Can anyone help me understand my royalty statement? My lease states we are to have “cost free royalty” and specifies that no deductions are to be made for the processing, gathering, transporting, etc. I just received my first royalty check and the statement is rather confusing, but includes the price per barrel and quantity with a gross value. From that gross value is the first deduction column where it shows large amounts deducted for processing and gathering which then gives the left over net value. Then they have figured my royalty interest by the net value and there is a second deduction column that shows no other deductions. I am confused as to why there are processing and gathering deductions at all. Thank you for any help!
It depends on your free royalty clause in your lease. Most of the internal revenue systems these operators use allow for free royalty. Some of the companies are getting sneaky and charging fees for “off site” processing, etc. The one deduction you can’t get away from is the severance tax, which is imposed by the State of Texas. I would call the division order department and get your questions answered sooner rather than later.
Thank you. I contacted the division order office yesterday and they sent back their copy of my statement which doesn’t show the gross value at the head of the well. Now, they won’t respond back to answer about these deductions.
You need to get with the oil company paying royalties and have them review your lease agreement and then make the necessary adjustments. If your lease excludes those processing, gathering, transporting, etc. costs, then your royalties should not reflect them being deducted. Someone at the oil company most likely made an error if this is the case. Should be easy to resolve.
First, operators will put the processing and gathering charges at the gross level on every check. If you are not being charged for these costs, then the matching entry under your “net share” will be -0- instead of a deduction. Second, whether or not you will be charged for expenses will depend on the language in your lease as a whole and not just a clause. If your lease provides that the royalty will be calculated by the “market value at the well”, then Texas courts have held that all costs from the well out to the point of sale can be assessed regardless of any cost-free language. If your lease provides for royalty to be paid at the market value (or better yet market value at the point of sale) and provides for cost-free, then you should not be charged these costs. However, it will also depend on the exact wording of your ‘cost-free’ language. Some clauses are less detailed than others, or may only specify certain expenses and leave out others. Third, some operators may charge costs and figure that most mineral owners will not protest or will only protest and not sue as that would not be economic. If you used an attorney to draft your lease, consult him about the lease and the checks. If you post your lease you may get more explicit advice. Or identify the operator and well to get a response from other royalty owners in your well.