate at the separator with no problems. Then there was the geologic success I had in finding a gas deposit that didn't have enough BTUs to sustain a flame. whoops!!
Tom Ed Moore said:
Gary,
Several years back I had a well with a high BTU gas factor1.65, yet was being paid less than dry gas. One call and all back pay arrived. I owned the surface, so a 55 gallon barrel of high grade equal length aliphatic liquid was left at the sight. No smell and no ping in my old mowing tractor. I was much better than iso-octane. Probably would have powered a AA Fuel Dragster
That ole 'drip gas' sure did run good in that old '53 Ford I had back years and years ago. That ole flathead V8 would gittie up and go. My girlfriends dad was a pumper and he always had 3--55 gallon barrels full of 'drip gas' behind the garage and I could 'fill up' anytime I wanted. Boy you talk about 'High Octane". Wow.
Clint Liles
Tom Ed Moore said:
Gary,
Several years back I had a well with a high BTU gas factor1.65, yet was being paid less than dry gas. One call and all back pay arrived. I owned the surface, so a 55 gallon barrel of high grade equal length aliphatic liquid was left at the sight. No smell and no ping in my old mowing tractor. I was much better than iso-octane. Probably would have powered a AA Fuel Dragster
I have a Lincoln county Meisner Hunton well that produces super octane drip. All my Lincoln County wells have high BTU factors. One well paid $14.00+ on the gas last month.