With a Lease Agreement Dispute with O&G Should I Cash their Royalty Checks

I have a lease in Tyler county, WV, with which an O&G violated.  They incorrectly and intentionally miscalculated my decimal interest for the minerals we have leased.  Our lease specifies (in black and white) that all of our land and any wells must be included in only one unit (I have it in writing from them that they promised this condition, for which I learned later that all of their drilling platforms are split into two units), but the O&G has split our land into two units.  When the O&G sent us the Division Orders to sign, we refused.  Two months later, the O&G sent us royalty checks based upon their decimal interest calculation.  There was no federal, state, or severance tax withholding.

Does anyone have an idea what we should do with regards to cashing the checks?  I do not want to have the process of cashing imply that I agree with their decimal interest calculations.  But if I do not cash them, and the checks expire, what happens?  Additionally, I am sure the O&G will report a 1099 to the IRS, for which I will incur a very large tax bill.  Will the WV county apply a large severance tax that I would be required to pay?

Thanks in advance,

Leo

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Mike MurphyPermalink Reply by Mike Murphy on December 16, 2015 at 4:15am

Sounds like you need to have a good oil and gas attorney look at your situation and advise you on what to do remember if the unit is 640 acres your decimal interest is figured on that even thou the drilling unit may only be 150 acres

Permalink Reply by Leo S on December 16, 2015 at 4:49am

Thank you.  Yes, I have both unit definitions, and all the parcels that are included in the two units.  My land is in both units, not just one unit as I have in writing.  The unit definitions include my acres that are in the unit, and the unit's total size.  It is not hard to properly calculate the decimal interest.  However, I should be in just one unit, not two.  So the decimal interests clearly are incorrect.

Permalink Reply by G.H. on December 16, 2015 at 8:51am

Question, why do you care if your land is in two units as long as all of your land is unitized?  Is it so that the whole parcel can't be held up by a well that is producing on only part of it?  If they have two wells that are producing or soon to be producing, that problem probably wouldn't present itself for quite a long time from now.  I am not saying your thinking is wrong, I am just curious of the idea behind it.

Obviously if your decimal interest is wrong that is a problem.  I would talk to a competent oil and gas attorney ASAP... might as well just not cash the checks until you talk to one, if you have not cashed any yet.  Whether you cash them or not, that money is still owed to you and you can get a check.  They could maybe try to make you pay a fee for reissuing a check or something, I am not sure on this.

Permalink Reply by Leo S on December 16, 2015 at 2:08pm

The long term plan is 5 wells in the two units. But I agreed to four wells in one unit.  Two wells were drilled, one within each unit, to hold 900 acres by production.  Both wells were to be put into the same unit, with my land.  This would provide 50% of my planned royalty coming from these two wells which were definitively to be drilled, and left 50% remaining for the future, if the two wells were drilled.  I have two issues; first is that the time frame when I will realize the revenue, has changed from what we agreed; and second is that my royalty calculator shows a difference of perhaps several hundred thousand in royalty payments, depending on the price.  This assumes the same productivity rates in the wells. 

Permalink Reply by Bill Bergseid on December 24, 2015 at 11:30am

I doubt either the lease you signed or the unitization agreement provides a time frame for drilling all of the wells.  The lease normally requires a producing well be drilled by the end of the primary term.  As long as the initial well continues to produce in paying quantities, the lessee can drill additional wells on whatever schedule it wants.

As to your decimal interest, take the unit plat and ownership exhibit and calculate the number of acres in the tract with your minerals x the % of mineral interest you own in the tract x the royalty rate in your lease and divide by the total number of acres in the unit.  That decimal is your unit revenue interest.  If the payor is paying all of your interest, you should find that decimal on your check stub.  However, if there are, for example, two companies who own leases in the unit each may pay you separately you would not receive your full decimal from either one.  It is sometimes the case that the operator will pay for each working interest owner share (lease owners in the unit) and the check stub will have a line for each working interest owner's share.  In those cases, you can often see how one company sold its gas for a different price that the other working interest owners. So no line will have your full decimal interest shown but the total of those decimals should come to your unit interest.  If this is the case, be sure you are looking at the lines in the statement for the same month.

Permalink Reply by Leo S on January 6, 2016 at 1:33pm

Thank you.  I understand how to calculate decimal interests....for my situation, the decimal interests should have both wells and my land in one unit definition.  Instead, my land is split into two unit definitions, each with one well.  The royalty payments made for the two units are far less than what I would receive from these two wells, if my land were in one unit, along with both wells, as we agreed.  Both wells already had their vertical holes drilled before I was leased.  I was certain there would be two wells drilled, and I made sure both wells in the same unit, as well as my land.  Splitting into two units has significantly altered the net royalty payments I should receive from these two wells.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on December 17, 2015 at 3:32am

Leo,

   WV has a problem at present due to the Counties calculating taxes on producer production rather than actual royalty paid. Some have lost their minerals due to huge increases in the value of their land. See my post on Ohio & WV County Taxes.

Check with a lawyer and ask if WV can tax you if you don't take the check. If he says NO, it might save you from the temporary insanity in progress in WV at the county level, that is using a Calculation to determine your taxes rather than actual payment.

WV counties either doesn't realize O&G companies don't pay a fair royalty or know this fact and are using it to take landowners mineral rights for themselves.

Permalink Reply by Leo S on December 18, 2015 at 4:08am

Ron, thank you for the heads up caution...btw...I find it very difficult to search and find a highly skilled, successful, O&G attourney willing to protect consumers in this market

Leo

Permalink Reply by Leo S on January 6, 2016 at 1:34pm

Thank you!  Interestly, I wrote to Mr Rohrig, multiple times, and he never replied.

Permalink Reply by Nancy Mosley on January 6, 2016 at 2:37pm

Maybe busy but I think he should respond. Try Windom.

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