I was wondering if anyone had a good resource or explanation for inflated interest rates. This happens with enhanced recovery unitization on very old fields with multiple operators and payors on each track with in the unit. I have heard that it has something to do with multiple operators and each one taking in kind. In the end the volumes balance but I need help explaining why this happens. Any place to find out more information on this issue?
Do you mean an increase in your royalty DOI? One way this happens. Suppose there is one payor on your tract (or well) interest and your decimal is 0.10000 on 100% of the volumes. If 100 bbl are sold at $50, then you will be paid 100 bbl X $50 X 0.1000 = $500 royalty. Then another WI owner decides to take in kind and pay its share of royalties separately. For simplicity, assume that each WI has 50% interest and so each WI now sells its half of the volumes and pays its royalty owners separately. Also, assume that 100 bbl are produced so each of the WI sells 50 bbl.
Now your payor has 2 options -
A) Continue to pay your royalty decimal on 100% of the volumes. You check will look the same.
B) Pay on the reduced volumes. Your payor decides to pay royalty on the reduced volume (in this case 1/2 ). So if there were 100 bbl total, then your payor only sells 50 bbl. If you are paid on the 50 bbl without an adjustment to your royalty decimal, then you would only get half of the money due - ie, 50 bbl X $50 X 0.1000 = $250. Therefore your royalty needs to be increased to 0.2000 to make you whole. You can calculate this by multiplying your well or tract DOI by total bbl/paid bbl - in this case = 0.1000 X 100 bbl total / 50 bbl sold by your company = 0.2000. Similarly, if your company only sold 25% of the volumes, your decimal would increase fourfold - 0.1000 X 100 bbl total / 25 bbl sold by your company = 0.4000.