Tracking royalty payments

#1

I'd like to hear how and to what extent others are tracking monthly royalty payments. Document storage of check details? What level of detail do you track: by lease, by month, track deductions or taxes? Seems like it would be a mess the way some revenue is deducted and re-booked several times. Thanks

#2

I too, would be interested on what you find out.

#3

I alphabetize revenue detail by operator/payor for each year. Compile list of wells. Track payments in order of value of property to you, ie interest owned, volumes produced. Also track payments from any questionable operator/payor.

#4

My rule: anything of high value or suspicious, track and investigate as needed.

#5

If you have little income from an operator it is really not worth auditing. By the time you do all of the work and find small underpayments you have wasted more time than your underpayment is worth. Time is the most valuable asset anyone has. Generally, you would make a claim and the operator will contest your claim and then you will have to decide if it is worth hiring a lawyer to file suit.

If you have a good amount of royalty income, the best place to start is your oil and gas lease. If the lease is recent and has favorable clauses in your benefit it would be worth looking into. If it is old and basically a net proceeds lease, the chances of them paying you correctly increases.

With all of that being said, your ability to reconcile royalty checks decreases with the amount of wells you have an interest in. Ten wells are manageable for an individual. Any more than that should be done by someone who audits royalty payments. They will have a program that compiles all of the adjustments and kick out a report with what you are getting paid. Most auditors will take a look at your leases and check stubs at no charge. I know I do. If they do not, I would question their intentions. I believe that it is better to take a preliminary look and see if anything stands out instead of just taking business for the income. Word of mouth travels a long way and if an auditor clients that do not have a return on investment a majority of the time just hurts their business.

Now for the meat and bones of what needs to be done. Texas - Production and Sales Data. Production will be your RRC disposition. If the operator is allowed lease use, use code 2 and 3. No lease use use the gross production. That is your volume reconciliation. If the operator pays you on liquids, good luck! If your leases do not require them to provide you with chomatograph reports you will have to file suit. Oil is paid out when sold and not produced. You would have to check and see when the oil is sold and not produced. I use the RRC data and other data from Drilling Info. I purchase data from Lasser and Drilling Info as well as getting monthly reports from the comptroller for my internal system. In addition to all of this I keep a lease cheat sheet. This tells me what I believe the royalties should be paid on. I normally do not have to look at it because I commit it to memory. When I get older I am sure the cheat sheets will prove to be more useful.

Other states than Texas are more difficult. You will have to depend on what the operator will give you. Usually nothing, unless it is in your lease. You will have to rely on production reporting.

Check on your tax exemptions and state allowable vent/flare issues. Some States only allow venting and flaring for a year with no royalties. Tax exemptions used to be a big problem. The operator would take the exemption and not pass it to the royalty owner. That is not as common as it used to be anymore. They generally pass the saving along but not all of the time. You can also look into if they are taking the best exemption possible. For instance, when a high cost gas well in Texas qualifies for a low producing gas well exemption when the price for gas qualifies for the 75% or 100% exemption, the operator should generally take it. They do not all of the time because their accounting system is not set up for it.

I have not seen any operator pay proper royalty payments initially, unless the leases are all net proceeds leases. And even not then all of the time. They benefit in not paying correctly. Most royalty owners think that they would be paid correctly and not make the effort to verify. The statute of limitations is on their side unless you have a huge interest on underpayment. Even then rolling the dice is still in their benefit.

Now back to the rule of ten. Just because it is less than ten wells don't think you will find everything. I know, and I am sure other auditors know that certain companies are infamous for different accounting methods. I know of quite a few that I just need to look at a few months of check stubs and can make a determination if royalties are being paid correctly per the lease.

When approaching an auditor realize a few things. Data is very expensive! The depth of an audit can range from very easy to very difficult also. When you get chromatograph tests on a few hundred wells with plant reports time is not on your side. It is a long process that does not need to be rushed. Accuracy is key to proving an operator is not paying correctly. Otherwise data is not considered reliable. You start out with the data reported and then changes have to be made when other data is provided. Either through discovery or the good faith of the operator.

If you have the income join NARO. National Association of Royalty Owners. They have chapters for every state with production. You will find the information retained in one state convention is invaluable. Second time around you may retain a majority of that information. On top of that every year another issue is addressed. Never stop learning. The oil and gas business changes daily. Just recently, the Hyder case changed Texas oil and gas in some ways. Be thankful that the Hyders spent the money to bring their case to the Texas Supreme Court. It was not cheap and the outcome was uncertain.

I hope I help someone. If not, please ask some more questions.

#6

Thank you for all the info. I am looking at making a spreadsheet to just track it by month and Lease for now to start.

#7

Jay,

If your receiving checks from a company that is on oildex you can use mineralsoft.com to have a better visualization of your checks. They have software that will parse out all relaxant information and out it in a format that is easy to see, export to excel, etc for tax time. Also has a mapping feature, Etc which is helpful.

#8

Yes I have a few on oildex. Thanks for the reminder.

Phillip D said:

Jay,

If your receiving checks from a company that is on oildex you can use mineralsoft.com to have a better visualization of your checks. They have software that will parse out all relaxant information and out it in a format that is easy to see, export to excel, etc for tax time. Also has a mapping feature, Etc which is helpful.

closed #9