Uderstanding your royalty statements, empowering landowners against royalty theft or mistakes

We are chugging along towards completion of the well that includes a portion of our property. The last word is completion of the connecting pipeline is in June and it looks like they are well moving to that goal. They have been working 24 hours a day setting up the pad for production and what I assume is the flowback portion of the procedure.

My attention will soon turn towards a very daunting task of verifying my royalty statements against lease terms and fair market pricing.

I have been told and very much believe that the statements will be nearly impossible to read and understand. Fair enough, but, I am not easily daunted by complications from difficult situations. I fully intend to hire an accounting firm specializing in oil and gas royalties to verify everything and then I will hold the producer accountable for any discrepancies.

I am tired of hearing about landowners being abused.

This is a serious matter, folks who have never had money think money solves problems but it doesn't, it creates a whole new set of complications. And so it is with your royalties.

This site could do a tremendous service to its participants if instead of bombarding us with buyers of mineral rights and royalties it would offer solutions to understanding your royalty statements and aiding in the educating of landowners.

This is my new endeavor, soon enough we will begin to receive royalties and I fully intend to stick around, sharing information with others, learning from some and helping others, extracting the falsehoods and emphasizing the truths.

So, does anyone have any useful information for us on how they started down the path of deciphering royalty statements ? My first guess is the statements are overloaded with numbers that don't correspond to other numbers, confusing and complicating matters needlessly.

I appreciate anyone trying to help.

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Permalink Reply by KAS on March 23, 2016 at 4:05am

I have noticed some statements are info heavy with lots of lines and numbers,  Our statements are just the opposite single line with little information.  One company claims 'gathering deductions' the other company has 'market enhancement deductions' - nothing more.  The amount taken is not a consistent percentage. I am starting to talk with the neighbors to compare numbers as the price received for gas varies even on wells close to each other using same pipeline network.  It is very hard to obtain information on this process, plus people who have a stake in it are often not comfortable taking 'money'.  Good Luck and please share as I am always eager for information..    

Permalink Reply by David Allen Lilly on March 23, 2016 at 12:11pm

If possible, it seems it would be wise to stick together as royalty owners in the same unit. This is sometimes a difficulty, thank God I am not in the other unit drilled from the same pad. Our unit size is smaller and with fewer landowners.

Plus, we have one landowner who is a financial guy by profession.

Permalink Reply by sircedric on March 23, 2016 at 8:36am

We started geting royalites a couple years ago from Chesapeake,Statoil,Mitsui, and Anadarko. You could figure statements out fairly well. Then they started taking out deductions even though we have the Market Enhancement clause.  Statements are a laugh now. Nobody has done anything about it. [yet] They keep taking out more and more. The state is trying [PA], lawyers are trying, but nothing so far. I have gave up trying to keep up what they are doing because if they  are breaking the law and getting away with it, where does that leave you. I sign the checks and move on. Hopefully some laws will be passed and the stealing will stop. Good luck to you, try not to let it ruin your sleep.

Permalink Reply by David Allen Lilly on March 23, 2016 at 12:04pm

I would never sign and deposit a check if I thought the payment was inaccurate. I believe the proper course of action would be to keep a running tab on the shortages and berate the producer ceaselessly about them. If that fails you must take them to court, I would assume that a lawyer could be found to help you out, they can't all be owned by the producers.

I have heard that PA is not that great a state to be receiving royalties, or driving the interstates for that matter.

I am in Ohio, nonetheless, I have made a habit of making enough noise in all the right places to get things remedied.

Our royalties will not be used for a long time anyhow, we don't have that much so it doesn't take that much to float our boat, everything we have is paid for already.

I hope that puts us at an advantage in that all we will be doing is squirreling the money away for many years until the pile is big enough to accomplish our goal.

I think two things are key, you must set up an accounting system for yourself to track royalty shortages and compile a total damage. More importantly, don't get yourself into a situation where your hand is forced in accepting what is offered.

I wont let it ruin my sleep, I refuse to be consumed by any of this. It is all out of my hands anyhow.

Permalink Reply by sircedric on March 23, 2016 at 12:48pm

You may know your payment is inaccurate but the Gas company say's your wrong. Thousands of people across the land are being robbed. Alot of lawsuits out there, but we need the Goverment to make some laws. Thats when something will change. Sorry but i will keep signing my checks. Last year when gas was higher, Royality payments were more than my wife and i made for income. It has made retirement look alot more promising. There is allso that morning that will never come. Your right about two things though. We need to make noise and its out of our hands.

