Royalty payment on "unit basis" vs "revenue interest by tract"

I recently received a letter indicating that a company is “in the process of separating the Plains Tracts in which you’re being paid on a unit basis”. They want to “pay each tract by revenue interest rather than by unit share”.

Can someone explain what this means and the effect on mineral owners?

The property is in Garvin County, described as Tussy Deese Unit –Plains Tract. It is an old well that came down to me from family inheritance, and I can't seem to find any information on when the well was drilled, etc.

Thanks for any comment.

Not sure, but it does not sound advantageous.

Thanks for your comment, Pete. Whatever the result, it's going to be better financially for the company than for mineral owners. The company has not returned my emails, so I don't know yet whether I am a winner or a loser.

A unit is composed of several tracts. Your royalty should not be affected by being paid on a tract basis or on the unit basis. For simplicity, assume you own all minerals in 100 acres and there are 3 more tracts of 100 acres each unit has 400 acres. If your royalty is 20%, then on unit basis you will be paid 0.2 X 100 tract acres / 400 unit acres = 0.05 royalty decimal on 100% of production revenue. On a tract basis, your royalty decimal is 0.2 X 100 acres / 100 tract acres = 0.20. But, you will only be paid on 1/4 of revenues, because the production will be allocated among the 4 tracts. 0.20 royalty X 1/4 of revenues takes you back down to an effective royalty decimal of 0.05 on the whole unit. On your check, if you are paid on unit basis, then you will see 0.05 royalty decimal and 100% of volumes and sales. If you are paid on tract basis, then you will see 0.20 royalty decimal but only 25% of volumes and sales. So why is there going to be a shift from unit to tract payment? There may be different lessees in the tracts so they are working interests (but only 1 is the operator). Maybe one working interest wants to sell its oil and gas separately or maybe some working interests are not participating and so those interests and rated tracts need to be accounted for separately until payout. Some operators just prefer to account for units on tract basis. And if you own interests in several tracts then you may see several lines on your check, each tract with its own royalty decimal and allocated portion of volumes and sales. It means that to audit your volumes, you need to know the tract factor (the fractional interest of the tract within the unit) to apply to total production reported to RRC. Ask your oil company to give you the tract factors and what its records show for your net mineral acres and your lease royalty rate.

TennisDaze, thanks for a very good explanation of the issue. I was afraid that somehow, if the actual well was not on my specific acreage, things could be re-arranged so that my interest would no longer be included in a "new tract". With the help of others, I did find the Plan of Unitization (from 1961). By locating my acreage, a "participation" column indicates a 2.87446 participation. Would this be the tract factor you mention? Great information. I will request the information you noted.