We will soon receive our first check for a new horizontal well. I guess the first thing I should confirm is the royalty percent. Then what else should I verify?
For example, our lawyer negotiated a “no deductions” clause. How can I confirm that on the check details? What should I be looking for?
Are there any other things you typically review? Thanks!
I would suggest that you review the check stub and then come back and ask things that you have questions about. Most companies have different categories on their stubs or in different places so comparing them is not simple.
Thanks, Todd, will do. I should have figured that since every company is different, every lease is different, etc.
In general, the equation is net mineral acres/actual spacing acres x royalty x percentage of perforations in your section. The spacing acres comes from the OCC cases that pertain to that section (usually 640 for a horizontal well in OK). You do need to find out if the actual spacing acres if the section is irregular. Most DO will have any irregular acreage in very tiny print somewhere in the order. You can contact the DO analyst for what your net acres and royalty are. Keep that information for your records. The percentage of perforations will be stated in the OCC cases pertaining to your well. You should have gotten the mailings. Also verify the post production charges against your lease language.
You do not have to sign a Division Order in OK to get your royalties, but you do need to return a W-9 to the operator.
Now that I have my first check with correct royalty percent, some questions:
My statement’s Oil Production numbers match the OK Tax Production History to the penny. I’m using the website: https://oktap.tax.ok.gov/oktap/web/_/ and using Help / Public PUN Search / by API: 35015233340000. So far so good!
However, the Gas Production numbers do not match at all. In the OK Tax Production History, there is nothing for June, July, and August. But my statement shows amounts for those months. Are there reasons why some months are not reported on OK Tax?
For September, my statement shows 19,179.39 but OK Tax History shows 19,168.00 (difference only 11.39); for October, my statement shows 28,138.30 but History shows 26,491.00 (difference 1,647.30). What would be reasons for the differences in reported Gas Production?
I suppose I have to trust their Prices. But when I “do the math” (Price times Volume), there are differences. My statement is sometimes lower, sometimes higher than my calculation. Could this have a simple explanation like rounding (maybe my statement is only showing 2 decimal places but there are actually more)? Other ideas?
There are no Deductions for Oil (as expected since we have a “no deductions” clause in the lease). But Gas has deductions in the range of 15%-19%. Any ideas why?
And finally, looks like I’m being taxed at 10.2% for Oil and 11%+ (varies) for Gas. I don’t reside in OK. Could that be why the tax is so high? Why would Oil be taxed differently than Gas? It’s my understanding that I should file a non-resident OK tax return and could maybe get some of that back. Other thoughts?
I plan to call the operator and ask them to walk through the statement and explain to me. But I wanted to get feedback from this forum first. As always, thanks everyone for all your help!
As a non-resident, yes, you should file an OK tax return and depending on income, you should get most of that back. OK law says operator has to withhold 5% of gross revenue. Send information to your accountant.
The gas numbers will rarely match exactly due to various technical reasons. Some may be due to NGLs and some to line loss and other factors.
Check your lease language. Often it will say “no deductions”, but actually may have a “; however” wording that puts them right back in.
You have both personal income tax taken out and OK severance tax taken out. That is normal.
I confirmed with the operator that non-resident State Tax is calculated at 5% and “Production Tax” (aka Severance Tax) is 5.2% for oil.
They are checking why the Gas Production/Severance Tax is different. May have something to do with tax incentives for horizontal wells.
In any case, only the State Tax is reported on the 1099. Does that mean Production/Severance Tax is not applicable to tax returns?
Also, I’m planning to use TurboTax. Does anyone else use that? Does it seem to handle “depletion allowance” and royalties in general? Thanks!
Yep, sure enough there is a “however” exception for “enhancing” the product. As the operator explained to me: “The well is connected to a gathering system owned by Mustang. Our contract with Mustang allows us to participate in the processing of the gas to extract and sell the liquids which enhances the value. Processing liquids is very important with the very low gas prices. Should we elect not to process the liquids we would be leaving money on the table”
This really doesn’t mean much to me (as someone who doesn’t know a lot about the oil industry). Could you explain what that means?
Thanks!
The easiest way to explain is by using a dairy analogy. If you just milked a cow, you would only get milk that you could drink. But if you send the milk to the dairy plant, you can strip off skim milk, whole milk, cream, butter fat and then make yogurt, cottage cheese, cheese, etc.-not to mention the pasteurization. Many of those by-products sell for higher than just plain whole milk.
Same thing with an oil and gas stream. The oil usually gets to the plant via truck or pipeline where it is then stripped into its multiple components. The gas stream needs more help to get to its plant. It needs to have a high enough pressure to get into the gathering line, it has to be de-watered, etc. When it gets to the plant, it is stripped out into methane, ethane, propane, butane, iso-butane, etc. Each of those has a different price structure (many are higher than just the price of methane). If you didn’t do the processing, you wouldn’t make the extra money which goes to the operator and the royalty owner.
Thank you! I knew you’d be able to put this in terms I could understand! You are such a valuable resource to this community!
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