General question about Oil price on royalty checks

Colorado Mineral Rights Weld County, CO
1

My significant other has several parcels in Weld County. We have been receiving royalties on her Bringelson Ranch parcel Section 20 Township 9 Range 58 from Carrizo Oil for about the last year. When I compare the oil price that her royalty is calculated on in her check stub vs. the market rate, the royalty check oil price is always roughly $7-10 dollars under the NY Mercantile oil price. Is this true for others in Weld County? What is troubling to me is that Carrizo’s financials for the 2nd quarter 2014 state that their average sale price per barrel of oil was $98.90 yet we were paid based on a price of $92.28. In the most current royalty check covering August the price is down to $82.43.

My questions would include:

  1. Is Weld County price lower than the NY Mercantile?

  2. What are producer requirements for transparency with mineral owners? (What info can I require Carrizo to provide us?)

  3. Are producers allowed to deduct any costs prior to calculation of oil price royalty is based on?

  4. I assume hedging activities should not be included in royalty calculation since this is a financial transaction and risk strategy for producers’ shareholders and has nothing to do with the physical oil transaction. Am I correct?

Thanks for any information that can help enlighten us.

2

You are likely paying your share of transportation costs per barrel. Read your lease.

3

You are likely paying your share of transportation costs per barrel. Read your lease.

Thanks Gary, I will review it tonight.

4

Carlos,

  1. NYMEX price is usually Henry Hub price in Oklahoma. Contracts based on bid prices vary in the contracts for BTU, high sulfur, etc.

  2. Read the lease, if it isn’t tied to posted market price, wellhead, or point of sale, there isn’t much you can do. Note that the lessee may not have signed the lease and therefore made no commitments. Your lease may also allow the operator to sell to an affiliate at less than posted price.

  3. Read the lease. (That quick bonus price may not look as good today as it did a few years ago.)

  4. See my 2) above. Without a base price formula in the lease or arms length transaction language, there is no reason to prevent the advantages of hedging to the producer to affect the lessor.

Hope all the parcels aren’t locked up in one lease so that your SO has some leeway in royalty measurement and payment in the future. A smaller operator like Carrizo may not have the marketing flexibility that Kerr MAC has so its sale may be arms length but they are also entitled to what deductions are allowed in the lease that was signed.

5

Carlos,

  1. NYMEX price is usually Henry Hub price in Oklahoma. Contracts based on bid prices vary in the contracts for BTU, high sulfur, etc.

  2. Read the lease, if it isn’t tied to posted market price, wellhead, or point of sale, there isn’t much you can do. Note that the lessee may not have signed the lease and therefore made no commitments. Your lease may also allow the operator to sell to an affiliate at less than posted price.

  3. Read the lease. (That quick bonus price may not look as good today as it did a few years ago.)

  4. See my 2) above. Without a base price formula in the lease or arms length transaction language, there is no reason to prevent the advantages of hedging to the producer to affect the lessor.

Hope all the parcels aren’t locked up in one lease so that your SO has some leeway in royalty measurement and payment in the future. A smaller operator like Carrizo may not have the marketing flexibility that Kerr MAC has so its sale may be arms length but they are also entitled to what deductions are allowed in the lease that was signed.

Gary L Hutchinson Minerals Management

Thanks Gary, I am going to review the lease that my SO signed for further details.