How do you know if the Oil Co. you are receiving your royalties from is paying you the correct .00XXXX (decimal percentage) from inherited royalties that have been producing for many years??? Do you have the right to inspect how the Oil Co. came up with that percentage, and can you correct it if there are errors??? Just wondering what others have had to do & how you go about doing it. Thanks!!!
It is on your check. Do you know what it should be ?
The Division Order states the percentage as a decimal. That is the time to question it. But here goes.
What is your royalty interest? say 3/16th (0.1875)
What is your acreage? say 40 acres
What is the size of the drilling unit? (most are going to be 640 acres but each section varies and some have smaller or larger spacing. Spacing is set by the OCC.) Let's assume 640 acres.
Finally, what is the percentage of the well that lies in the unit? We have something called "cross-section" wells. You might be only getting 91.34% of the total production, or even 5.1% etc. Let's say you have 75% of the well in one section and 25% in your section (again this is approved by the OCC)
So here be go. You own 40 of 640, with 18.75% royalty, and 25% of the well is applied to your unit.
40 ÷ 640 = 0.0625 x .1875 = 0.01172 x .25 = 0.00293
So say one month's run is 3000 bbl. of oil at $91/bbl. 3,000 x 91 = 273,000. The company will now take out "Post-production" expenses, including transportation, treatment, marketing, etc. say 15%. So the net check is $232,050 and your percentage of that is 0.00293 = $679.91
Check the net v. gross receipts of the company. That tells you what percentage of the money is being taken out for those "post-production" expenses. This is getting more companies sued than anything else.
Unless you were wise enough to require the company to allow you to audit them regularly and then also require that they PAY for the audit if an error is found, in your lease, you often cannot force companies to open their books and "prove" anything. You have to take that responsibility on from day one yourself.
Some errors are inevitable when you are dealing with thousands of royalty owners. And most will fix errors but if you wait years, they don't have to correct those errors. The Statutes of Limitations comes into play. So monitor and if you are not satisfied .... well, can you afford to go to court?
PS - if your well is held by old production, production declines over time. They are very small interests usually. Hopefully, you have a vertical and horizontal Pugh clause in the lease.