Oil Payment/Production Payment

Royalty Statements
1

What exactly is an “Oil Payment”, sometimes called a “Production Payment”, and how does it originate?

I’m a mineral rights owner and on the print out that accompanies one of my royalty checks there’s a category labeled “Oil Payments” and a separate category labeled “Royalty”. “Oil Payments” has a smaller Owner Decimal than the “Royalty” does.

I called Customer Relations with the oil company that issued the check asking what is “Oil Payments”. The person I spoke to said she’d never seen that before and would have to check on it and call me back. She called back and said it’s a different type of royalty payment. It came to their company on a Pay Sheet from a previous operator who called it a “Production Payment”, but her company calls it “Oil Payments”. She said this type of payment can occur until a certain total dollar amount has been paid to the mineral owner ……. or it can be a payment that would only last for a specific amount of time. She said that it possibly could have something to do with an improvement to …… or maintenance on …… the well, but admitted that she really didn’t understand exactly what this was. I’ve done an online search for these terms but didn’t find much more information than what this woman told me.

Anyone know what this type of payment is …….. and how it would have originated? I see no mention of it in my mineral deed and I don’t have a copy of the original lease since this oil interest has been passed down the family for 2 generations and no one seems to know anything about it.

2

Jdub, it could be a payment directly from the oil purchaser and not from the producer, my best guess not having the documents in front of me.

3

Jdub,

Been a long time since I have dealt with these. They were quite the fashion in the late 50's and 60's. Now before you start thinking that I am older than I am, the agreements were entered into, for example 10 years before I got in the business, but I still had to administer those agreements.

Now, on to production payments.

There are two. A money production payment and a product production payment. Money is by far the most common.

An example of typical language would sound something like this:

"Assignor does hereby reserve for himself, his heirs and assigns, a production payment of $75,000.00, payable out of 2% of 8/8ths gross production. After assignor has recovered the full amount of the production payment, Assignor will quit claim his production payment interest to Assignee."

Since production payments are not so common anymore, the accounting system of the payor may not be set up to account for the payment, so you may receive the "oil payment/production payment" forever.

Also, the production payment is typically characterized as being analogous to a type of overriding royalty interest ---- at least in ownership in place states, like Texas. As to non-ownership states, I do not know, but this is really, really splitting hairs.