Permalink Reply by Fast on March 23, 2016 at 2:40pm
Here's a tip from one of the best lawyers. Right now cash the check as fast as you can. . Hold it and it could bounce.
Go back and audit and take action after two full years of payments. If you audit the first year ... They may pay up and then go back to cheating you Again. Which is why you wait two years. Also, you want to audit within the time frame allowed by law.
So with that said
1. You better have a right to audit in your lease
2. You better have a lease that says even if they are paying you improperly ... That's doesn't relieve them of money owed to you, even when you cash the check. This needs to be written within your lease.
3. I have followed the lease to the "T" and they don't. Better have the right to litigate in your lease. No arbitration.
4. At some point you have to remove yourself from the .... Fighting back every moment of the day. Idk a person out there who's ok with being cheated!! It can consume you. Therefore, pace yourself or you will eat, sleep and walk it every moment. We aren't morons by know means. However, let the real money makers (large acreage royalty owners) fight the battle first... Then you know what your up against.
5. Fighting the good fight is admirable. However, if you get 5k a month and you are taxed on that money by the good old IRS... They don't care after they get their cut ...if you want to spend it on legal fees. Not trying to be a smart A$$ just trying to give you a feel for what's most likely going to happen. Maybe you will be exempt. I doubt it.... But you never know. We have No deduction lease and it's worthless at this point. I've already spent several thousand $$$$ to get what I have. Damn shame but there are certain things that are more about principle & I did spend the money to prove my point. I will take every damn penny of that money to let you know I know what your doing. Good thing I don't need it to live off of. Just saying " Pick your poison"
Permalink Reply by David Allen Lilly on March 23, 2016 at 11:35pm

Many folks will want to know if legal fees are recoverable ?

Permalink Reply by Mark Hrutkay on March 25, 2016 at 5:22am

Attorney fees and expenses in a contract dispute are generally NOT RECOVERABLE unless stated specifically in the contract.  I can tell you up front that is RARE to see it.......  In a gas lease don't expect to see it..

Permalink Reply by Fast on March 25, 2016 at 6:14am
The answer to this question is yes. Royalty money requires you to file a CAT tax and pay. Therefore, it is considered a business. I verified this with the accountant this morning. I didn't want to reply until I had the correct answer. I probably should have asked that question myself .... Prior to filing this year. I'll be ready going forward!! Thanks for bringing this up.
Permalink Reply by INVICTUS on March 24, 2016 at 11:44pm

CASH the damn Check. Get the check cleared and deposited.

"Fast" is onto a good point about the IRS...at the end of the year, you will get your 1099 and you will have to explain to the IRS why you shouldn't pay taxes based on royalties. They don't care that you didn't cash the checks...you had "constructive receipt" of the income.

Now, how will you set aside for taxes? The checks typically are only good for 90 days, and if you don't cash them you are fighting a rear guard action putting you further behind in collecting your loot.

The audit and lawsuits are future battles and the lines are now being drawn.

Get the money.

Then quietly work with the IRS and Justice Department, funnel them the info (you do have a good attorney in the background working with you in this, don't you?) and exhibit some tenacity and patience.

I've said it before and I'll say it again - a good forensic audit will cost $500k to $1MM. Then get a good legal team to force that issue with the O/G producer.

If you aren't lead plaintiff in any actions, work with multiple law firms.

Lots of court filings, briefs, backroom negotiations. Settlement offers (first set of those are crap and are a quick buck for the plaintiff attorneys) will come to avoid actually going to court.

Believe this: O/G is coming back here in the not too distant future. Not with the frantic wild west headline grabbing (and bonus paying) frenzy of the past 5 or so years, but it is coming back. Cash the checks, get educated about subsurface mineral rights (your rights, landowner/leaseholder) and for you own sakes, get together and protect your common interests.

Permalink Reply by David Allen Lilly on March 24, 2016 at 11:51pm

I think the point about cashing the checks is well made. I wondered if cashing the checks would legally bind you to accepting the payment as accurate and you a landowner out in the cold as far as restitution for shortages.

Permalink Reply by Fast on March 25, 2016 at 12:15am
Depends on your lease. Mine states .. The cashing of the check doesn't get the company off the hook.

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