Effect of negative WTI spot prices on royalty interest payments

In the wake of WTI’s first dip into negative territory ever, a question sprang to mind: Can companies that continue to produce when oil prices are negative bank the losses against future royalty payments that are due to royalty interest owners once prices go back to positive?

I understand that royalty interests are not generally cost or loss-sharing, but I was curious how royalty payments are affected when prices do go negative.

Thanks in advance for any insight!

Good question. My thoughts are since the May contract did not expire negative (it just went negative for one day before expiration), then there will be no unforeseen effect on royalty payments. They’ll simply be very low for that month. This is not for certain, but just what I think is the case.

From experience when natural gas went negative, the negative royalty dollar amounts were deducted from the check. So I’m assuming that this will be the case with negative oil. Didn’t may oil end up closing higher for the month though? Closing at 4 or 6 dollars per barrel?

@Rick5 and @TwoShoeBeagie7 Thank you for your responses! Thank you for reminding me that contracts did not actually expire negative, put just went negative the day before expiration.

Truth be told, I don’t fully understand how royalty payments for a given month are calculated. Is it (total volume per month) x (average spot price for the month)? Or, is the price a single data point that is the value of WTI on the front or back end of the month?

All wells are different. Some sales are made on the spot market where you get the posted price on the day the oil is sold. Some are subject to contracted prices. So your royalty check will or can be a combination of those with different prices.

Even if oil got sold at a negative price, there should be no deductions on your royalties unless the negative was caused by transportation and other deductions and your lease allowed that. My leases say they are supposed to pay me a royalty, not deduct me a royalty. If you have a gross proceeds lease, it should be zeros at worst. If it allows post-production deductions, they may argue they can deduct based on an “offset” theory.

The entire premise of leasing is we put up the assets, and the operator takes the risk of making or losing money developing it. Did any of these operators offer to come and share profits with you when times were good? Why should you have to share in the losses?

Negative prices have already happened in Permian gas starting last year. There are several threads on it if you search in upper right.

All other things aside, mineral owners shared handsomely during the good times. Can’t think of another industry that pays you to help increase the value of your assets. Sure there are some, but in a matter of months or even weeks, sometimes days, the values shot up to unbelievable figures. Probably to not be seen again in our lifetimes.

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